July 12, 2024

The Chief Mag

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Nike Shareholder Files Class Action Over Brand’s DTC Sales Strategy

4 min read

Nike is in hot water with an investor who claims the athleticwear titan misled them about its earning potential as a result of its evolving sales strategy.

Filed last week in the U.S. District Court of Oregon by a shareholder listed as the City Pension Fund for Firefighters and Police Officers in the City of Pembroke Pines, a securities class action lawsuit claims that the company misrepresented its ability to generate sustainable revenue growth as it pivoted to a more digitally-native, direct-to-consumer-focused business model.

The evidence in the case dates back more than three years. On March 19, 2021, Nike announced financial results for the third quarter of that year on an earnings call. CEO and president John Donahoe II—the defendant in the case—told those on the line that Nike “continues to deeply connect with consumers all over the world driven by our strong competitive advantages,” noting that its “strategy is working, as we accelerate innovation and create the seamless, premium marketplace of the future.”

He stressed the company’s “tremendous success in digital,” saying its “digital transformation remains a unique advantage.”

On the same call, co-defendant Matthew Friend, Nike’s executive vice president and chief financial officer, echoed the sentiments, saying that “[Nike]’s brand momentum is as strong as ever and we are driving focused growth against our largest opportunities.”

That wasn’t all true, the lawsuit claims. By June 22, 2022, investors began to see the cracks in the strategy when Nike announced its full-year and fourth-quarter financial results. The complaint cites Nike’s 1-percent overall quarterly revenue decline and its 7-percent quarterly wholesale decline, which was measured against the same period the year prior.

Again CEO Dohanoe insisted, “the strategy is working.” He called the company’s “expanding digital leadership” one of its “competitive advantages,” telling investors on the end-of-year earnings call that the company was “very confident in our long-term strategy and our growth outlook.” Nike’s Class B common stock price fell $7.72 per share—almost 7 percent—overnight. It started at $110.50 per share on June 27, 2022 and closed at $102.78 per share on June 28, 2022.

Results for the next quarter ended Sept. 29, 2022—the end of Nike’s 2023 fiscal year—revealed that Nike’s net income had plummeted 22 percent from the year prior. Earnings per share also fell 20 percent. The company reported a reduction in gross margin decline of 220 basis points from the previous fiscal year due to the disposal of excess inventory, 44 percent higher than the first quarter of 2022. On the heels of these revelations, Nike Class B common stock contracted by $12.21 per share—nearly 13 percent. Nike leadership nonetheless continued to speak to the brand’s “competitive advantages.”

Dec. 21, 2023 revealed new information to investors. During an earnings call about the company’s second-quarter fiscal 2024 financials, CFO Friend said Nike’s “total retail sales across the marketplace fell short of our expectations.”

The executive also said its digital business saw a contraction of consumer traffic because of “higher promotional activity” across the industry, which caused Nike to lose out to competitors. Friend said Nike was going to adjust its channel growth plans for the remainder of fiscal 2024 while pinpointing opportunities to generate cost savings of up to $2 billion over the ensuing three years. Following this earnings call, Nike’s Class B common stock fell $14.49 per share, or nearly 12 percent, from $122.53 on Dec. 21, 2023 to $108.04 on Dec. 22, 2023.

The brand’s performance continued to worsen into 2024. On March 21, Nike announced its third-quarter results, with Donahoe telling investors on an earnings call that Nike was “not performing [to its] potential,” while minutes earlier he had said Q3 demonstrated results that matched expectations. Nike saw across-the-board 3-percent declines in digital revenue in the Middle East, Africa and Europe.

Then, Donahoe delivered the news that the company was taking a strategic U-turn, and would lean into wholesale partnerships “to elevate our brand and grow the total marketplace” while pulling back on DTC e-commerce. He said the firm was making a “reinvestment” in its wholesale retail relationships for a more “holistic offense” moving forward.

Friend also projected that the company’s revenue during the first half of fiscal 2025 would be down low single digits, prompting Nike’s Class B common stock to decline 7 percent, from $100.82 on March 21 to $93.86 the following day.

In the suit, the plaintiff’s legal counsel wrote that the individual defendants—including Donahoe and Friend—controlled the information that was provided to the Securities and Exchange Commission (SEC), as well as the information that was released publicly through press releases and assessed by securities analysts, wealth managers and investors of all kinds.

The suit said Nike leadership engaged in a “scheme” to “deceive the investing public” by presenting factually inaccurate information about the company that caused investors to buy stock at “artificially inflated prices.”

Nike leadership worked to paint an optimistic picture of the company’s financial standing and its future potential for the public, while working with different information internally, the complaint said.

Now, law firms are requesting that shareholders who purchased or acquired Nike stock between March 19, 2021 and March 21, 2024 join in the class action lawsuit, which is pushing for compensatory damages for all parties affected. Nike investors have until Aug. 19 to join the case as lead plaintiffs.

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