Sportswear giant Nike Inc. unveiled a new cost savings plan on Thursday while confirming it has started laying off employees as part of a broad restructuring.
The company aims to save $2 billion over the next three years through measures like streamlining products, increasing automation, and cutting jobs.
Savings Targeted Through Product Simplification and Tech Investment
Nike said the $2 billion in savings will come from “simplifying its product selection and using more automation and technology.” Reducing complexity in its product lineup could involve cutting underperforming styles and SKUs.
Embracing more technology is also expected to drive efficiency gains in areas like manufacturing and distribution over the next few years.
However, the most immediate savings will likely come from headcount reductions, as Nike also announced it expects to book pre-tax restructuring charges of $400-450 million. Most of those charges relate to “employee-severance costs” and will hit the books in Q3 2023, indicating major layoffs are already underway.
Significant Job Cuts Confirmed as Part of Restructuring
While Nike did not reveal specifics around the job cuts, the size of the restructuring charges indicates they could be substantial. For context, Nike employed approximately 79,000 people worldwide as of May 2022.
Assuming an average salary of $60,000, severance costs of $400-450 million would equal roughly 6,700 to 7,500 positions eliminated.
The layoffs represent the most aggressive move yet by CEO John Donahoe, who took Nike’s reins in 2020, to streamline operations. Nike has faced mounting earnings pressure recently from supply chain challenges, higher product and transportation costs, and fierce competition.
CFO Flags Q2 2023 as “Turning Point” Despite Flat Growth
Nike CFO Matthew Friend described Q2 2023 earnings as a “turning point in driving more profitable growth.” However, results for the quarter were mixed. Revenue grew only 1% annually to $13.4 billion, which missed analyst expectations. Net income jumped 18% to $1.5 billion as gross margins expanded.
Much of the margin improvement stemmed from easing supply chain headwinds, with lower freight costs and fewer discounts boosting profitability. Still, sluggish topline growth indicates operating challenges persist. The restructuring aims to better position Nike for the future but will also create distractions in the near term.
Caution Still Required Navigating Uncertain Retail Landscape
Nike competes in an increasingly treacherous retail environment. Consumers have tightened discretionary budgets due to high inflation, pressuring sales of non-essential items like sportswear. Rivals such as Adidas and On Running also threaten Nike’s market share in key categories like running.
While Nike’s brand power remains strong, the macro climate requires a cautious approach to planning and inventory management.
Nike is working to align supplies closer to demand signals but may still need to discount excess items. Promotional activities could prevent a hoped-for rebound in margins.
Nike Stock Plunges Over 5% on Missed Growth and Restructuring News
Nike shares plunged over 5% during after-hours trading as investors reacted to the Q2 earnings miss and restructuring announcement. Some analysts and investors had turned “surprisingly bullish” on Nike heading into the report, noted Wedbush analyst Tom Nikic.
However, Thursday’s results gave bulls some pause. While Nike has opportunities to reaccelerate growth in 2024, Nikic cautioned it is “not yet firing on all cylinders.” For example, Nike was more promotional than expected over the Black Friday period.
With expectations elevated, Nike’s sluggish Q2 growth was likely unsatisfactory to shareholders. The large restructuring charges also indicate meaningful business struggles under the surface.
In summary, Nike unveiled ambitious cost cutting plans on Thursday as it begins large-scale layoffs and a broader reorganization. While aiming to drive “more profitable growth,” Nike continues to face topline pressure from an uncertain retail environment and tough competition.
Thursday’s underwhelming results and restructuring news sent Nike shares sharply lower during late trading.