Stock Slumping, Old Playbook Broken: Nike's "Future Plan" Is Full of Doubt | Top 15 Annual Reports

Fashion's growing pull has made athletic companies — once fixed on athletes, sweat, and the track — far easier for trends to sway. Caught up in a fast-fashion pace, Nike has slowed down on product innovation.

The sports giant closed out 2016 with a quarterly report that caught Wall Street off guard.

In the three months ending November 30, 2016, Nike's revenue grew 6% year over year to $8.18 billion, beating Wall Street's expectations.

It caught the market off guard because, before this report, Nike's share price had already fallen for twelve straight months by more than 30%, and in its most important market — North America — futures orders had weakened for four consecutive quarters.

Futures Orders — the total value of goods Nike will wholesale to distributors the following quarter — have been investors' most important gauge of "how much money Nike will make in the future" since the company went public in 1980.

In November, Nike's stock took a beating it had never seen before: several financial institutions cut their rating to "sell." Against 2015, when the shares jumped 40.47% and the market cap broke through the $100 billion mark, Nike's 2016 was a bad year.

"$32.3 billion in annual revenue — more than Adidas, Under Armour, and Lululemon combined — and yet Nike seems to have grown a little too comfortable," Bloomberg columnist Shelly Banjo wrote in one piece.

The year-end report won back some ground. Nike CEO Mark Parker announced at the earnings call, with evident delight: "We are creating a new process we call the 'Express Lane,' which allows us to cut the cycle from creation to market from months to weeks."

Nike brand president Trevor Edwards heaped on the praise too, citing three retro running shoes that had sold strongly of late — the Presto Mid Utility, the Flyknit Racer, and the LunarCharge: "We got them to market in a quarter of the time. Thanks to our accelerated shoe-creation ability."

The year-end report also carried one landmark change: Nike decided to stop publishing Futures Orders data. With direct-to-consumer (DTC) business now more than 25% of revenue, Nike concluded that futures orders could no longer "foretell the future." In other words, Nike's old sales method had stopped working.

In fact, the "Future Plan" — as Nike named this once-novel way of working with retailers back then — was the key innovation Nike leaned on to break through its annual-growth ceiling when supply-and-demand trouble hit in 1973.

That autumn, Nike founder Phil Knight had an idea: sign our biggest retailers to fixed agreements, get them to place large, non-refundable orders six months ahead, and offer discounts of up to 7%. As he wrote in his memoir: "I told them the 'Future Plan' was about all of our futures — theirs and ours — so they'd better join us, the sooner the better."

But now the ceiling — or the wall — had arrived. The clearest sign came from a bankruptcy in the sporting-goods retail trade this year: Sports Authority, a U.S. chain with 463 stores, whose business model could not keep up with a diversifying sporting-goods market, lost customers in droves. And it was no isolated case. "These days every athletic brand has started selling its own goods on its website, customers have better places to go, and our value shrinks a little more every day," said Brian Shelton, owner of a sporting-goods company, in an earlier interview with The Wall Street Journal.

Back in late 2015, Nike had announced plans to lift DTC business — physical stores plus its online shop — to 33% of total company revenue by 2020. Clearly, the "Express Lane" is no model built for sluggish retailers. It suits the five-story flagship store Nike opened in New York's SoHo in November: distinctive shelf displays and the freshest styles — that is what today's consumers care about.

All the old benefits — longer lead times, fewer shipments, sales locked in ahead, cash piling up in the bank, far greater company stability — look like a handicap in the athletic market of 2016.

The pace here runs much faster than it did 40 years ago. Fashion's pull has made these companies — once fixed on athletes, sweat, and the track — far easier for trends to sway.

Trends have spurred spending. The athleisure way of dressing turned sneakers and athletic wear into everyday clothes, which genuinely drove athletic brands' growth over the past two years — and sharpened the competition along with it.

Shanghai's Huaihai Road "athletic-brand strip" is a perfect snapshot of this shift. Once dominated by luxury goods and Swiss watches, the street has now been taken over by fast-fashion and athletic brands. Young shoppers carrying H&M and Uniqlo bags duck into the Nike flagship to pick out a pair of sneakers to match — in location and in market terms alike, Nike has more to contend with.

Over the past year, at least three Nike rivals have opened stores on Huaihai Road: PUMA and ASICS flagships, plus an adidas young kidswear store, launching in February, May, and September. By December, the Adidas flagship right next to Nike had just finished its renovation. Cao Jun and her boyfriend sat on the ground floor; he was agonizing over whether to buy James Harden's new basketball shoe at 1,499 yuan. "He thinks it's a bit pricey," she said — but asked about the limited-edition NMDs on his feet, Cao Jun's boyfriend said he had paid 2,999 yuan, a markup over retail.

The brand that thrived most under 2016's athletic trend was Adidas, and the secret was still speed. Led by one or two breakout models — the Yeezy and the NMD — sneakerheads and trend-chasers watched every new style Adidas dropped each week, and once it hit the shelves it sold out at once. Lester Wasserman, owner of the famous New York sneaker shop West NYC, observed: "Adidas — wound up like clockwork. Their speed to market will be their rivals' biggest challenge. Even if a competitor pulls off something better 30 days earlier, Adidas will have its new product to market within a few months."

Nike, meanwhile, has tried to get closer to consumers by tightening its grip on the retail end. Across 2016, those efforts included opening giant flagship stores in the heart of major cities — "offering the best personalized service and creating a seamless link between digital and physical stores"; growing the worldwide count of Jordan stores and NikeLab outposts, which Nike uses to show off its fashion taste in Hong Kong, Tokyo, Paris, and elsewhere; and deepening ties with big chain retailers like Foot Locker in the U.S. and Oumeihui in Beijing's Zhongguancun, opening "shop-in-shops" to raise the brand's in-store profile.

These fairly traditional moves lifted Nike's DTC business 23% last quarter, but some see the profit those numbers drive as "hurting independent retailers." As Brian Nadav, founder and creative director of the Philadelphia boutique Lapstone & Hammer, told Footwear News: "But in today's athletic lifestyle space, a retailer can survive without Nike — if you carry Adidas — and that wasn't possible a year or two ago."

Independent retailers worldwide, especially those in the sneaker-resale trade, have all felt the profit point shift in the sneaker market. "In the old days, when a new Jordan came out, you'd basically never see it going below retail," said Zhu Ziyan, owner of the Taobao sneaker shop Haitun Sports. He thinks Nike has put out too many odd colorways. "Volume is part of it too — people's enthusiasm for AJs has cooled."

On basketball, there is a bigger backdrop: the sports market itself is being reshaped. Running and fitness — a better fit for modern life than basketball — have become the new mainstream, and many fans don't play much themselves. At the same time, the television media that grew up alongside the NBA is in decline; this year's sparsely attended Rio Olympics was one sign of it. Forty years ago, the top three finishers at the U.S. Olympic Trials all wore Nike, and that might still have been enough to corner the market. But now young people care less about what the gold-medal sprinter has on his feet than about the street shots Kanye West just leaked on Facebook. Most gold medalists probably carry less weight today than an Angelababy, or a Ning Zetao.

Nike has not lost its grip on social media, but it works only with athletes, building sports communities and conveying its reach through figures like "2.5 billion miles run worldwide through Nike+."

At the December 20 earnings call, brand president Trevor Edwards promised that Nike's basketball business would return to growth after May 2017. The company had redesigned its basketball line, putting out "better-looking, better-value" shoes such as the Kyrie 2, LeBron Soldier 10, Jordan 31, and Kobe A.D. But the other side of that result is Nike's gross margin falling for two straight quarters to 44.2%. Bloomberg analyst Chen Grazutis pointed out that this means the company will lean harder on discounting to win sales growth — in other words, in a heating competitive environment, Nike can no longer charge a premium for its shoes.

For the past three years, Nike's strong financials owed mostly to high-margin products: the Flyknit line launched in 2012, and the star shoes in the Jordan and Kobe ranges. But Flyknit is now four years old, and knit-fabric technology is no longer Nike's alone. Adidas has Primeknit uppers; at New Balance it is the newly launched 580 series; this woven material has already spread to many athletic-goods makers.

Matt Powell, vice president and sports-industry analyst at the market-research firm NPD Group, argues that the claim athletic brands lack innovation is a misreading, because we are now stuck in a strange loop where consumers don't see technology as fashion. "The 'tech-as-fashion' trend ended in 2013; retro rules. Most importantly, it is now consumers, not brands, who decide 'what is fashionable,' and even very cutting-edge technology doesn't win them over."

But look at the most successful technological breakthroughs in the athletic world, and you find they tend to pull on fashion quite naturally — Air Max's exposed little window of cushioning, Flyknit fabric giving running shoes richer gradient colors, Boost's instantly recognizable white pellets that go with anything are all examples. And of course, these technologies first changed the wearing experience: lighter, more comfortable.

As for the two new technologies Nike took pride in this year: the full-length-cushioned VaporMax has yet to launch, and the self-lacing HyperAdapt 1.0 sells for $720 — neither has made a deeper mark on the market. Nike's Tech Pack apparel line uses Therma-Sphere honeycomb-fabric technology, but several rivals have matching products, such as Adidas Climaheat and Under Armour's Storm series. More important, perhaps, is that Therma-Sphere is technology tucked between the fabric layers — consumers can't see it and can't tell it apart.

To borrow Shelly Banjo's words from the Nike stock-downgrade report: over the past year, Nike has yet to bring any exciting new technology or style to market.

"Whether by speeding up new-product development or taking firmer steps to stop talent from leaving, Nike badly needs a way to fix the problem." Otherwise it will look as defenseless as it did in the spring of 2016 when the NMD went on sale, no match for Adidas's hard push of new products.

This is the ceiling Nike has hit. It has fallen behind in the fast-fashion race, while its edge in athletic performance erodes bit by bit. Even so, as the year drew to a close, beyond a decent quarterly report Nike had some good news: the self-lacing HyperAdapt shoe sold well, according to Fortune, though whether this new technology can roll out widely is still an open question. Nike also just announced a new project — it wants to break the limits of the marathon by sponsoring three runners to go under two hours, with the official product line to be unveiled in 2017. The project may help Nike build new competitive moats in professional sport.

Looking back over all of 2016, Nike was one of only two blue-chip stocks that fell, and the worst-performing of them, down 15% from its early-2016 price of $61.50.

Over the past 30 years, Nike's stock has fallen in only six. The one time it fell two years running was 1983–84, when Reebok was taking Nike's market. Reebok was later bought by Adidas in 2005, and has since been the loser repeatedly floated for sale.

Even that time, Nike pulled through quickly. The question is: what about this time?

About the Top 15 Annual Reports

2016 was a turbulent year worldwide. Judged by corporate performance, the market leaders suffered more than their challengers.

The Top 15 companies QDaily follows — those leading shifts in how people live — had a hard year as it drew to a close, and they shared a single trouble: the ceiling.

Whether developing new products (like Apple's watch and car) or opening up new users and channels (like IKEA going into e-commerce), these industry leaders have been searching anxiously, and perhaps blindly, for their "next" growth engine.

Breaking through that ceiling has proved harder than imagined. The 2016 Top 15 year-end report is not all good news.

Cover image and all unattributed in-body images courtesy of Nike