Nike’s Dramatic Downfall & Britain’s Road to Economic Recovery

23:36We're back with ProfG Markets. In a terrible earnings report at the end of June, Nike lowered its full-year guidance and slashed its sales projections for the current quarter by 10%. That report sent the stock down 20 % in a single day, wiping out$28 billion in market value. It was the company's worst day on record, but the pain has continued. Nike was the biggest loser on the Dow last week as it slumped to a new 52-week low. And year-to-date, the stock is down more than 30%. Scott, Nike's downfall here has been slow and then quite sudden. In the past three years, the stock has been cut in half.

24:14What do you think is happening here to Nike? I have some personal history with Nike because Nike was one of our biggest clients at L2. And it's top to bottom, it's an outstanding firm. It's got smart management. It's obviously got, arguably, Nike is one of probably the 10 strongest brands, not only now, but over the last 30 or 40 years. They made a very strong transition into going vertical. It just has a history of innovation. And they also got out of the kind of the brand era and said, all right, we need to be direct to consumer. And I have a bias towards them because when after Gartner purchased L2 and I gave the acquiring firm a list of the most talented people in the company, and within about six months, 11 of those 12 people had left.

24:57I mean, three of the most talented people at L2, Daniel Bailey, who is probably one of my best students ever, Ashley Tolbert, super talented young woman, and Maureen Mullen, who in many ways kind of built L2. All three of them went to Nike and I think worked in the direct-to-consumer group. And so I know that they have extraordinary talent there. They have an unbelievable brand. They're saying that they over-invested in direct-to-consumer such that when we came out of COVID, they didn't have the same amount of shelf space. I think most of it is that they're struggling with the same headwinds in China as like an Estee Lauder is.

25:30And also they say that the Hoka brand and On Running have eaten share these two kind of cool upstarts that have gotten huge traffic and are now kind of billion-dollar-plus brands. But at the end of the day, to have this kind of erosion in market capitalization and for the company to be trading at what is, I think, a multiple of 17 versus an average of 28 over the last five years to have its stock cut in half versus a doubling of the S &P at that time, I think most likely the CEO's days are numbered. because what this looks like is that to have this kind of implosion, I think their stock's off, I forget what their stock's off substantially this year.

26:1230 % year to date. Year to date, it's off 30%, but I think Adidas is up 20%. That's right. So it's not the whole category, right? This is specific to Nike. So I would bet that, I think it's John Donahoe is his name. Yeah. I think he's on the green mile. His background is very interesting. He was the CEO of eBay, and then he was the CEO of ServiceNow, He's been the chairman of PayPal. So he's kind of this software tech guru. And it was, I think people were excited, but also a little ambivalent that Nike would bring him in. But I think the thesis there was that he would digitize the company. He sort of fixed the supply chain.

26:50You know, he'd do all these things to bring the company into the future. What looks like has happened is that during that process, he has neglected the brand. I think bringing in a tech guy to run what is the largest or arguably one of the most important consumer brands ever is probably, in this instance, just not paying off. He's been there a while. He owns this performance now. And the performance has been such a disaster from a shareholder standpoint. you know he's going to have to outline pretty serious a pretty serious change in direction here and give investors confidence or like i said there's going to be there's going to be a switch at the top this feels to me just like taylor made to make us to switch the ceo because this just hasn't worked that with a brand like this with the human capital i know they have i remember i think i worked for a woman named heidi roisen and she was so talented and i remember when they brought in Donahoe, I remember thinking, the hard thing about sexism or anti-Semitism or any ism is it's subtle.

27:54No one's going to say, no one's going to say, oh, you know, we'd rather just have a white guy running the company. But I remember I met several executives at Nike who were women in their 50s who I thought were just incredibly impressive, who I thought were going to be the next CEO. And then boom pops up a white guy from Silicon Valley. At the end of the day, hey, the reason the CEO can make so much fucking money is he or she, the buck stops with them. And so he's, I think, got three months to outline a vision, and he's got 12 months to show some traction against that vision. Otherwise, I think he's out.

28:29As a matter of fact, I bet the board is having several, what I call, parking lot conversations. And that is, there's two board meetings typically. There's one that happens during the board meeting, and then there's a second one. And the two or three most important people on the board kind of get together in the parking lot or downstairs or they talk or whatever, or they meet up and they're like, hey, what do you think's going on here? Like, do you think Bob is the right guy? And then there's a bunch of kind of one-off calls. Once those two or three people come to a consensus decision, there's a few more calls.

29:01And then in executive session, at some point, they'll do a call where they think, you know, we have some concerns. What do you think? and then they'll make a decision and then they'll go about trying to affect the decision. But right now, I can't see any reason for why all roads don't lead to a leadership change because it's nothing obvious to me that you could blame this on. Yeah, it's interesting you say that. I don't think it's obvious, but just at a very simple level, sales growth is declining and they are giving up market share to other companies, other brands that we've mentioned on. Lululemon, Aloe, Hoka.

29:40These are all great brands, and the stocks of a lot of these companies are way up this year. On Running is up almost 40 % this year. I think, very simply, it wouldn't be unreasonable to say the Nike brand is just falling out of favor. And that's what they have had to depend on. And just as a consumer, I don't know if you've been to a Nike store recently. It used to be like going to the Apple store when I was a kid. It was like the coolest experience going to Nike Town in London. Last time I went into a Nike store, it feels cheap. It sort of feels like a, English listeners will know this, a JD Sports.

30:18I don't know what the equivalent would be. Almost beginning to feel like a Dick's Sporting Goods. Or even worse, Big Five, where I bought my first boogie board in Culver City. It's becoming Big Five, sure. um it to me it feels like this is plain and simple a brand issue so i i just want to return to brand again if you were advising nike today what would you do to sort of revitalize this brand that at one point seems to own the premium luxury athletic wear market and whose market share has just been diluted down by these other companies like on running who are now the sexy sports brands I don't think it's a big, bold, strategic move here.

30:58Again, you're right. It's a brand thing. And what you just said about the stores, that bubbles up to the CEO. That means the CEO has the wrong guy or gal in charge of retail operations. and i don't think there's what i call like an obvious quick fix here i don't think it's you know fire the agency and have a new ad agency i don't i don't think it's buy on running which is now probably too expensive to buy i think this is unfortunately very boring shit around supply chain trying to increase the pace of innovation with new products to get people excited about the brand again you know this is just it's to me this is blocking and tackling and bringing in a ceo who's going to make a lot of hard decisions.

31:40I'd be very interested to know what is the employee to revenue headcount? Is this in fact a company that's sort of fat? But this is the boring stuff of day-to-day operations. And what it sounds like is that the CEO has the wrong people making the wrong decisions across the strongest brand or one of the strongest brands in consumer history. But if I'm a shareholder here, actually I am a shareholder in my 401k, I have Nike and Oracle, although it's not a big position. But I'd be pissed off that the three, I just mentioned my three colleagues that went to work for them five years ago. I mean, L2, we were purchased by Gartner and it was not a cultural fit, but you just have to give it to the management team there.

32:27And a lot of people left and some of our most talented employees went to Nike. Gardner's up 160%, and Nike is down 20%. So you got to think there's a lot of people internally who are just like, okay, so my stock options are worthless? Everybody, all of my buddies, I graduated from whatever, University of Oregon, and I took a job here, and I had an offer with Google. Maybe I'm very talented. I had an offer with Salesforce, or I had a chance to go to work for Adidas. I mean, name the company. those people have made a lot more money than people at nike the stock is the stock has been cut in half i mean that's just that's just crazy and at the end of the day that the only real litmus test or metric that matters for the ceo is the stock price 17 times ebda evita ebda multiple of 17 uh for adidas that number is 29 for on running it's 48 nike is almost three times cheaper than On.

33:29Is it a good time to buy? I think comparing it to On is unfair because On is a hot new growth brand. And by the way, I'm wearing a pair of Ons. It's literally, you know, tell me you're a douchebag without telling me you're a douchebag. Like every VC in the world is wearing On. I haven't seen you not wear Ons for the past two years. Yeah, it's true. I sleep in them. I shower in them now. I love this brand. I absolutely love the brand. Anyway, that's not fair because it's a hot upstart brand that's growing fast. The better comparison is Adidas, which is at 29 times. And the even better comparison is Nike's average over the last five years has been 27 and now it's at 17.

34:10But to your question, I don't like to make stock recommendations. I think everyone should invest in ETF or index funds. But I think, yeah, the answer I think Nike is a buy because this brand is so strong and the depth of human capital there is so deep that they can survive headwinds, some exogenous shocks, and even a bad CEO. I think we might look back on this and think it was a buying opportunity. Okay, well, Scott, I'm going to give you your own megalomaniac moment. Two years ago in October of 2022, when Adidas was dealing with this crisis management with Kanye West, here's what you said about Adidas stock.

34:50The stock actually even looks cheap. And I think that's kind of a learning here is that there's when you have bad news and you have dislocation, you have tumult, no obvious answers, a lot of unknowns that usually spells opportunity. And that is there's just a just the perfect storm of bad things right now at Adidas. There's loss of this hugely lucrative partnership. their core business is weak. So as a result, Adidas market cap sits around$19 billion for an iconic century-old brand that has real aspirational value. And it's probably, it's maybe a distant number two, but it's a solid number two to Nike.

35:31Nike on a relative basis is trading at about 3x the valuation of Adidas. So I would argue that the opportunity here from an investment standpoint is actually with Adidas. And by the way, the stock has doubled since then. So Scott, your reactions to your own prediction? Oh, Ed, I hate it when you do this. I just, you know, Ed, I don't like to draw attention to myself. And I think it's just inappropriate to talk about your wins. Daddy! But the truth is my nipples are hard. My nipples are hard. Thank you, Thank you, Ed. Thank you. We'll be back with a look at the road ahead for the UK.

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37:54We're back with ProfitU Markets. In her first speech as Britain's new chancellor of the Exchequer, Rachel Reeves said the country's Labour government has inherited, quote, the worst set of circumstances since the Second World War. She cited new analysis from the Treasury, which showed that if the UK economy had grown at the average rate of other OECD nations in the past 13 years, the economy would be£140 billion larger. We went over why the UK is struggling on our May 27th episode. But now the Labour Party needs to get out of this mess, and Reeves laid out the government's plan to do that. It includes increasing public sector investment by£5 billion a year, launching a national wealth fund for green sector investment, building one and a half million homes over the next five years, and letting the world know that, quote, Britain is a place to do business.

38:41In short, Labour's economic agenda today is growth, growth, growth. Scott, do you have any reactions to Labour's first week in charge in the UK and the road ahead for the country? Everything here makes a lot of sense to me. And the thing I found really refreshing around these elections was I feel like they were trying to govern from the center. And that is, they said no to the far right and the far left. And I like this kind of leftward breeze that's coming back from continental Europe. France figured out a way to bind together to kind of body check or stiff arm the far right, which I thought was very encouraging.

39:16Although the far left in France is not as crazy, but they're still fucking crazy. So I like this and I'm rooting for them. And I think everything they've outlined here makes a lot of sense for green sector investments. Now people would say the government shouldn't be picking winners. I think a better investment would be to come up with some sort of tax scheme or subsidization of venture capital. There's for every startup in Europe, there's 1 million in venture capital available. In the U.S., it's 5 million. So a lot of this is just they need to free up the purse strings to encourage more investment.

39:51In startups, I think increased public sector investment makes sense. More housing, I think that's a fantastic idea. We desperately need that in the United States. And the price of housing is outpaced inflation. and also just being more kind of open for business and trying to encourage foreign investment. The only thing I would suggest, and I don't think if it's possible, is what I'm deeming or labeling back sit and basically say, Brexit was the stupidest fucking thing we'd done and let's undo it. To basically say a lot of the stupid shit here where we made things more expensive that made our own products less appealing and made our own economy less productive, We're going to try and counteract these things.

40:33But anyways, I'm hopeful. You're the Brit. Do you have any thoughts? Yeah, I think directionally speaking, the whole Labour manifesto makes a lot of sense for all of the reasons that you just described, and I agree with them. My concern, though, is that I looked at the actual numbers, and the numbers that they are proposing for this big national turnaround are shockingly small. So I'm just going to give some examples here. They want to boost public sector investment by five billion pounds a year. That's not a lot of money. That's as much as Google spends on CapEx in a single quarter. And if you look at the Tories' proposals, what were the Tories' proposals to cut spending over the next several years, this plan would only undo a fifth of those cuts.

41:21So this is actually a very incremental change in public sector investment. The other issue that's happening in the UK right now is the NHS, the National Health Service, is in crisis. There are 7.6 million people on the waiting list right now to get treatment. Now, Labour has a whole plan. They've promised 2 million hospital appointments per year, an extra 2 million per year, which, again, that's only a 2 % increase from the year before. And even if everything goes to plan, it's going to take five years to clear that wait list. You mentioned home building. They want to build one and a half million homes over the next five years.

42:01That's 300 ,000 homes a year. Back in the 60s, England was building 600 ,000 homes a year, double what their plan is today. So these are all directionally the right changes in my view, but numerically, they're so small. And it does make me wonder if the UK can even bounce back from this because it just feels like they don't have enough money. There's just not enough money in Britain. They don't have the capital or the credit. They're now at 100 % debt to GDP to dig themselves out of the hole. And it does make you think, you know, if you're American, you should feel lucky to be American. Because, yes, America has its problems.

42:45But at the very least, America has the option to spend its way out of those problems. And I'm looking at what's happening in the UK right now and these very small incremental changes. And I'm wondering if the UK has the option to spend its way out as well. You may be right, but it's definitely classic glass half empty British thinking. It's the Southgate analysis. I don't care we're in the finals. You suck. Look, the second greatest self-inflicted wound in geopolitical history of the last 50 years beyond the invasion of Iraq was Brexit. And there's something about the culture there that does not inspire a lot of organic value creation.

43:28Having said that, the quality of the educational institution, specifically the universities, the fact that London is the new luxury item globally, what do I mean by that? I don't want to say I started a trend, I was part of a trend, but some of the wealthiest Americans with the most opportunity are moving to London. You started it. I'll give you credit. Yeah, yeah, I started it. But if you're... And opening a business, an American business or an Asian business in Europe, I think you put your headquarters still in London. There's all this talk about, oh, we're going to France. I have a lot of friends in Britain who do very well.

44:08And all this bullshit of two months ago, the non-dom thing, I'm moving back to Hong Kong. No, you're not. So people are saying that. Give us a brief explanation of what this non-dom thing is. Well, basically, my understanding is the UK essentially had a tax status where you could be a non-domiciled resident of the UK and pay taxes from your resident taxable place. And now they're basically saying, sorry, if you're not paying taxes here, you can't stay here. And there was this issue where you had all these rich people who have houses in the Maldives or wherever, and they basically weren't paying taxes in the UK.

44:44And it was a big problem. I have several friends who do really well and pay no tax, right? So if you were a resident for whatever, for tax purposes out of Hong Kong or Portugal, and you can live in London, you can pay effectively no tax. And so this thing came through, and I heard a lot of people bitching and moaning that they were going to leave the UK and was going to be a disaster for a UK. But here's the thing. The UK, especially London, is one of the world's great cities. And when you get to a certain point of wealth, I mean, if you wanted to avoid taxes if you're wealthy, I could move to Puerto Rico right now and basically not pay taxes.

45:25They have this deal. It's totally legal. you can go and you can pay, I think, 2 % or 3 % tax rate. It's either 2 % or 3 % or 7%, but dramatically decrease your taxes. But here's the thing. You got to live in Puerto Rico. And supposedly, what's different about the Puerto Rican tax evasion is that you actually have to live there for 183 days a year. You have to prove that you're living there for 183 days. And supposedly, not supposedly, it's reported several billionaire hedge funders move there. And supposedly, almost all of them have moved back. And that's the thing that London has. It will always attract a disproportionate amount of capital because it's an outstanding city to live in.

46:04And I still think it's the capital of Europe. Everyone says eventually, oh, no, it's not. It's Berlin or it's Frankfurt or it's startups are headed to Paris. No, they're not. I still think the center of Europe is, in fact, London. Your point is an interesting one. And that is you're saying the tagline for all these initiatives should be the following. Think small. What you're saying is it's just not that dramatic. It's not that interesting. The other signs of life here are Raspberry Pi going public there. I think Sheehan going public there on the LSE is going to be a big deal. But the nation with the best players wins.

46:43And I do see a trend towards wealth and human capital continuing to aggregate in London. You've been predicting ever since Sheehan said it was probably going to list in London, and then we had this development where Raspberry Pi listed in London, you've been predicting that we were going to see a revival of the stock market in London. I want to flag a new report from BlackRock. The note said, quote, we are now overweight UK equity market. Valuation is attractive. It has been the case for a while, but now we have a catalyst of potentially perceived political stability that could act as a trigger for international sentiment to warm up.

47:19Is it time to start reinvesting in the UK? So again, if you're going to do this, I would say put it in an index fund. But if you look at the multiple on earnings for stocks in the FTSE, it looks cheap. And the markets are cyclical. And just about the time everybody says, it's all about America and it's all about tech, and just throw in the towel, you see other markets outperform. And at some point, any market gets so cheap that it's irresistible. To me, it looks like the UK has been beaten up so badly for so long. You're right. It probably is a decent buying opportunity right now. Let's take a look at the weekend.

47:59Second quarter earnings season continues with the banks. Golden Sachs, Charles Schwab, Bank of America, Morgan Stanley and U.S. Bank are all reporting. And we'll also see earnings from Johnson & Johnson, Netflix and American Express. Do you have any prediction, Scott? I think you're going to see an activist at Nike. It's just too juicy a target. I don't think it's hard to imagine, and these are famous last words, that this company is going to trade that much lower than it's already gone. But the numbers here are just striking. I got to think that some of the bigger players who have a lot of capital to put to work have their pencils out and are looking at this thing.

48:38So my prediction is in the next 90 days, you're going to see an iconic activist firm pop up and say, we're here and we're concerned. We're here and we're here to help, is how they'll position it. This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Our executive producers are Jason Stavis and Catherine Dillon. Mia Silverio is our research lead and Drew Burrows is our technical director. Thank you for listening to Prof G Markets from the Vox Media Podcast Network. Join us on Thursday for our conversation with Kyla Scanlon, only on Prof G Markets.

49:36And the dove flies In love, love, love, love