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Dive brief:
- A class action lawsuit was filed against Nike on Thursday, alleging securities fraud in connection with the retailer’s DTC strategy. CEO John Donahoe and CFO Matt Friend were named in the lawsuit.
- The complaint alleges that Donahoe and Friend misled investors about the success of its Consumer Direct initiative, by continually touting the strength of its business model and digital plan when in fact the DTC strategy was “unable to generate sustainable revenue growth,” according to court documents filed in the U.S. District Court for the District of Oregon. The complaint also contends that Nike was unable to protect itself from industry pressures after abandoning many of its wholesale partners.
- The lawsuit was filed on behalf of investors who purchased Nike stock between March 19, 2021 and March 21, 2024. Nike did not immediately respond to a request for comment on the lawsuit.
Dive Overview:
Nike’s Direct Consumer Offense and the acceleration plans are being attacked in a new class action lawsuit alleging that two of the brand’s top executives misled investors about the strategy’s success.
“Throughout the Class Period, Defendants have repeatedly touted the purported strength of Nike’s business model, and in particular the claimed success of its digital and direct-to-consumer strategies in producing sustainable growth, while downplaying the significant competitive pressures the Company faces,” the lawsuit reads.
The complaint traces Nike’s efforts to shed its wholesale partners in 2020, which continued into 2022 with a high-profile exit from Foot Locker, as well as the retailer’s subsequent return to many of those partners when its DTC strategy failed to deliver the desired results. Indeed, following disappointing sales results, Nike launched a cost-cutting plan late last year aimed at boosting growth and profitability. The plan included layoffs, as well as a simplification of its product portfolio, with executives citing its shift to a DTC model as the reason for the cuts.
“Since fiscal 2019, our investments to accelerate Nike’s direct-to-consumer vision have created new operational capabilities, added tens of millions of new members to our membership base, and generated more than $12 billion in incremental revenue,” Friend said on a call with analysts at the time. “However, we have also added complexity and inefficiency. In this competitive environment, we must accelerate our pace of innovation, improve our market experiences, maximize the impact of our storytelling, and increase our speed and responsiveness.”
Donahoe followed up in March by acknowledging that the company needed to make “significant adjustments” to its direct-to-consumer acceleration strategy because Nike was “not performing to its potential.”
A lackluster innovation cycle is also part of the retailer’s recent financial challenges, analysts say, and Nike has been working to ramp up innovation in the first half. The retailer introduced a new product line in April as part of a “multi-year innovation cycle” and sold out of its spring launch of the Air Max DN, which analysts saw as a good sign. Nike’s wholesale partners have also commented on the retailer’s upcoming innovation, with Foot Locker chief commercial officer Frank Bracken saying in May that the brand was “going back on the offensive.”
