Nike, a prominent player in the sportswear industry, witnessed a significant dip of 12 per cent in pre-market trading on Friday, triggering a cascading effect on other sportswear companies. The tumble followed Nike’s decision to slash its annual revenue forecast and indicate a strategic shift prioritising profit over sales, raising concerns amidst weak consumer spending.

In addition to revising its revenue outlook, on Thursday, Nike unveiled a $2 billion cost-saving plan, emphasising a “more prudent approach” for the remainder of the year. The company attributed the downward adjustment in forecasts to the underperformance of its online business and an uptick in promotional activities.

This development had a ripple effect on rival companies, with shares of Adidas and Puma both declining approximately 5 per cent. Lululemon experienced a 2 per cent drop, while Under Armour saw a decline of about 6 per cent before the market opened.

The market response aligns with a broader trend seen in the US retail and wholesale sectors, where companies are prioritising margins over sales in response to challenges in the macroeconomic environment. Barclays analyst Adrienne Yih noted, “This ‘margins before sales’ theme is not new across the entire US retail and wholesale sectors. As companies clean up inventory in a tough macro backdrop, it has been the norm to guide for a weaker top-line offset by stronger margins and cost-cutting.”

Analysts also raised concerns about Nike’s competitive position, suggesting that the company might be trailing in innovation and losing market share to brands like Lululemon and Deckers Outdoor’s Hoka. TD Cowen analysts, after downgrading Nike’s stock to “market perform” from “outperform,” highlighted the need for increased and improved marketing investments.

Nike responded to the challenges by outlining plans to simplify its product assortment, enhance automation, and introduce fresher styles to attract consumers. However, analysts, including Piper Sandler’s Abbie Zvejnieks, expressed caution, stating that while the cost-saving plan is a positive shift, scaling newness and innovation will take time, and a soft macroeconomic environment will continue to exert pressure on results.

Piper Sandler adjusted its price target for Nike from $112 to $107. Nike’s forward price-to-earnings ratio for the next 12 months, a standard benchmark for stock valuation, stands at 30.01, compared to Adidas’ 44.48. The market will be closely monitoring Nike’s strategies and performance as it navigates challenges in the sportswear sector amid shifting consumer behavior and market dynamics.

(With Reuters inputs.)