A new lawsuit is accusing Nike of misleading investors about its purported success in its direct-to-consumer strategy.
A class action suit filed by Kessler Topaz Meltzer & Check, LLP on Thursday claims that Nike chief executive officer John Donahoe and Nike chief financial officer Matthew Friend failed to reveal to shareholders that the company’s “direct-to-consumer strategy was unable to generate sustainable revenue growth.” The suit also accuses the executives of failing to disclose that Nike’s competitive advantages did not “protect the company from intense competitive pressures after Nike largely disengaged from many of its wholesale and retail partners.”
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The suit seeks to represent those who bought or came into Nike, Inc. common stock between between March 19, 2021 and March 21, 2024.
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FN reached out to Nike and Kessler Topaz Meltzer & Check, LLP for comments.
The suit comes as the athletic giant has lost share in crucial categories like running and faced criticism from the Street for its lack of innovative products.
In 2020, Nike rolled out its DTC-focused strategy, “Consumer Direct Acceleration” or CDA, which involved zeroing in on DTC and digital channels and pulling out of numerous wholesale partnerships. But throughout the last year, market watchers have become increasingly skeptical of Nike’s progress within this plan, especially as the Swoosh re-entered or reinvigorated its wholesale partnerships with retailers such as DSW, Macy’s and Foot Locker. In Nike’s most recent quarter, Donahoe openly announced a renewed investment in wholesale accounts, an apparent reversal of CDA.
“While Nike Direct will continue to play a critical role, we must lean in with our wholesale partners to elevate our brand and grow the total marketplace,” Donahoe said in March.
According to the suit, investors became skeptical of Nike in 2022, when executives continued to tout the company’s competitive advantage and digital edge despite several quarters of challenging results.
“Notwithstanding the company’s struggles with Nike Direct and its direct-to-consumer strategy, defendants continued to tout the purported strength of Nike’s business model over the next year,” read the suit. This positive commentary, the suit alleged, was misleading to investors.
According to analysts, Nike’s focus on DTC set the stage for current issues the company has faced.
“The decision to sacrifice their wholesale partners to drive greater digital business has created some issues for Nike, particularly on the competitive side,” wrote Wedbush analyst Tom Nikic in a March note. These issues, he said, have been especially prevalent in the running category, a “highly wholesale-dependent” category that Nike had largely neglected until Covid. Nike’s absence in this channel has largely contributed to its lagging performance behind fast-growing brands in this category, such as Hoka and On.
Nike’s DTC focus also caused it to miss out on a large swath of shoppers looking to buy shoes in stores after the pandemic.
“Customers want to buy Nike everywhere so reducing wholesale dramatically seems like the wrong move in hindsight,” wrote Jefferies analyst Randal J. Konik in a March note.
