Dive Brief:
- Nike could be considering a sale of Converse, BNP Paribas Equity Research senior analyst Laurent Vasilescu said in a client note Monday. Vasilescu warned that Converse’s underlying health is “more precarious” than it may seem.
- The footwear brand saw revenues decline 30% in its most recent quarter, while the namesake Nike brand was up 1.5%. CEO Elliott Hill said in December that Converse’s turnaround would take longer than Nike’s.
- Nike declined to comment on the possibility of selling Converse.
Dive Insight:
A sale of Converse could be on the horizon as the sneaker brand’s performance falters.
In addition to multiple quarters of revenue declines, BNP Paribas pointed to 700 basis points of margin deterioration in Q2, on top of 620 basis points in Q1. Lower average selling prices and higher product costs are also of concern, as the former could indicate a reliance on off-price in lieu of key wholesale partners.
“What really surprised us with this 10Q is that demand creation declined 44% YoY vs down 6% YoY in 1Q,” Vasilescu wrote. “We’ve never seen a 44% decline in demand creation for a brand.”
That metric alone could suggest Nike is evaluating strategic alternatives for Converse, according to BNP Paribas. Hill made no mention of a potential sale on a call with analysts last month, but noted that it “will take more time to return to healthy growth” at Converse. The subbrand, which made $1.7 billion last year, is in the midst of a reset with a new CEO as of July.
“A potential divestiture would not be Nike’s first. Rather, it would cap off a long history of divestitures from Cole Haan, Umbro, Starter, Bauer, and Hurley,” Vasilescu said. “A divestiture of Converse would finalize the divestiture of Nike’s all acquired brands, a further testament that brand acquisition is hard to pull off.”
Should Nike sell off Converse, it would mean a roughly 3% headwind to sales next year, as well as a hit to the bottom line, though Vasilescu said that was harder to calculate.
The discussion comes amid a turnaround at the broader company, which saw revenue inch up in both quarters this year. In the roughly year and a half since Hill joined Nike as CEO, the executive has overhauled the retailer’s C-suite ranks, cut back on the oversupply of its classics franchises and realigned its teams around key sports, among other changes.
