Nike, Inc. had a stand-out performance in its fiscal second quarter ended November 30 as the company beat street expectations on the top and bottom line and, perhaps more importantly, made progress in reducing inventories and raising full-year guidance.
Company President and CEO John Donahoe said the company was creating more separation between itself and its competition “thanks to the meaningful relationships we have with consumers and the continued success of our strategy.”
Nike reported fiscal 2023 second quarter revenues were $13.3 billion for the three-month period ended November 30, up 17 percent compared to the prior-year comparable period and up 27 percent on a currency-neutral basis.
“Our Q2 growth was broad-based across our brands, channels and geographies,” Donahoe shared on a conference call with analysts. “We had strong double-digit growth across both our partners and our Direct business, which was, once again, led by our industry-leading digital performance.”
Nike Direct sales were $5.4 billion for the quarter, up 16 percent on a reported basis and up 25 percent on a currency-neutral basis. Nike Brand Digital sales increased 25 percent on a reported basis in fiscal Q2 or 34 percent on a currency-neutral basis. Wholesale revenues grew 19 percent year-over-year on a reported basis and 30 percent on a currency-neutral basis, “driven by strong demand for seasonal products, higher shipments based on earlier supply availability and lower shipments in the prior year, given supply constraints.”
Inventory for Nike, Inc., a challenging subject after the fiscal Q1 call, was still high at quarter-end, but management said they felt the peak was behind them. Inventories were $9.3 billion at November 30, up 43 percent compared to the prior-year comp period, driven by an increase in units from lapping prior-year supply chain disruption and higher input costs.
“We believe the inventory peak is behind us as actions we’re taking in the marketplace are working,” Donahue said, addressing the elephant in the room. “Our current headwinds, such as foreign exchange and inventory challenges, are transitory, but our tailwinds are structural, like the expanding definition of sport, the consumers’ move toward digital and the cultural shifts toward comfort and health and wellness.”
Company CFO Matt Friend went into more detail regarding the inventory question on the call.
“Last quarter, we talked specifically about the actions we are taking to address excess inventory with a focus on pockets of seasonally late products, predominantly in apparel,” Friend said. “At the end of Q2, we are tracking in line with our plan, and we are pleased with the progress we have made over the last 90 days. Let me go deeper into what we are seeing and why I am optimistic about our path ahead. First, inventory dollars and units are down sequentially.”
He went on to say that last year’s Vietnam factory closures distorted prior-year comparisons. He explained that compared to the prior quarter, inventory dollars are down 3 percent, and units are down high-single-digits with days in inventory at the lowest level in four quarters. He shared how Nike is making progress where it is focused most.
“In North America, year over year growth in inventory dollars decelerated from 65 percent in Q1 to 54 percent in Q2,” Friend detailed. “More importantly, total inventory units are down low-double-digits from first-quarter levels even as spring products continue to arrive earlier with faster transit times. Third, the composition of our inventory is improving. In North America, apparel inventory units and apparel closeout units are both down by mid-teens from the prior quarter. Lastly, we have proactively reduced forward supply.”
Friend continued, “As I mentioned last quarter, we have tightened our second-half buys to prioritize inventory health across the marketplace. As transit times stabilize, we are optimistic that we will begin to see a more normal and predictable flow of supply in a more capital-efficient manner.”
Overall revenues for the Nike Brand were $12.7 billion, up 18 percent on a reported basis and up 28 percent on a currency-neutral basis, with strong growth across all geographies and channels.
“In North America, we captured market share with strong holiday results and positive consumer response to new assortments,” Friend shared.
Nike Brand fiscal Q2 revenue grew 31 percent on a currency-neutral basis and jumped 30 percent on a reported basis to $5.83 billion. EBIT grew 21 percent on a reported basis. North America Nike Direct grew 23 percent, with Nike Digital up 31 percent on “double-digit growth in traffic and repeat member buying.” Wholesale revenue grew 37 percent, driven by “strong marketplace partner demand and improved inventory supply.”
LeBron 20, KD, and Gianni’s shoes reportedly fueled double-digit growth in basketball. In women’s, Nike’s new statement leggings, Nike Go, launched with positive early response as the Free Metcon posted double-digit growth, according to Friend. Dunk reportedly “outperformed” in men’s, and Pegasus led the running category.
Europe, Middle East & Africa (EMEA) region Q2 revenues grew 33 percent on a currency-neutral basis and increased 8 percent to $3.49 billion on a reported basis. Regional EBIT grew 23 percent on a reported basis. Friend said Nike Direct grew 44 percent on a currency-neutral basis in the region, with Nike Digital growing 62 percent. Membership was an accelerator as members drove over 85 percent of demand during Cyber Week, its highest demand week in the EMEA. The company’s campaign led with sport, adding more than one million new members and inviting consumers to join in celebrating the World Cup.
“The power of our portfolio drove momentum across the marketplace,” Friend elaborated. “Earlier this month, we celebrated the Milan opening of Jordan World of Flight, a premium retail concept at the forefront of basketball culture. Meanwhile, Nike dominated shoe and apparel counts at the Berlin and London marathons as Alphafly drove strong sell-through. Pegasus Shield and Winflo Shield grew double digits in women’s running. Zegama created energy in trail running, the sport’s fastest-growing segment. And global football grew double digits as we continue to celebrate an incredible year of sport.”
Greater China’s fiscal Q2 revenue grew 6 percent on a currency-neutral basis but dipped 3 percent to $1.79 billion on a reported basis. Regional EBIT declined 10 percent on a reported basis. Friend said Greater China Nike Direct grew 4 percent on a currency-neutral basis, with Nike Digital growing 9 percent.
“In addition to delivering positive growth, we achieved our goal of returning to inventory health at the end of Q2,” Friend suggested when discussing the Great China business. “Inventory dollars declined 3 percent this quarter, and closeout inventory was down high double-digits versus the prior year with closeout mix now in line with pre-pandemic levels. Our team delivered these results while managing through significant COVID-related disruption, including the closure of over 1,500 owned and partner stores at the end of November.”
Friend went on to say that the energy surrounding the return of the Shanghai Marathon extended into double-digit growth for the Nike running business led by Zoom Fly and Vaporfly, as well as the Pegasus and Winflo. “Nike’s brand momentum with our youngest Chinese consumers continues to grow as well. On 11.11, Gen Z demand for Nike grew by 45 percent on Tmall,” he said.
Donahue added, “I want to take a moment to acknowledge our Greater China team and the 6 percent growth they just delivered. As I said earlier, it’s been nearly two years of unprecedented disruption in China, but this team’s resilience, experience, and strategy have set us apart to gain momentum on all fronts.”
The Asia Pacific & Latin America (APLA) region Q2 revenue grew 34 percent on a currency-neutral basis, or 19 percent to $1.60 billion on a reported basis. Regional EBIT grew 25 percent on a reported basis despite the transition of the circular territory to a distributor model.
APLA Nike Direct revenues grew 30 percent on a currency-neutral basis, and Nike Digital grew 35 percent. “In Korea, one of our fastest-growing marketplaces, we’re excited to integrate our digital business onto Nike’s global platform, which will enable us to serve Korean consumers through the Nike SNKRS app,” Friend shared. “We also continue to strengthen local connections through our express lane with launches, such as our Somos Familia collection.”
Revenue for Converse was $586 million, up 5 percent on a reported basis and up 12 percent on a currency-neutral basis, led by double-digit growth in North America, partially offset by declines in Asia.
Gross margin decreased 300 basis points to 42.9 percent of sales, primarily due to higher markdowns, mainly in North America, unfavorable changes in net foreign currency exchange rates, elevated freight and logistics costs, and increased product input costs, partially offset by strategic pricing actions.
SG&A grew 10 percent to $4.1 billion in Q2 due to wage-related expenses, strategic technology investments, higher Nike Direct costs, and increased demand-creation expenses. Demand creation expense was $1.1 billion, up 8 percent, primarily due to advertising and marketing.
Operating overhead expense increased 10 percent to $3.0 billion, primarily due to wage-related expenses, strategic technology investments and higher Nike Direct costs.
Net income was $1.3 billion, flat compared to the prior-year quarter, and diluted earnings per share increased 2 percent to 85 cents a share.
Analysts were expecting net earnings of 64 cents a share on revenue of $12.58 billion.
Cash and equivalents and short-term investments were $10.6 billion at quarter-end, down approximately $4.5 billion from last year, as share repurchases and cash dividends offset free cash flow.
Looking ahead, NKE now expects full-year revenue to grow in the low- teens on a currency-neutral basis, an upside outlook versus the low-double-digit guidance in the prior quarter.
“As of today, we expect approximately 700 basis points of foreign exchange headwinds, resulting in full-year reported revenue growth of mid-single digits,” Friend detailed. “Third-quarter revenue growth is expected to be higher than the fourth quarter due to the timing of wholesale shipments. We continue to expect gross margin to decline between 200 to 250 basis points versus the prior year, reflecting ongoing liquidation actions in the second half.”
Friend explained that the improved outlook reflected the company’s strong performance in the second quarter, primarily offset by an additional 25 basis points of negative foreign exchange impact, which now totals 95 basis points for the full year. He said it now expects the third-quarter gross margin to decline at a similar rate as the second quarter, including 120 basis points of foreign exchange headwinds. For the full year, NKE expects SG&A to increase in the high single-digits and sees third-quarter SG&A dollars in line with the second quarter.
Photo courtesy photo credit STRF/STAR MAX/IPX
