Nike Inc.’s online growth took off and China resumed growth during its fourth quarter ended May 31 but both provided little ammunition to overcome the impact of store closures caused by the emergence of COVI-19.
The company posted a net loss of $790 million, or 51 cents a share, in the period, driven by lower revenue and gross margin as a result of the COVID-19 impact on operations, partially offset by lower selling and administrative expenses.
Sales decreased 38.0 percent to $6.3 billion and were down 36 percent on a currency-neutral basis, primarily due to owned and partner physical store closures across North America, EMEA and APL A due to COVID-19, partially offset by growth in Greater China.
As of Thursday, approximately 90 percent of Nike-owned stores were open across the globe. Nike said retail traffic continues to improve week-over-week with higher conversion rates as compared to the prior year.
Nike’s digital sales jumped 75 percent in the fourth quarter, or 79 percent on a currency-neutral basis, with strong double-digit increases across all geographies and were approximately 30 percent of total revenue.
Gross margin decreased 820 basis points to 37.3 percent as higher full-price average selling prices, despite increased wholesale discounts, were more than offset by higher product costs including factory cancellation charges, increased inventory obsolescence reserves and the adverse rate impact of supply chain fixed costs on lower wholesale shipments primarily due to COVID-19.
Selling and administrative expense decreased 6 percent to $3.2 billion, which included an incremental $178 million increase in bad debt expense. Demand creation expense was $823 million, down 19 percent to the prior year as retail and brand marketing spend was shifted as sporting events were canceled or delayed due to COVID-19. Operating overhead expense decreased 1 percent to $2.4 billion driven primarily by lower total wages and travel and related expenses, partially offset by higher bad debt expense.
Total Nike Brand sales were $6.01 billion in the quarter, down 38.1 percent on a reported basis and 36 percent on a currency-neutral basis. Among categories for Nike Brand, Footwear was down 35.4 percent to $4.2 billion and gave back 34 percent on a currency-neutral basis. Apparel dropped 42.4 percent to $1.64 billion and was down 41 percent on a currency-neutral basis. Equipment reached $165 million, down 53.4 percent on a reported basis and 51 percent on a currency-neutral basis.
From an EBIT (earnings before interest and taxes) perspective, Nike Brand showed a loss of $360 million in the period against EBIT of $1.74 billion a year ago.
Digital Sales Expands 80 Percent In North America
By region, sales for Nike Brand in North America declined 46.5 percent in the quarter to $2.23 billion and fell 46 percent on a currency-neutral basis. Nike digital, however, grew 80 percent. The Nike app grew triple-digits and now represents 30 percent of the North America digital business.
Women’s full-price apparel grew 200 percent and was powered by strong new member growth with women representing over half of new member acquisition in the quarter.
Matt Friend, CFO, said on a conference call with analysts, “As retail began to reopen in mid-May, we saw strong double-digit growth in retail sales for our brand across the total North America marketplace. These trends have continued into early June, including Nike Digital growing triple digits. Physical retail traffic remains below prior year and is being offset by higher rates of conversion due to promotional activity as well as significant shifts to owned and partner digital. And as of today, approximately 85 percent of Nike-owned stores are open.”
Nike Brand posted an EBIT loss of $13 million in North America in the quarter against positive EBIT of $1.05 billion a year ago
EMEA Sees Robust New Member Growth
Sales in the EMEA (Europe, Middle East & Africa) region for Nike Brand fell 46.0 percent to $1.33 billion and sunk 44 percent on a currency-neutral basis. Digital grew nearly 100 percent with continued brand momentum and significant new member acquisition and engagement across the Nike Training Club and the Nike Running Club apps with active new member growth of over 200 percent and more than 18 million workouts logged in the quarter.
Nike gained market share across both Footwear and Apparel, becoming the number one apparel brand during Q4 in key markets for the first time. As retail began to reopen in the EMEA region in May, Nike saw slight growth in total retail sales versus the prior year across the marketplace, with better performance in Germany, France and the U.K. offset by slower recovery in Spain and Italy. Retail sales have now accelerated in June, including triple-digit Nike Digital growth. Traffic levels, conversion trends and consumer shifts toward digital are similar to what Nike is seeing in North America. Approximately 90 percent of Nike-owned stores are open.
The EMEA region for Nike Brand showed an EBIT deficit of $153 million against positive EBIT of $506 million a year ago
China Returns To Growth
Faring better was Greater China, where sales for Nike Brand were down 2.9 percent to $$1.65 billion while gaining 1 percent on a currency-neutral basis. Growth improved each month of the quarter, including strong double-digit growth in May on a currency-neutral basis. Digital grew 53 percent and the Nike app, which launched in fiscal Q3, saw nearly 11 million downloads, driving over 10 percent of total digital demand in the fourth quarter. All Nike-owned stores are open in the region. In June, Nike saw a return to positive comparable store sales in Nike-owned stores with higher conversion and higher units-per-transaction more than offsetting lower traffic. Nike Digital growth has accelerated to triple digits. Greater China’s EBIT for Nike Brand in the quarter still fell 15.3 percent to $571 million.
APAL Region Challenged By Outbreaks In Latin America
In the APAL (Asia Pacific & Latin America) region, sales for Nike Brand were down 41.9 percent to $801 million and lost 39 percent on a currency-neutral basis. Nike saw varied COVID-19 impact across countries in the region with South Korea recovering the fastest with 8 percent growth in the quarter. Digital growth was nearly 80 percent, led by strength in Japan, Korea and Brazil, with Women’s growing two times the rate of Men’s on Nike Digital. Approximately 65 percent of Nike-owned stores are open in the region with a higher percentage in South Korea, Japan and Australia, while stores across Latin America remain largely closed. Friend said about the region, “Fiscal year ’21 will continue to be a time of uncertainty as economies rebound from the effects of COVID-19 and seek to contain further outbreaks of the disease. We will be agile and resilient, because we understand that each market recovery will not be linear.”
In the APAL region, EBIT for Nike Brand was down 76.7 percent in the quarter to $79 million.
For Converse, sales in the fourth quarter were down 37.9 percent to $305 million. EBIT showed a loss of $305 million against positive EBIT of $82 million a year ago.
Jordan Leads Full-Year Sales Growth
COVID-19 sidetracked what was heading for another strong year for Nike Inc.
Revenue for Nike Inc. for its full fiscal year fell 4 percent to $37.4 billion and was down 2 percent on a currency-neutral basis. In the first half of fiscal 2020, prior to COVID-19, Nike revenue was up 9 percent, or 11 percent on a currency-neutral basis, reflecting strong, broad-based consumer demand, higher full-price sales realization and a double-digit increase in digital sales. Digital sales increased 47 percent, or 49 percent on a currency-neutral basis, in the full year, with all geographies growing strong double-digits.
Net income was $2.5 billion, or $1.60, down 36 percent, driven by lower revenue and gross margin impacted by COVID-19 in the fourth quarter and higher selling and administrative expenses, partially offset by a lower tax rate. The latest year also included a one-time charge associated with the strategic distributor partnership transition in South America, which reduced earnings per share by 25 cents per share.
As usual, Nike provided a further look into its category performance in its annual reports. Among the highlights:
- Nike Brand sales to Wholesale Customers were $23.2 billion, down 9 percent on a reported basis and 7 percent on a currency-neutral basis;
- Nike Brand sales through Nike Direct $12.4 billion, up 5 percent on a reported basis and ahead 8 percent on a currency-neutral basis;
- Nike Brand Men’s sales were $16.7 billion, down 6 percent on a reported basis and 4 percent on a currency-neutral basis;
- Nike Brand Women’s sales reached $7.0 billion, declining 5 percent on a reported basis and 3 percent on a currency-neutral basis;
- Nike Brand Kids’ sales reached $5.03 billion, off 5 percent on a reported basis and 3 percent on a currency-neutral basis;
- Nike Brand Running sales were $3.83 billion, down 15 percent on a reported basis and off 12 percent on a currency-neutral basis;
- Nike Brand Basketball sales were $1.51 billion, down 6 percent on a reported basis and 4 percent on a currency-neutral basis
- Jordan Brand sales were $3.61 billion, climbing 15 percent on a reported basis and 16 percent on a currency-neutral basis;
- Nike Brand Football (Soccer) revenues reached $1.58 billion, down 17 percent on a reported basis and 14 percent on a currency-neutral basis;
- Nike Brand Training sales were $2.69 billion, off 14 percent on a reported basis and 13 percent on a currency-neutral basis;
- Nike Brand Sportswear revenues totaled $12.3 billion, down 1 percent on a reported basis but up 1 percent on a currency-neutral basis;
- Nike Brand Greater China revenues increased 8 percent, or 11 percent on a currency-neutral basis, to $68 billion, marking its sixth consecutive year of double-digit growth on a currency-neutral basis;
- Nike Brand North America sales declined 9 percent to $14.5 million and dropped by the same 9 percent on a currency-neutral basis;
- Nike Brand EMEA sales declined 5 percent to $9.35 billion and 1 percent on a currency-neutral basis;
- Nike Brand APLA sales fell 4 percent to $5.03 billion but gained 1 percent on a currency-neutral basis.
Slow Recovery Expected
Friend said Nike expects to see sequential quarterly improvement in fiscal 2021 as retail reopens and each market normalizes supply and demand. Revenues for the first half of the fiscal year are expected to be below prior-year levels, but less of a decline than experienced in Q4 as stores reopen and digital growth continues. Revenues in the second half are expected to be up significantly with the return of a healthy marketplace and normalizing full-price sell-through across our channels. For the full fiscal year, revenues are expected to be flat to up versus prior-year.
Gross margin will be impacted by a priority to return to normalized inventory levels in Q2. SG&A is projected to decline versus the prior year
Friend concluded in his formal comments, “The financial and operating principles that will carry us through these unprecedented times are the same ones that have guided us over the decades. And our brand momentum and deep consumer connections are differentiated product and continuous flow of innovation, our digital advantage and our operational capabilities have never been stronger. In addition, consumer interest in sport, fitness, health and wellness has never been greater, leaving Nike’s market opportunity larger than ever. And though we can’t predict short-term trends due to the dynamic nature of this pandemic, interestingly enough, we can now see our brand’s long-term future even more clearly.”
Photo courtesy Nike