At its annual meeting, Nike officials expressed confidence that profitability would bounce back in the coming fiscal year ended May 2024 after markdowns to clear excessive inventories led to a profit shortfall in the prior fiscal year. Execs were also bullish on the brand’s innovation pipeline, structural tailwinds behind the athletics space and its evolving marketplace strategy.
“Looking at fiscal ’23, we delivered on our operational and financial goals,” said Nike’s President and CEO John Donahoe at the meeting held Tuesday at Nike’s Beaverton headquarters. “Operationally, we returned to healthy inventory ahead of our competition. The decisive actions we’ve taken to prioritize a healthy pull market have positioned us for more profitable growth going forward.”
Profits in the year ended May 31 were $5.1 billion, or $3.23 a share, down 16 percent year-over-year.
Gross margin decreased 250 basis points to 43.5 percent. At the start of the year, Nike had projected gross margins in FY23 would be flat to down 50 basis points with the underperformance blamed on markdowns used to clear elevated inventories that developed as the supply chain disruptions lessened.
Revenues for the fiscal year increased 10 percent, up 16 percent on a currency-neutral basis, to $51.2 billion. Sales were expected to climb slightly low double-digits on a currency-neutral basis under Nike’s guidance at the fiscal year’s start.
Donahoe spent much of his presentation discussing growth, noting that Nike surpassed $50 billion in revenue for the first time in the year. Broad-based growth was seen across geographies, its three brands—Nike, Jordan and Converse—and its consumer construct of men’s, women’s and kids.
He called out the performance of the Jordan brand, which grew 29 percent on a reported basis, up 35 percent on a currency-neutral basis, in the year, to $6.6 billion. Jordan brand’s gains were boosted by strength in areas being targeted, including women’s apparel and international.
“Thanks to a strong roster of exciting young superstars, growth in Jordan performance footwear is now outpacing the already-strong retro footwear,” said Donahoe. “And, today, Jordan is well on its way to becoming the second-largest footwear brand in North America. Simply put, we see a tremendous amount of potential for Jordan in its unique ability to drive culture, connection and growth like no one else.”
He said Nike continued to benefit from secular trends supporting casualization and fitness. Donahoe said, “Over three years after the start of the pandemic, the societal movement toward comfort remains, as does a global focus on health and wellness. So as ever, it is our passion and deep connection to sport that keeps us in the lead.”
Calling out successes in innovation, he pointed to several global football (soccer) launches timed with the FIFA Women’s World Cup, including the Phantom Luna, which he described as Nike’s “most innovative women’s led football boot ever,” and World Cup kits that Donahoe said featured “significant fit and material innovations mapped to a female athlete’s specific movements.” Nike also unveiled its “largest ever” soccer-inspired sportswear collection for fans and players off the pitch.
In basketball, Donahoe called the Lebron 20 the “strongest LeBron launch in years.” The Sabrina 1, Nike’s first unisex sneaker by a female athlete, saw a strong launch across men and women, helping double Nike’s WNBA business versus two years ago. The Sabrina 1 is New York Liberty guard Sabrina Ionescu’s first signature shoe.
In running, Donahoe said Nike remained “confident in growth opportunities” in the category. Launch highlights for the year include the Invincible 3 featuring the most ZoomX foam on any Nike road running shoes for maximum cushioning and comfort. Donahoe added that the Vomero 5, blending running with streetwear styling, “has become a staple of modern sneaker culture this year.”
He said, “This is just the start as we reinvigorate and strengthen our running footwear line with more to be unveiled as we build momentum heading into the Olympics in Paris next summer. We’re in a competitive mode with our running business and we are competing to win.”
Donahoe said Nike continued to make progress with its marketplace strategy, which is focused on creating “meaningful relationships” with consumers.
“We continue to bring to life our vision of giving consumers personalized digital experiences regardless of channel,” said Donahoe. ”We know that consumers expect us to know who they are both online or offline and across a full array of mono-brand, Nike digital and our wholesale partners. Our membership offense allows us to know our consumers better and serve them better.”
He said Nike continued to expand its membership base in the year with members tending to buy more frequently and buy more.
“Looking ahead to fiscal ’24, I’m confident and energized,” said Donahoe. “Our team is focused. Our innovation pipeline is as relentless as ever. And globally, we are united by our winning culture. Nike will stay on the offense as we continue to create the future of sport. I wouldn’t trade our position with anyone.”
In the Q&A session of the presentation, the first question explored whether profitability expectations or strategies around Nike’s Consumer Direct Acceleration strategy, first announced in 2020, had changed given news that Nike re-partnered with some of its wholesale accounts that it had exited as part of the program.
The Consumer Direct Acceleration strategy involves emphasizing DTC sales while narrowing its wholesale customer base to fewer strategic accounts. Nike recently returned to selling Nike footwear to DSW and Nike apparel to Macy’s after exiting both chains in 2022 as part of the program. Nike is also reviving its relationship with Foot Locker after committing to significantly reduced allocations to the sneaker chain, including marquee products, in early 2022.
“Let me just start by saying that our marketplace strategy remains the same,” said Donahoe. “Simply put, our focus is to serve consumers with what they what, when they want it, and how they want it. And Nike creates distinction across the marketplace by segmenting our consumer experiences to drive deep and direct connections with consumers across all channels.”
The marketplace strategy, he said, starts with digital. The CEO said, “We’ve accelerated our investment to create a truly distinctive digital experience for our own platforms powered by our membership offense.”
“Secondly,” he added, “we also actively manage and partner with our multi-brand partners in three complementary areas that each serve distinct consumer needs. We created greater focus and differentiation by working with fewer large multi-brand partners who have the scale to invest across the full retail experience. We’ve also sharpened our commitment to neighborhood authenticators in both sport and lifestyle to drive energy and validate our brands. And last but not least, we partner with accounts to help us provide access to consumers in key segments and price points that might otherwise not be met.”
Finally, a priority for Nike’s marketplace strategy is opening owned stores that reach consumer segments not fully addressed by other distribution avenues, including newer concepts emphasizing women’s and the Jordan brand.
Donahoe said, “This is how our Consumer Direct Acceleration strategy drives the future of the marketplace, which we envision to be seamless, member-led experiences that address the opportunities we see across the consumer landscape and meet consumer needs. And so, as we grow, we’re always actively managing our marketplace to serve consumers with extended choice in access and convenience.”
Nike earlier this year indicated it had ended its efforts to reset the wholesale marketplace. Exited U.S chains over the past several years also included Belk, Big 5 Sporting Goods, Bob’s Stores, Boscov’s, City Blue, Dillard’s, Dunham’s Sports, EBLens, Fred Meyer, Olympia Sports, Shoe Show, Urban Outfitters, VIM, and Zappos.
Matt Friend, EVP and CFO, said Nike has not changed the profitability goals expected from its Nike’s Consumer Direct Acceleration strategy due to the adjustments. He pointed out that Nike has made “significant progress” in realigning its distribution under the program over the pandemic. Nike finished FY23 with Nike Direct comprising 44 percent of sales, up from 26 percent in FY19. Nike Digital ended the fiscal year at 26 percent of sales compared with 10 percent in FY19.
“Nike Direct continues to lead our growth and we continue to see the strategic and financial benefits of building deep, direct connections with our consumers at scale,” said Friend. “In terms of where our exact business mix lands, the consumer will ultimately decide our endpoint. We also continue to drive focus and attention on improving our marginal cost of growth, expanding our profitability and driving higher returns on our investment capital. We’re confident that we’re going to be a more direct and more digital company over the long term. And we remain on the path toward achieving our long-term profitability goals.”
Asked about supply chain challenges, Friend agreed Nike had faced a number of disruptions in recent years, citing factory shutdowns, transit delays and supply shortages. The challenges ended with the rapid improvement in transit times that caused multiple seasons of inventory to arrive on top of each other, leaving Nike with too much inventory. Friend commended his operations team’s response to rebalance inventory levels
“Over this past year, we led with decisive actions to strategically manage extra inventory and drive a quicker return to a healthy pull market,” said Friend. “And while this did have a transitory impact on gross margins in fiscal 23, our priority was to set the stage for future seasons of sustainable profitable growth. Ultimately, we exited fiscal 23 in a healthy marketplace position with total marketplace inventory units, which includes Nike and our wholesale partners, down year over year. We feel great about the results driven by our decisive actions over the past year. Along with a robust product innovation pipeline and a normalized flow of supply, we’re confident that Nike’s ready to compete and to win.”
Craig Williams, president of geographies and marketplace, added that Nike is “focused on building a supply chain that is both responsive and resilient” based on four elements: diversifying its manufacturing countries of origin, accelerating innovation and automation in the Nike manufacturing system, driving greater speed and precision through locally-responsive models, and creating a digital-first consumer fulfillment network at scale. Williams said, “This ongoing transformation is laser-focused on ensuring we have the right products in the right places for consumers.”
Asked whether Nike’s growth outlook for China has changed given the disruptions taking place in the region over the last few years, Williams agreed China has faced “roughly three years of unprecedented disruption.” However, he said the Nike brand has delivered three straight quarters of positive growth on a currency-neutral basis, continues to rank as the “number one favorite and number one cool brand” in China, and remains committed to a localized approach to investing in China.
“We have launched China-specific versions of our apps to build Nike experiences that are faster, more engaging and more personalized,” said Williams. “We created a first-of-its-kind China-specific member journey with Tmall, which saw a significant uplift in new member recruitment and demand per member. We piloted connected membership in our key Nike store partners, driving conversion, member acquisition and retaining high-value members. The team continues to drive China-specific initiatives by creating hyperlocal product design and local marketing storytelling and content. In short, we remain extremely confident in our local team and long-term opportunities in Greater China. This is the geo where our brand really comes to life and we use these insights across the entire company.”
Asked what gives Nike confidence in its long-term growth opportunities, Donahoe said, “Over the last 50 years, Nike has always been a growth company and for over five decades now we have innovated for athletes, redefining sport for generation after generation. And so today, we’re the biggest champion for athletes in sport and we’ve inspired a global community and remain driven by the power of sport to create a better world. So, we remain quite competent in our long-term strategy and growth outlook. Our structural tailwind – which includes the expanded definition of sport, the societal movement toward comfort and health and wellness and the fundamental shift in consumer behavior toward digital – all continue to create energy and momentum for us. Nike’s growth always has been and will continue to be the result of three things. First and foremost, our culture of innovation drives a continuous pipeline of new products, and it’s the lifeblood of everything we do. Secondly, we combine that with a brand that deeply – three brands, in fact, are deeply connected with consumers, fueled by authenticity in sport and compelling storytelling. And then last but not least, we drive a competitive advantage in digital as one of the few brands that can connect with and directly serve consumers at scale, whether it’s through our own digital channels, our strategic partners, or our mono-brand retail.”
Friend added, “For Nike, everything starts with the consumer. So, whether it’s how we innovate to make athletes better, to serve more athletes and to make the world better for athletes everywhere; how we elevate and transform the marketplace to serve consumers seamlessly; how we unlock the meaningful growth potential that we continue to see in our international markets; we know that when we create value for the consumer, we will create value across our entire ecosystem. And beyond unlocking opportunities for future growth, our confidence also comes from seeing around the corner the transitory headwinds that have pressured our profitability over the past few years. When combined with our structural opportunities to improve profitability as we grow, we are confident that Nike continues to strengthen our foundation for sustainable, profitable long-term growth.”
Photo courtesy Nike