Nike missed on earnings for the first time in three years as compressed margins weighed on profits during its fiscal fourth quarter ended May 31. The sportswear giant also forecast first-quarter revenue below Wall Street targets as North America softness overshadowed China’s recovery. On the positive side, Nike indicated demand remains healthy across regions and inventories have been rebalanced to position the company for profitable growth going forward.
In his formal comments, John Donahoe, president and CEO, highlighted Nike’s success for the fiscal year with sales exceeding $50 billion on growth of 16 percent on a currency-neutral basis.
“This growth is broad-based across our consumer construct of men’s, women’s, and kids, across performance and lifestyle and across all geographies. North America, EMEA, and APLA all saw full-year double-digit growth and Greater China returned to double-digit growth in Q4,” said Donahoe. “In particular, I want to highlight Jordan’s brand’s record year. Jordan grew mid-30s with impressive growth across men’s, women’s, and kids, footwear, and apparel in both North America and internationally.”
He also highlighted that Nike was able to “return to healthy inventory ahead of our competition,” ending the quarter with inventories flat year-over-year in dollars and down in units versus 12 months ago. Donahoe said, “The actions we’ve taken position us for more profitable growth moving forward.”
In the fourth quarter, sales rose 4.8 percent (+8 percent on a currency-neutral basis) to $12.8 billion, slightly above Wall Street’s consensus estimate of $12.59 billion. Nike Direct grew 18 percent with 14 percent growth in Nike Digital, and 24 percent growth at Nike stores. Wholesale grew 2 percent, moderating as planned, as Nike tightened supply to normalize marketplace inventory levels.
Net income declined 28.4 percent to $1.0 billion, or 66 cents a share, just below Wall Street’s consensus estimate of 67 cents.
Gross margins decreased 140 basis points – in line with analyst targets – to 43.6 percent, primarily due to higher product input costs and elevated freight and logistics costs, higher markdowns and continued unfavorable changes in net foreign currency exchange rates partially offset by strategic pricing actions and lapping higher inventory obsolescence reserves in Greater China in the prior period.
Matthew Friend, EVP and CFO, said the fourth quarter marked “another quarter of strong consumer demand, with traffic growing online and, in our stores, and total retail sales across the marketplace up double-digits versus the prior year.”
He likewise cited the likely future benefit of a “significantly improved marketplace position,” due to actions including moderating ordering and liquidations to rebalance inventory levels. Total marketplace inventory units, including within Nike and at wholesale partners, were down year-over-year. Friend said, “We feel very good about the results driven by our decisive actions over this past year, as well as the sales momentum that we continue to see from Nike Direct and our top strategic partners, including Dick’s Sporting Goods, JD, Sports Direct, and our city specialty partners.”
Inventories Flat At Quarter End
Nike ended the quarter with inventory dollars flat after being up 16 percent at the close of Q323, 43 percent at the close of Q223, and 44 percent at the close of Q123. Units were down double-digits across both footwear and apparel. Apparel units were down more than 20 percent versus the prior year, its mix of in-transit inventory has normalized, and days in inventory show improvement versus the prior quarter and the prior year.
Nike’s closeout mix is in-line with pre-pandemic levels, with improvements in the average age of closeout inventory versus the prior year. From a geographical perspective, both North America and Greater China have inventory dollars down high-single-digit versus the prior year, with units being down double-digits.
North America Q4 Sales Expand 5 Percent
By region, sales for the Nike Brand in North America grew 5 percent on a currency-neutral basis (+4.7 percent reported), to $5.36 billion, well off the pace of 18 percent currency-neutral growth seen in the fiscal year. The sales growth was slowed by a 3 percent decline at the wholesale channel, following reduced spring and summer sell-in to proactively manage marketplace inventory. EBIT declined 6 percent on a reported basis.
Friend noted that for another consecutive quarter, strong consumer demand drove retail sales up double-digits across North America, “enabling us to drive a quicker return to healthy marketplace inventory levels.” Member engagement grew on all-digital platforms in North America and buying frequency was at an all-time high. Nike’s store traffic gre double-digits, surpassing industry trends.
“We saw strong brand momentum across our portfolio,” said Friend. Performance delivered strong growth with LeBron and Giannis models up double-digits and Free Metcon continuing to lead women’s performance franchises. Jordan Brand delivered “another dominant quarter” with women’s leading growth, Luka and Tatum driving momentum in men’s performance, and iconic franchises “inspiring the next generation.”
Friend noted that Air Jordan 1’s Spider-Verse launch drove the brand’s largest ever kids drop on the SNKRS sneakers app. The CFO said, “With a robust product pipeline, a healthy mix of inventory, and a normalizing supply chain, we are confident in Nike’s ability to set the pace in North America as we look ahead.”
EMEA Q4 Currency-Neutral Revenues Increase 7 Percent
In EMEA, Q4 revenue grew 7 percent on a currency-neutral basis (+3 percent reported) to $3.35 billion, also well-off currency-neutral growth of 21 percent seen for the full fiscal year. Nike Direct was up 28 percent. Nike Digital grew 24 percent, with traffic up double-digits and conversion rates expanding. Friend said, “Brick-and-mortar traffic in key countries also remains strong.” EBIT declined 13 percent on a reported basis.
Friend said Nike’s “authenticity in sport and culture continues to create separation,” in the EMEA region. He noted that Vaporfly and Alphafly topped shoe counts at the Paris and London marathons while Pegasus and Invincible drove strong sell-through. Friend said, “We channeled the energy of Air Max Day into positive momentum for Air Max Pulse and Air Max 1. And we closed out our biggest football year ever, up double digits with strong full-price sales, led by Mercurial and Phantom, and balanced growth across men’s, women’s, and kids.”
Greater China’s Currency-Neutral Sales Jump 25 Percent
Greater China’s revenues jumped 25 percent currency-neutral (+16 percent reported) to $1.81 billion. Nike Direct grew 19 percent with a recovery in brick-and-mortar offsetting a 12 percent decline in Nike Digital. EBIT surged 70 percent on a reported basis.
The top-line gains represented a continued recovery in the region with currency-neutral sales ending up 4 percent in the fiscal year.
“This quarter left no doubt, sport is back. Consumer confidence is rebounding, and Nike’s brand momentum is growing,” said Friend.
“Full-marketing activations” supported the Chinese high school basketball league, Air Max Day, and Super Brand Day to help drive the strongest product sell-through in eight seasons with full-price momentum accelerated by a healthy inventory position. Double-digit growth was seen in key running and basketball categories as well as on 6/18 against record year-ago results. Next week, Nike will introduce its first athlete tour in China since the pandemic with Giannis Antetokounmpo arriving in Beijing. Friend said, “As we look forward, we are confident in the strength of our consumer connections and confident in Nike’s ability to drive sustainable long-term growth in China.”
APLA’s Currency-Neutral Sales Expand 6
APLA sales increased 6 percent currency-neutral (+0.8 percent reported) to $1.7 billion. The growth slowed versus prior quarters with currency-neutral growth in the fiscal year up 17 percent. However, the region faced approximately 6 percentage points of a headwind due to the impact of a distributor-model shift in Central and South America. Nike Direct in the quarter was up 9 percent with Nike Digital growing 9 percent. EBIT declined 16 percent on a reported basis.
Friend said APLA saw “balanced growth” across the region. Jordan saw “strong double-digit growth as our new World Of Flight doors in Tokyo and Seoul create local brand energy.” Cortez, Vamiro 5, Pegasus and Invincible 3 models all delivered strong performances in the region. In global football, double-digit growth was seen across men’s, women’s, and kids with excitement building ahead of this summer’s Women’s World Cup being co-hosted in Australia and New Zealand.
Guidance
Looking ahead, Friend said, “We are entering fiscal 2024 on our front foot, ready to navigate any uncertainty that may be ahead of us, and ready to compete from a position of strength.”
Nike’s “opportunity to grow is as large as it’s ever been. Consumer interest around the world in sport, health, and wellness has never been greater and what excites us most is the potential still ahead,” he said. Friend cited benefits emanating from Nike’s “relentless pace of innovation,” its investments to further connect and personalize experiences with consumers across digital platforms, and its “meaningful growth” potential internationally, citing unserved opportunities in Korea, Central and South America, Southeast Asia and India, as well as China.
Friend concluded, “Last, we can now see around the corner on the transitory cost headwinds that pressured profitability in fiscal 2022 and 2023. When combined with our structural opportunities to improve profitability as we grow, we are confident that we will deliver above average margin improvement in fiscal 2024 with many of the drivers continuing into fiscal 2025.”
For FY24, Nike expects revenue to rise mid-single-digits, compared with analysts’ expectations of a 6.3 percent rise. The gains are expected to be again led by Nike Direct with growth impacted by approximately four points of headwinds from the prior year from wholesale shipment timing and accelerated liquidation activities.
Gross margins for the year are projected to expand in the range of 140 basis points to 160 basis points on a reported basis, which translates to approximately 200 basis points of operational gross margin expansion, excluding 50 basis points of negative impact from foreign exchange headwinds. This reflects the beginning of recovery from transitory headwinds, including more favorable ocean freight rates starting halfway through the second quarter and a modest improvement in markdowns versus the prior year. Margin enhancements from low-single-digit price increases and its shift to a more direct business are expected to be partially offset by higher product costs with inflation causing higher labor and fulfillment expenses in parts of Nike’s supply chain.
SG&A for the year is expected to grow slightly above revenue to support marketing behind key global sports moments and product launches as well as ongoing investments. SG&A is expected to remain below pre-pandemic levels as a percent of revenue.
For the first quarter, revenue growth is projected to be flat to up low-single digit, compared with analysts average expectation of 5.8 percent rise. Friend said the flat to modest growth expectation reflects Nike’s decision to tighten first-half buys and restrain marketplace inventory. Another quarter of sequential improvement in gross margin is expected, down 50 basis points to 75 basis points on a reported basis, which translates to 25 basis points to 50 basis points of operational gross margin expansion, excluding the negative impact of a 100 basis points of foreign exchange headwinds
SG&A expense in the quarter is projected to increase in the first quarter by low double digits on a reported basis, elevated by investments behind the Women’s World Cup and an ERP implementation in North America.
Photo courtesy Nike
