Shares of Nike, Inc. opened nearly 11 percent higher on Wall Street on Friday morning following the sportswear giant’s stronger-than-expected first-quarter earnings that eased analyst concerns over slowing wholesale sales and a potential stalled recovery in China. The North America region, as expected, showed its first decline for Nike in ten quarters due to elevated marketplace inventories, but the brand’s performance was better than many analysts forecasted.

Sales missed Wall Street’s targets for the first time in two years, but Nike maintained its overall outlook for the year.

On an analyst call, Nike’s CFO, Matt Friend, said overall first-quarter results aligned with guidance with efforts to reduce Nike’s inventories supporting demand.

“Retail sales across Nike Direct and Wholesale continue to grow on top of extraordinary sales this past year. Both Nike inventory and our total marketplace inventory are healthy,” said Friend. “Working capital efficiency is improving with a normalized supply chain.”

Friend said gross margins are expanding on an operational basis, excluding the effects of foreign exchange, and transitory headwinds are abating. Said Friend, “In short, we are building on a strong foundation for sustainable and more profitable long-term growth.”

Sales Inch Up 2 Percent
In the first quarter ended August 31, sales rose 2.0 percent to $12.94 billion, just short of analysts’ consensus target of $12.99 billion. Nike had predicted revenue growth to be flat to up low single digits, reflecting its efforts to tighten first-half buys and restrain marketplace inventory.

Nike Brand sales grew 2.5 percent to $12.4 billion and gained 3 percent on a currency-neutral basis. The gains were led by currency-neutral growth in EMEA, Greater China and APLA, partially offset by a decline in North America.

Converse’s sales were down 9 percent on both a reported and currency-neutral basis to $588 million. A decline in North America was partially offset by growth in Asia.

Friend said retail sales across Nike Direct and Wholesale grew mid-single digits versus the prior year. He said, “Our top franchises are driving strong full price sales and our newest product offerings across Nike, Jordan and Converse are generating positive consumer reception.”

Inventories Down 10 Percent
Nike inventory dollars were down 10 percent at the quarter’s end versus the prior year, primarily driven by a decrease in units, partially offset by product mix and higher product input costs. Total inventory units across the marketplace, including Nike’s Direct channels and at wholesale partners, were down double digits versus the prior year.

“Partner-owned inventory units are in line with the previous year, with levels planned to remain lean through our second quarter, a meaningful accomplishment after higher levels of wholesale sell-in during fiscal ’23. On the whole, we are very comfortable with the level of inventory in the marketplace in relation to the retail sales that we’re seeing as we begin increasing levels of wholesale sell-in in our second half,” said Friend. “And overall, we’re confident in the health and shape of our marketplace.”

Earnings Well Ahead of Analyst Targets
Earnings slid 1.2 percent to $1.45 billion, or 94 cents a share, from $1.47 billion, or 93 cents, a year ago, but came in well ahead of analysts’ consensus estimate of 74 cents.

The beat was attributed to better-than-expected gross margins, which decreased ten basis points to 44.2 percent but exceeded the consensus target of 43.7 percent. Higher product costs and unfavorable changes in net foreign currency exchange rates offset strategic pricing actions. Nike has projected gross margins would be down 50 to 75 basis points.

Selling and administrative expense increased 5.0 percent to $4.12 billion, or to 31.8 percent of sales from 30.9 percent a year ago. Demand creation expense climbed 13 percent to $1.1 billion, primarily due to advertising and marketing expense. Operating overhead expense increased 2 percent to $3.0 billion, primarily due to wage-related expenses and Nike Direct variable costs, partially offset by lower technology spend.

Operating earnings declined 9.8 percent to $1.65 billion from $1.83 billion a year ago with the operating margin eroding to 12.7 percent from 14.4 percent a year ago.

Nike Direct Sees Store Momentum Offset Digital Softness
By channel, Nike Direct revenues were $5.4 billion, up 6 percent compared to the prior year on a reported and currency-neutral basis with growth across all geographies.

“As we deliver on our strategy to elevate the marketplace through premium physical and digital retail experiences, we continue to see that consumers want to connect directly and personally with our brands,” said Friend. “And in fact, member engagement within our direct business is up double digits versus the prior year, with increasing average order values.”

The gains, however, were driven by stores, where traffic climbed double digits from last year. The strength caused a shift in sales from digital to physical channels, which Friend said is similar to what other retailers are experiencing. He said, “After seeing this trend build in early July or in early June, our team was nimble in transitioning inventory to capture higher full-price sales across our entire store fleet.”

Nike Brand Digital sales increased 2 percent on a reported and currency-neutral basis. The year-ago period was boosted by liquidation actions and a higher number of product launches on the SNKRS app. Friend indicated he isn’t worried about a slowdown in digital sales. He said, “What stands out are the underlying consumer trends we see in our digital business. This includes sustained momentum on the Nike mobile app with growth in traffic and increasing member buying frequency. We continue to see a growing structural advantage as more consumers start their shopping journeys with us on mobile.”

Flat Wholesale Revenues Supported By Strategic Partners
Wholesale revenues were $7.0 billion, flat compared to the prior year on a reported basis and up 1 percent on a currency-neutral basis.

Friend said Nike is seeing “largely positive results” at its key retail partners, citing high single-digit to low double-digit retail sales gains and strong inventory management with Dick’s Sporting Goods and city specialty partners in North America; JD, Zalando and Sports Direct in EMEA; and Topsports and Pou Sheng in Greater China. He said Nike continues to reset its business with Foot Locker, planning for near-term sales declines “as they invest in consumer-right concepts for the future.”

Friend said Nike’s reset of the marketplace has resulted in “a segmented portfolio of strong partners across price points and channels” with no single partner representing more than a mid-single digit of Nike’s total business. He added, “Looking across the entire marketplace, we are confident in our brand momentum as we accelerate direct consumer connections, elevate our brands and create capacity for long-term growth.”

North America Revenues Decline 2 Percent
By region, sales in North America for Nike Brand reached $5.42 billion, down 1.6 percent on a reported basis and off 1 percent on a currency-neutral basis. EBITDA gained 4 percent to $1.43 billion, primarily due to strong gross margin expansion.

The 1 percent sales decline on a currency-neutral basis in North America in the quarter followed gains of 18 percent in Q423, 23 percent in Q323, 21 percent in Q223; 13 percent in Q123, 7 percent in Q422; 9 percent in Q322; 12 percent in Q222; and 15 percent in Q122, and 141 percent in Q421.

The 141 percent gain in the fiscal fourth quarter ended May 31, 2021, reflected the lapping of the most-affected quarter during the pandemic. The last decline of 11 percent in the fiscal third quarter ended February 28, 2021 was attributed to supply chain challenges, including global container shortages and U.S. port congestion.

Nike Direct sales in North America grew 7 percent as stores grew 11 percent and Nike Digital gained 4 percent. Wholesale sales declined 8 percent, in line with expectations following the brand’s moves to restrain of sell-in of marketplace supply.

“In a competitive environment, our retail sales momentum grew throughout the quarter across Nike Direct and wholesale,” said Friend. “Nike’s back-to-school performance outpaced the broader industry with strong sales from our top franchises and clear consumer excitement around newness.”

Friend said Infinity 4 drove strong full-price sales with the aid of partnerships with key running specialty accounts to host community activations. Double-digit growth was seen from the newest generation of Tech Fleece supported by wholesale partner programs. Double-digit gains were also seen in North America in leggings from Zenvy, Go and Universa while Dunk and Free Metcon footwear styles also saw strong sell-through. Jordan brand continued to see double-digit growth in North America, led by women’s and kids as well as performance basketball.

EMEA Sales Expand 8 Percent
Sales in the EMEA (Europe, Middle East & Africa) region for Nike Brand were up 6 percent on a currency-neutral basis (8.3 percent on a reported basis) to $3.61 billion. On a currency-neutral basis, Nike Direct was up 6 percent. Nike stores grew 17 percent while Nike Digital declined 2 percent. EBITDA declined 5 percent on a reported basis to $930 million.

Friend said global football and fitness grew double digits while women’s outpaced total growth. Phantom Luna, a women’s soccer cleat, delivered strong sell-through, the Metcon training style was up double digits and Motiva, a walking shoe, is “off to a great start” in a new category for Nike. In the running category, Pegasus, Invincible and Vomero also delivered strong results in the quarter in the EMEA region. Leggings and shorts grew double-digits in the quarter with support from retail integration. Trail running footwear grew double-digits with a boost from brand activations.

China’s Sales Climb 12 Percent Currency-Neutral
In Greater China, sales for the Nike Brand rose 12 percent currency-neutral (4.8 percent on a reported basis) to $1.74 billion. Nike Direct grew 10 percent, with Nike stores up 12 percent and Nike Digital up 6 percent. EBITDA was off 3 percent to $525 million. Retail sales across Nike Direct and Wholesale grew double digits with another quarter of strong sell-through.

“Throughout the quarter, we saw incredible energy around the return of sport, with thousands of young runners joining in our back-to-school kid’s race, players across cities taking part in our Jordan Flight basketball tournament and historical highs in social engagement with our neighborhood accounts as consumers joined in hyper-local community experiences to celebrate our newest Kobe release,” said Friend. “In a highly promotional marketplace, we outperformed industry trends with improvement in full-price sales. Our performance dimensions led growth with consumer excitement around G.T. Jump, Sabrina 1 and Invincible. And in lifestyle, Vomero and other retro running styles are gaining momentum as we prepare to scale over the coming seasons.”

APLA Sales led by Japan, Southeast Asia, India, and Mexico Expand 3 Percent
Asia Pacific & Latin America (APLA) sales for the Nike Brand increased 3 percent currency-neutral (2.4 percent on a reported basis) to $1.57 billion, led by Japan, Southeast Asia, India, and Mexico. Nike Direct grew 3 percent with a 10 percent store gain offsetting a 3 percent digital decline.

Friend noted that the growth reflected accelerated momentum in the region, marked by store traffic in Japan returning to pre-COVID levels. Sales through its new partnership in India exceeded plan, Mexico’s digital business delivered double-digit growth, and kids overall grew double-digits. Market share gains are being seen in women’s lifestyle products with positive consumer response to Air Max Koko, V2K and Gamma Force. Jordan’s Luka Dončić and Jayson Tatum models drove strong momentum in basketball. EBITDA slumped 17 percent to $414 million.

Innovation Update
Nike CEO, John Donahoe, largely addressed Nike’s innovation successes and pushes, including the brand’s successes in lifestyle products over the last two years by developing Air Force 1, AJ1 and Dunk to be the three largest footwear franchises in industry history. He said Nike continues “to set the bar in key global sports like basketball and global football” while Jordan now ranks as one of the leading footwear brands in North America “with potential for so much more.”

In global football, he called out the success of Phantom Luna and Mercurial boots around the Women’s World Cup that also included successful activations.

“We brought our culture of innovation to life through our storytelling as we dominated the conversation with a leading share of social voice,” Donahoe said. “In particular, we were incredibly effective in reaching Gen Z women through our lens of sports, style and culture. On TikTok, our priority channel for Gen Z, our engaged audience, meaning those who actively interacted with our content, was up 172 percent, a huge statement of Nike’s ability to connect with authenticity to this important demographic.”

In EMEA, Nike Brand’s key boot franchises –  Mercurial, Phantom, Tiempo and Phantom Luna – saw double-digit growth in Q1, leading adult global football category to grow double digits in the geography. In APLA, global football also grew double digits with strong growth in kid-sized kits. Donahoe said Nike’s efforts around the World Cup, the Euros last summer, the WNBA and  investment in coaching show the brand remains “committed to growing the game for women’s sports.”

In basketball, Donahoe said the Sabrina 1 “continued its very strong sell-through this quarter, with both women’s and men’s interests high” while the Kobe Brand was launched in the quarter to ”very strong demand.” Jordan footwear grew double digits in the first quarter. High expectations are set for the LeBron XXI, launched this week and Devin Booker’s first signature shoe, which launches in December.

Donahoe also noted that innovation includes Nike’s has investments in digital capabilities “that fuel engagement with our brands and deepen direct consumer connections around the world,” although he also pointed to some shortcomings for the brand.  For instance, while Nike has come out with a number of product innovations in running, “we need to drive more meaningful consumer connections among everyday runners and scale these innovations more effectively across the marketplace.”

He added, “Our storytelling has driven energy in many areas, but we have the opportunity to cut through with more sharpness and clarity around the performance benefits and distinction of our products.” Donahoe further believes Nike has an opportunity to “deliver more compelling assortments, particularly when it comes to serving our women consumers.”

He concluded, “Across our company, we are focused and mobilized to address areas where we need to raise our game while continuing to drive competitive separation across the board.”

Looking ahead, Friend said Nike in coming seasons will look “build on the consumer momentum around running and modern comfort” with updates to performance and lifestyle franchises such as Infinity, Motiva, Invincible, Vomero 5, V2K and the Air Max 1. The CFO added, “We will refresh our basketball portfolio across Nike and Jordan through innovation and style and grow the Kobe brand. We will ignite the next chapters of Pegasus, the Jordan Game shoe and Tech Fleece while continuing to grow powerhouses like Dunk and Metcon.”

In 2024, around the tenth anniversary of Air Max Day and next summer’s Paris Olympic Games, the “next wave of Nike Air innovation” will debut, Friend noted.

From a profitability standpoint, Nike Brand ASPs (average selling prices) are up across footwear and apparel with a “focus on the price value of our products.” Improving China’s profitability now becomes a bigger priority as sales growth has recovered, according to Friend. At the supply chain level, investments in regional service centers and a new transportation management system are expected to reduce online fulfillment costs. Overall, Nike is planning “more modest” increases in operating overhead this fiscal year, following two consecutive years of double-digit growth. Field said. “We are doing this by unlocking speed and productivity as we transform our operating model to build a faster and more efficient Nike.”

Outlook
Looking ahead, Nike reiterated its outlook for the year, continuing to expect reported revenue to grow mid-single-digits. The growth outlook includes approximately 4 points of headwinds from accelerated liquidation and higher wholesale sell-in during the prior year “as we sold roughly five seasons of supply within four financial quarters.”

Gross margins are still expected to expand 140 to 160 basis points on a reported basis, which includes 50 basis points of negative impact from foreign exchange headwinds. Friend said, “We are cautiously planning for modest markdown improvements for the balance of the year given the promotional environment.”

SG&A is expected to continue to slightly outpace revenue growth. more specifically at the high end of mid-single digits.

Second-quarter sales are expected to be up slightly as the quarter laps Nike’s “most challenging comparisons” in FY23. Gross margins are forecast to expand approximately 100 basis points, reflecting benefits from strategic pricing, improved markdowns and lower ocean freight rates, offsetting higher input costs and 50 basis points of foreign exchange headwinds. SG&A expense is expected to grow mid- to high-single-digits.

Photo courtesy Nike