Nike, Inc. announced a broad restructuring program while slashing its revenue guidance for its fiscal year amid softening online sales, promotional pressures, and heightened macro headwinds, particularly in China and EMEA. For its fiscal year ended May 31, 2024, sales are now projected to increase only 1 percent against a prior outlook of a mid-single-digit increase.
Revenue is projected to be slightly negative in the current fiscal third quarter, comping against double-digit growth in the prior-year period and then be up in low single-digits in the fiscal fourth quarter.
NKE shares were down in double-digits Friday morning before the market opened. The company’s outlook and the stock slide have impacted the share prices for Adidas, Puma, Foot Locker, Hibbett, Dick’s SG, and others.
“Last quarter, as I provided guidance, I highlighted a number of risks in our operating environment, including the effects of a stronger U.S. dollar on foreign currency translation, consumer demand over the holiday season, and our second-half wholesale order books. Looking forward, the impact of these risks is becoming clearer,” said CFO Matt Friend on a conference call with analysts. “This new outlook reflects increased macro headwinds, particularly in Greater China and EMEA; adjusted digital growth plans based on recent digital traffic softness and higher marketplace promotions; life cycle management of key product franchises; and a stronger U.S. dollar that has negatively impacted second-half reported revenue versus 90 days ago.”
Nike still expects to deliver on its full-year earnings outlook, excluding restructuring charges. Gross margins are still projected to expand between 1.4 and 1.6 percentage points.
Q2 Earnings Top Estimates
Earnings were a bright spot in the second quarter ended November 30, thanks to better-than-expected gross margins and expense management. Earnings rose 19.6 percent to $1.58 billion, or $1.03 a share, exceeding analysts’ consensus estimate of 84 cents.
Gross margin improved 170 basis points to 44.6 percent, slightly ahead of estimates. The gains were primarily driven by strategic pricing actions and lower ocean freight rates, partially offset by unfavorable changes in net foreign currency exchange rates and higher product input costs.
The period marked the first time in seven quarters that margins improved. This time last year, Nike’s inventories were up a staggering 43 percent, and the retailer was in the middle of an aggressive liquidation strategy to clear out old styles and make way for new ones.
Nike inventory dollars were down 14 percent at the end of the latest second quarter versus the prior year and down high single-digits versus the prior quarter. In total, Nike inventory dollars are down over $1.5 billion from the peak at the end of Q1 in the prior year, with days in inventory continuing to improve. Total footwear and apparel inventory units across the marketplace are down double-digits versus the prior year.
Friend noted that the gross margin gains in the latest quarter came despite “a highly promotional marketplace.”
SG&A in the second quarter grew 1 percent on a reported basis, favorable to Nike’s expectations through disciplined expense management and some shifts in the timing of spending.
Sales Miss Wall Street Targets For Second Straight Quarter
In the quarter, sales inched up 0.5 percent to $13.39 billion, slightly below Wall Street’s consensus estimate of $13.43 billion. The report marked the first time Nike has seen consecutive quarters of revenue misses since 2016. Sales were down 1 percent on a currency-neutral basis.
Nike Direct grew 4 percent, with Nike stores climbing 9 percent and Nike Digital ahead 1 percent. Wholesale declined 3 percent. Nike Direct once again led the company’s growth following several quarters that saw wholesale outpace against amid inventory-clearance efforts. Wholesale shipments still exceeded expectations.
Friend noted that sales gains were challenged in the face of gains in the year-ago quarter of 17 percent on a reported basis and 27 percent currency-neutral revenue on a currency-neutral basis. Moves to reduce wholesale sell-in for the first half of fiscal ’24 to further rebalance inventories also restrained sales growth.
From a demand standpoint, some positives in the second quarter were total retail sales grew across the marketplace on top of double-digit growth in the prior year. ASPs (average selling prices) increased across footwear and apparel, and AURs (average unit retail) grew across channels.
“Our higher-priced products, in particular, have been resilient with our $100 plus footwear models, driving strong growth in units sold across the marketplace,” said Friend. “And overall, we have maintained lower markdown rates than many of our competitors.”
John Donahoe, president and CEO, further noted that Nike “outpaced the industry” during holiday spending occasions. Over the Black Friday and Cyber Week period, Nike Direct grew approximately 10 percent across North America, EMEA and APLA. Nike Digital had its strongest Black Friday week, and a record number of consumers shopped at Nike stores over the Thanksgiving shopping weekend. In China, brick-and-mortar sales grew double-digits during the region’s National Day holiday, and Nike again outperformed the industry during Double Eleven, ranking as the number one sports brand on Tmall.
Donahoe said, “These holiday results, when combined with Q2’s earnings growth and our continued healthy inventory, showcase how we’re executing against our priorities even in the face of a highly promotional environment and increasing macro volatility.”
However, total retail sales in the quarter across the marketplace fell short of Nike’s expectations with “softer demand outside of the key consumer moments,” according to Friend.
“What we saw in the quarter was a bifurcation of performance,” said Friend. “And, specifically, what I mean is that we saw incredibly strong performance for the Nike brand over the largest consumer moments if you book in from back-to-school in the prior quarter through Black Friday and Cyber Monday this quarter. But in the periods in between, we saw softer performance in the marketplace.”
Friend attributed the weaker selling to “more cautious consumer behavior around the world in an uneven macro-environment.”
Friend added that while Nike’s store traffic continued to grow, Nike saw softness in digital traffic and higher levels of promotional activity across the marketplace. The CFO said, “As a result, we are adjusting our channel growth plans for the remainder of the year.”
Friend added that while top franchises continue to drive strong full-price sales, Nike is stepping up plans to reduce inventories on key franchises “given the promotional environment and the cautious consumer behavior that we’re seeing.”
Friend said, “Our goal is to focus Nike’s brand heat and energy on what is new as we accelerate our product innovation cycle. We have seen encouraging signs from recent consumer activations around some of Nike’s latest innovations and newness, and we intend to accelerate our pace through the Paris Olympics and beyond. While this will initially take some time, we are confident in our pipeline and the product journeys, stories and consumer energy to come.”
Macro pressures in China and EMEA were the final factor in the reduction in sales guidance. Said Friend, “Overall, we’ve taken a more prudent approach to our planning for the balance of the year given the increased macro headwinds we’re seeing in China and EMEA, in particular, and the way that we’ve adjusted our digital growth downward based on the traffic softness that we’ve seen and the higher marketplace promotions.”
For the fiscal second half, Friend said Nike would remain focused on strong gross margin execution and disciplined cost management while injecting newness into offerings. He said, “Our focus is on newness and innovation, particularly because in an environment like this where the consumer is cautious, and we’re seeing higher levels of promotional activity, it’s newness and innovation that creates brand distinction in this environment. And we’re even seeing it in the context of recent releases and recent product introductions that we’ve had over the last 60 to 90 days.”
Cost-Cutting Program
Regarding its new restructuring program, Friend noted that while investments since 2019 in accelerating its Consumer Direct plan created new operating capabilities, added “tens of millions” of new Nike members, and delivered a return of more than $12 billion of incremental revenue, it also “added complexity and inefficiency.”
Friend added, “In this competitive environment, we need to accelerate our pace of innovation, elevate our marketplace experiences, maximize the impact of our storytelling and increase our speed and responsiveness, all in service of the consumer. To do this, we are creating investment capacity to fuel Nike’s next phase of innovation, growth and profitability.”
The cost-cutting program is designed to shave $2 billion in expenses over the next three years. Friend said Nike would look for cost savings “both up and down our P&L and across our value chain.” Areas of focus as part of the plan include
- simplifying product assortments,
- improving supply-chain efficiency,
- leveraging scale to lower the marginal cost of operations,
- increasing automation and speed from data and technology,
- streamlining organizational structure, and
- reducing management layers and enhancing procurement capabilities.
Nike expects to take a restructuring charge of $400 million to $450 million in its second half, primarily related to severance costs, which will be recognized mainly in the third quarter.
The CFO added, “And as we look to drive greater efficiency and productivity, we will reallocate and invest the majority of these savings to deliver the greatest consumer impact on our largest growth opportunities. Ultimately, we believe that building a faster and more efficient Nike will accelerate future growth and innovation and deliver long-term profitability, creating value for years to come. We will continue sharing updates over the coming quarters.”
Donahoe said the cost-cutting steps would enable Nike to invest more in innovation and better target areas of the company with the strongest growth potential, citing women’s, Jordan Brand, and running. He said, “We’re getting back on our front foot, accelerating the flow of our innovation and executing with excellence across our winning formula of innovative product times distinctive storytelling times differentiated marketplace experiences.”
He cited momentum in trail running, which grew over 20 percent in the quarter, and basketball, where Donahoe called out “huge momentum” in the sales of signature sneakers of players Sabrina Ionescu, Jayson Tatum, Luka Doncic, and Ja Morant.
Donahoe added, “The second half of fiscal ’24 represents the start of a multi-year product innovation cycle that will introduce new franchise concepts and platforms, elevating our full portfolio. And while there’ll be some key moments in the second half, this innovation cycle will take some time to fully ramp up, given our size and scale.”
Regional Performance
By region in the second quarter, sales for the Nike Brand were down 3.5 percent to $5.63 billion and were off 3 percent on a currency-neutral basis. Wholesale was down 9 percent versus the prior year. Nike Direct grew 3 percent, with Nike stores up 4 percent and Nike Digital up 2 percent. Operating income rose 1.9 percent to $1.5 billion.
Friend noted that the sales performance in North America followed “extraordinary growth” in the year-ago period, when overall North America revenue jumped 31 percent, with Nike Direct up 23 percent, Nike Digital up 31 percent and wholesale up 37 percent.
Nike saw mid-single-digit retail sales growth with key partners, including Dick’s Sporting Goods, JD Sports Finish Line, and Hibbett.
“Jordan and Women’s led our momentum in the marketplace with Jordan Remix footwear grew double-digits and the AJ 11 Gratitude release delivered the brand’s largest Shox drop ever,” said Friend. “Within Women’s, Dunk, Free Metcon, and our $100 plus statement leggings delivered strong growth. In addition, Structure 25 and Vomero 17, our latest updates for everyday runners, drove positive responses from consumers and running specialty partners.”
In the EMEA region, sales for the Nike Brand improved 2.2 percent to $3.57 billion. Currency-neutral sales declined 3 percent, with wholesale down 8 percent. Nike Direct was up 7 percent as Nike stores grew 8 percent and Nike Digital grew 7 percent. Operating earnings were down 6.4 percent to $927 million.
The EMEA region also faced a strong gain of 33 percent overall in the year-ago second quarter. Said Friend, “Against the backdrop of increased macro headwinds, we saw strong consumer response to newness and premium innovation. Our winterized running products drove positive sell-through and strong growth from Invincible, Vaporfly and Ultrafly. Mercurial, Phantom and Tiempo grew double-digits. And our retro running styles including V2K, P-6000 and Shocks continue to energize the marketplace.”
Greater China’s sales for Nike Brand were up 4.2 percent to $1.86 billion and gained 8 percent on a currency-neutral basis. Wholesale grew 19 percent. Nike Direct declined 4 percent, with Nike stores growing 16 percent and Nike Digital declining 22 percent. Operating earnings were up 0.6 percent to $521 million from $485 million.
“On the whole, we are seeing a highly promotional marketplace with increased macro headwinds, especially on Digital,” said Friend. “That said, Q2 was another strong quarter in brick-and-mortar with continued improvement in full-price sales and sales in Nike-owned and partner doors growing mid-teens versus the prior year. We also continue to see strong momentum with key strategic partners, including Topsports and Pou Sheng. And Nike continues to strengthen its lead as Chinese consumer’s number one cool and favorite brand.”
In product, in China, performance styles outpaced lifestyle this quarter with strength in basketball, fitness, retro running footwear and winterized apparel. Added Friend, “Looking ahead, we continue to closely monitor the operating environment. However, we remain confident in Nike’s brand strength, our deep consumer connections, and our foundation for long-term growth in China.”
In the APLA region, revenues for the Nike Brand gained 12.9 percent to $1.81 billion and grew 10 percent on a currency-neutral basis. Wholesale grew 7 percent. Nike Direct advanced 15 percent as Nike stores grew 17 percent, and Nike Digital grew 14 percent. Operating income advanced 7.4 percent to $521 million.
Southeast Asia, India, Korea, and Mexico grew double-digits. Friend said, “We saw strong momentum across our portfolio led by Jordan & Kids. Jordan brand delivered strong growth in Remix footwear, AJ1 essentials and Signature basketball. In kids, lifestyle and global football grew double-digits with positive momentum from all kids’ Fleece, Court Borough and the Mercurial.”
Converse’s sales were down 11.4 percent in the quarter to $519 million from $586 million and gave back 13 percent on a currency-neutral basis. Growth in Asia was offset by declines in North America and Europe. Operating profits fell 24.8 percent to $115 million.
Photo courtesy Nike
