Nike delivered a significant fourth-quarter earnings beat with the help of accelerated growth in the North America and EMEA regions. Stronger-than-expected FY22 guidance and a bullish multi-year outlook were also provided as its digitally-driven direct engagement with consumers is accelerating its overall growth.
The two challenges called out in the quarter were China, where the brand is facing a social-media backlash and continued supply chain constraints, but Nike’s robust outlook through fiscal 2025 showed confidence that the challenges are manageable.
Nike’s outlook through fiscal 2025 calls for revenue growth to inflect upwards to a range of high single-digit to low double-digit growth on average, with a high-teens EBIT margin and mid-to-high teens EPS growth. Previously, Nike’s long-term targets called for high-single-digit revenue growth and mid-teens EPS growth.
“These are times when strong brands can get stronger, and each quarter this reality becomes even more clear,” CEO John Donahoe said on a call with analysts. “Today, we are better positioned to drive sustainable long-term growth than we were before the pandemic.”
Donahoe expressed strong confidence about Nike’s ability to capitalize on its largest growth drivers, including the women’s business, apparel, Jordan Brand, and international. He also said “structural tailwinds,” partly due to the pandemic, would continue to benefit the brand. Donahoe said, “The return to sport and permanent shifts in consumer behavior toward digital and health and wellness continue to create energy for us.”
In its fiscal fourth quarter ended May 31, revenues were $12.3 billion, up 96 percent on a reported basis and 88 percent on a currency-neutral basis. Sales marked record quarterly levels and topped Wall Street’s consensus estimate of $11.1 billion. Sales increased 21 percent compared to the fourth quarter of 2019.
The year-over-year gain was driven by a strong rebound in wholesale shipments and Nike-owned store performance as pandemic-related store closures were anniversaried. However, Nike Digital still saw strong growth of 37 percent versus the prior year despite the reopening of physical stores.
Gross margin in the quarter increased 850 basis points to 45.8 percent versus the prior year, driven by favorable Nike Direct margins and the anniversary of higher pandemic-related costs.
SG&A grew 17 percent year-over-year due to higher sports marketing expense as sports events returned, digital marketing drove digital demand, technology investments supported its digital transformation and wage-related expenses.
Net income was $1.5 billion, 93 cents a share, nearly double Wall Street’s consensus estimate of 51 cents. In the year-ago quarter, Nike posted a net loss of $790 million, or 51 cents.
North America’s Revenues Catapult 141 Percent
Among its regions, Q4 revenue in North America grew 141 percent to $5.4 billion, marking the region’s first $5 billion quarter. Sales were up 29 percent compared to its fourth quarter of 2019.
The gains were driven by notable improvements in full-price sell-through as the marketplace reopened and sport’s events returned.
“Demand for Nike remained incredibly strong,” said Nike’s CFO, Matt Friend. “And, as we expected, delayed revenue from the global supply chain disruption in the third quarter was recaptured during the fourth quarter.”
Nike Direct grew over 120 percent in North America as Nike-owned stores returned to positive sales growth versus pre-pandemic levels, but Digital growth continued to be strong, increasing 54 percent versus the prior year and 177 percent compared to the fourth quarter of 2019.
The Direct growth in the region was attributed to an increase in members across digital and physical retail. Member demand nearly doubled versus the prior year, and the number of buying members grew roughly 80 percent.
“Across the total marketplace, we continue to see strong retail sales growth and consumer demand for our brands exceeding marketplace supply, with marketplace inventory down double-digits versus the prior year,” said Friend.
Nike-owned inventory declined 7 percent with double-digit declines in closeout inventory. Friend said that in-transit, full-price inventory remained elevated as longer lead times continue for product delivery. Supply chain delays and higher logistics costs are expected to persist throughout much of fiscal 2022.
EMEA Revenues Climb 107 Percent
In EMEA, Q4 revenues grew 107 percent on a currency-neutral basis to $2.98 billion with strong growth across the region, including the UK, Ireland, France, Germany, and Italy. Nike Direct grew 57 percent despite government restrictions requiring nearly half of its Nike-owned stores to remain closed for the first two months of the quarter. In May, as restrictions eased, Nike saw a strong consumer response with pent-up solid demand, and the momentum continued into June. Nike Digital grew nearly 30 percent in the quarter versus the prior year.
Through its Member Days, the EMEA region saw strong engagement with member demand outpacing total Nike Direct revenue growth with all-time highs for active female members during Air Max week. In the fourth quarter, the Nike mobile app was expanded to more than ten new countries across the region.
Friend said inventory in the EMEA region normalized during the quarter, a quarter sooner than expected.
Greater China Impacted By “Marketplace Dynamics”
In Greater China, its Q4 revenue grew 9 percent on a currency-neutral basis, to $1.93 billion. The growth fell short of its steady double-digit growth rate seen in recent years. Donahoe said China “was impacted amid marketplace dynamics with improving trends as we exited the quarter.”
Nike was one of the Western brands, including H&M and Adidas, that have faced calls for online boycotts in China starting in March after nationalist users on social media noticed that the brands had released statements expressing concern about reports of forced labor in China’s Xinjiang region.
China’s performance in the fourth quarter included Nike Direct growth of 2 percent as strong growth in Nike-owned stores offset declines in Digital. After a strong March, its business was impacted in April, and marketing activities and product launches were suspended. Sales recovered to a single-digit decline in May and have sequentially improved into June, with month-to-date retail sales trends approaching prior-year levels.
Friend noted that underlying demand in the region is evident as China delivered its seventh consecutive year of double-digit growth for the full year. Investments in the region also continue, including a new digital technology center in Shenzhen.
Asked about China in the Q&A session, Donahoe said Nike is planning for a continued recovery in the region throughout the fiscal year 2022, “but we don’t expect it to be linear.” He said the brand continues to be confident China will deliver low- to mid-teens growth long term.
“We’re confident about what we see in China as we drive long-term growth, and we have a long-term view about China. We’ve always taken a long-term view,” said Donahoe. “We’ve been in China for over 40 years, still invested significant time and energy in China in the early days and today we’re the largest sports brand there, and we’re a brand of China and for China. And the biggest asset we have in China is consumer equity. Consumers feel a strong deep connection to the Nike, Jordan and Converse brands in China, and it’s real.”
APLA Sales Expand 76 Percent
In the APLA region, sales grew 76 percent on a currency-neutral basis in the quarter to $1.46 billion. Growth was seen across all territories led by Japan, SOCO and Mexico. Korea grew double-digits in the quarter on top of the 8 percent growth in the year-ago fourth quarter.
Nike Digital grew more than 50 percent, and Member Days saw all-time highs for member demand. Friend said, “This momentum also extended to our marketplace partners in APLA as they returned to growth versus pre-pandemic levels and achieved their highest level of full-price realizations since the beginning of the pandemic.”
Low Double-Digit Growth Predicted For Fiscal 2022
For the current fiscal year, Nike expects revenue to grow low double-digits and surpass $50 billion, reflecting strong consumer demand across operating segments. Its first-half growth is projected to be slightly higher than the second-half growth.
Gross margin for the year is expected to expand 125 to 150 basis points, reflecting the continued shift to a more profitable Nike Direct business and sustained strong full-price realization, partially offset by higher product costs, supply chain investments and the annualization of certain one-time benefits in fiscal 2021.
SG&A growth for the current fiscal year is projected to slightly outpace revenue growth as marketing investments support the return of sporting events, more consistent store operating schedules arrive and ongoing investments in the brand’s largest growth opportunities.
Elevated Growth Outlook Through Fiscal 2025
The projection of high single-digit to low double-digit growth, on average, annually through fiscal 2025 reflects expectations of “outsized marketplace opportunities” in women’s, apparel, Jordan, digital, and international, said Friend.
Growth will be led by Nike Direct and its strategic wholesale partners. Nike Direct is approaching 40 percent of the brand’s revenues currently and expected to represent approximately 60 percent in fiscal 2025, led by growth in Digital. Owned and partnered digital is projected to achieve half of the business mix in fiscal 2025, with Nike-owned digital expected to represent 40 percent of overall sales.
Wholesale revenue is projected to remain roughly flat versus fiscal 2021 as Nike continues to divest from accounts it claims do not adequately support the positioning of the Nike brand. Said Friend, “We will support partners who continue to authenticate our brand and those who have the scale to create a consistent premium digitally connected experience for consumers across the marketplace.”
By region, on average through fiscal 2025, North America is expected to grow mid-single to high-single-digits; EMEA to grow high single-digits; and APLA to grow low double-digits. Said Friend, “In Greater China, while marketplace dynamics still exist, we are optimistic that we can continue to grow low- to mid-teens over the long term.”
Gross margin is now expected to reach the high-40s by fiscal 2025. Gross margins were 44.8 percent in the latest fiscal year. Friend said margins are expected to benefit from the shift to a higher mix of business through Nike Direct, led by digital, and leveraging enhanced data and analytics capabilities to optimize inventory, drive higher full-price sales and lower e-commerce fulfillment costs.
SG&A spend is expected to average roughly 32 percent to 33 percent of revenue, compared with 29.2 percent in the most recent fiscal year. EBIT margin is projected to reach high-teens by fiscal 2025, leading to EPS growth of mid- to high-teens on average through fiscal 2025.
Photos courtesy Nike
