Nike Inc. delivered essentially flat sales in the first quarter ended August 31, recovering from a 38 percent slide in its fiscal fourth quarter, due to the coronavirus pandemic. Online sales continued to accelerate, climbing 82 percent, to offset still eroding store sales.
On a conference call with analysts, CEO John Donahoe said the company is seeing market share gains across its Nike and Jordan Brands. Most notably, during the pandemic, Nike saw an acceleration of share gains in U.S. women’s and apparel, two areas of strategic focus, he noted. Overall, women’s global sales outperformed men’s for the quarter. A return to growth was also realized in its international markets which included China and Europe.
Nearly all Nike-owned retail stores remained open during the quarter across North America, EMEA and Greater China with approximately 90 percent of its doors open in APLA; however, sales at its wholly-owned stores overall were down as floor traffic continued to decline due to the pandemic and safety-related measures offset higher conversion rates. Traffic improved substantially versus the prior quarter.
Earnings improved and were well ahead of analyst targets as Nike benefited from spending less on marketing because of postponed or canceled sporting events.
Nike Direct Expands 13 Percent
In the quarter, revenues for Nike, Inc. decreased 0.6 percent to $10.6 billion and were flat to the prior year on a currency-neutral basis. Wall Street’s consensus estimates had been $9.11 billion.
Nike Direct business grew 13 percent led by strong digital growth, offset by declines in its wholesale business.
Gross margins decreased 90 basis points to 44.8 percent primarily as a result of impacts from COVID-19, including higher promotions to reduce excess inventory and higher supply chain costs. These factors were offset slightly by favorable full price product margins and the reversal of certain reserves associated with purchase order cancellations from higher than anticipated consumer demand.
SG&A expenses decreased 11 percent to $3.0 billion and were lowered as a percent of sales to 28.1 percent from 31.2 percent. Demand creation expense was $677 million, down 33 percent due primarily to lower marketing spend as live sporting events were postponed or canceled, slightly offset by continued investments in digital marketing to support heightened digital demand.
Operating overhead expenses decreased 1 percent to $2.3 billion as lower travel and related expenses were slightly offset by restructuring costs and continued investments in digital capabilities, both of which are associated with the Consumer Direct Acceleration, the next digitally empowered phase of Nike’s strategy.
Over the summer, Donahoe told employees that there would be layoffs this year, but did not specify the headcount. A Nike spokesman at the time said the reorganization was not due to the pandemic but intended to improve the company’s agility.
Earnings Top Wall Street Targets
Net income in the quarter was $1.5 billion, up 11.0 percent, as lower SG&A expense offset lower gross margin and revenue. EPS reached 95 cents per share, about double Wall Street’s consensus estimate of 46 cents.
Total Nike Brand sales were down 0.8 percent to $10.0 billion and flat on a currency-neutral basis. Double-digit growth in Nike Direct, as well as growth in Sportswear and the Jordan Brand, was offset by wholesale declines.
Total Nike Brand EBIT (earnings before interest and taxes) grew 13.3 percent to $2.11 billion from $1.86 billion.
By category for the Nike Brand, footwear sales were up 3.8 percent to $6.77 billion and increased 5 percent on a currency-neutral basis. Apparel was down 7.9 percent to $2.88 billion and declined 7 percent on a currency-neutral basis. Equipment revenue slumped 17.2 percent to $371 million and declined 16 percent on a currency-neutral basis.
North America Sales Down 1.6 Percent
In North America, sales for Nike Brand slid 1.6 percent to $4.23 billion and were off 1 percent on a currency-neutral basis. EBIT advanced 18.4 percent to $1.302 billion a year ago,
Digital in North America was up nearly 100 percent driven by triple-digit growth in full-price sales and fueled by strong momentum in styles like Air Force 1 and Air Jordan 1, along with women’s apparel, which grew nearly 200 percent in the quarter. Demand on the Nike App grew 150 percent in Q1, highlighting the continued shift to consumer thirst for mobile experiences.
Matt Friend, Nike’s CFO, said the brand in the North America region shifted product allocations to fuel higher demand in Nike Digital and focus on a smaller group of “strategic wholesale partners.” As a result, Nike Brand saw high-single-digit growth in differentiated wholesale that was offset by a decline of over 20 percent in undifferentiated wholesale, all with a higher full-price realization versus the prior year. Friend said, “This is a trend that we expect to continue throughout this fiscal year as we change the shape of the North America marketplace.”
In Europe, the Middle East and Africa (EMEA) regions, sales for Nike Brand increased 4.9 percent to $2.91 billion and were ahead 5 percent on a currency-neutral basis. EBIT was up 13.6 percent to $692 million.
Recovery in Italy and Spain continued to lag recovery across the rest of Western Europe. Nike Direct grew more than 25 percent with over 100 percent digital growth, driven by lifestyle products as the consumer focused on comfort. Apparel in the EMEA region grew 11 percent on a currency-neutral basis led by performance categories — Running, Training, Basketball, and Global Football — featuring Nike Brand’s biggest club launch to date with Liverpool FC.
Friend noted that the EMEA region continues to lead globally with its Express Lane offense, maximizing supply availability and actively managing inventory while capturing emerging trends. Express Lane drove revenue growth and generated a higher full-price realization.
Mainland China Resumes Double-Digit Growth
Greater China sales for Nike Brand were up 6.0 percent to $1.78 billion and added 8 percent on a currency-neutral basis. EBIT gained 2.8 percent to $688 million. Mainland China delivered double-digit growth on a currency-neutral basis.
Nike Direct grew over 20 percent with more balanced channel growth as digital grew nearly 30 percent and Nike-owned stores were up double-digits fueled by key consumer moments like 6/18, where Nike was the leading sports brand on Tmall. Nike Sportswear and Basketball drove double-digit growth in the quarter with a strong sell-through of key launches like Alphafly NEXT percent, Space Hippie and the AJ1 Flyease.
Friend said, “Retail sales in the marketplace are accelerating with an increasing proportion of full-price sales. Physical retail traffic continues to grow and is approaching prior-year levels. We are also well positioned for Singles Day in November.”
In the Asia Pacific & Latin America (APLA) regions, sales for Nike Brand were down 18.3 percent to $1.099 billion and fell 12 percent on a currency-neutral basis. EBIT was down 17.9 percent to $280 million.
Digital growth exceeded 90 percent. Growth was seen in the Asia Pacific region, led by Japan, Pacific and South Korea, while recovery in Latin America took place. Certain countries in Southeast Asia continued at a slower pace. Performance footwear resonated with consumers in APLA with strong results from the AlphaFly NEXT percent and the Pegasus 37. Jordan also continued to see momentum with locally relevant products like the AJ34 Rui Hachimura marking Japan’s bestselling basketball launch.
Converse sales in the quarter were up 1.4 percent to $563 million from $555 million, mainly driven by strong demand in Europe and in digital, globally. Converse’s EBIT was up 21.7 percent to $168 million from $138 million.
Nike’s Strengths Helping Overcome Challengesowth
Donahoe cited three “structural tailwinds” that are helping Nike outperform: “The accelerated consumer shift toward digital is here to stay; the definition of sport is expanding to include all facets of health, wellness and fitness; and it’s the deeply connected, authentic brands with scale that will win.”
The CEO added, “Nike’s strengths amid these evolving conditions help keep us in the lead. These advantages allow us to stay aggressive. And it’s why I continue to believe that no company is better positioned to emerge from this period than Nike.”
He further said the latest quarter “proved out” those advantages across four areas: product innovation, deep connections with consumers, the digital opportunity, and digitally-enabled retail.
On innovation, he cited success expanding key platforms, including Air Force 1, Air Jordan 1 and Air Max. The Air Max 90 was one of the quarter’s top growth drivers. The Nike NEXT% footwear platform continues in resonate with many customers telling Nike they’re running their fastest times ever in the models.
On the women’s side, launches included Nike (M), the brand’s first dedicated maternity collection; as well as a new Nike Yoga collection that’s “already driving incredible growth for our Women’s yoga business,” according to Donahoe. The sustainable footwear platform, Space Hippie “saw incredible sell-through” with VaporMax 2020, also carrying a sustainability message, also selling well.
On driving connections, Nike remains consumers’ favorite brand in 12 of the brand’s key cities. The “You Can’t Stop Sport” campaign garnered over 2.6 billion
impressions and reached more than 800 million unique consumers.
Digitally, Nike saw an all-time high in the percentage of members working out on the Nike Training Club app, with more than 50 percent of members worldwide starting a workout in Q1. The Nike Running Club app saw four consecutive months of more than a million downloads for its audio-guided runs. For the first quarter ever, women completed more guided runs than men.
Digital sales across owned and partner sites now represents over 30 percent of its total business, up more than 10 points of share versus the prior year. Digital’s growth of 83 percent on a currency-neutral basis came despite stores reopening.
On member engagement, Nike is seeing almost 200 percent growth in demand for its Nike commerce app with triple-digit growth in monthly active users.
Donahoe said, “While we’ve had tremendous success in digital and quickly pivoted to the accelerated consumer shift, I truly believe Nike is still just scratching the surface of what’s possible. With our breadth and depth, no one has the advantage in this space that Nike has to directly connect with consumers.”
He added that as part of the Consumer Direct Acceleration launched earlier this year, “some clear immediate priorities” include scaling O2O (online to offline), improving personalization and creating a consistent end-to-end technology platform.
Regarding how “digital is fueling how we create the future of retail,” Donahoe noted that Nike is increasingly seeing consumers self-identify as a member during checkout. He said, “This is our vision for the marketplace – a digitally connected experience where membership is a true differentiator.”
He noted that Nike “took focused actions to proactively shift the North America marketplace as part of our strategy to serve consumers more consistently and more personally,” referencing its planned moves to stop selling accounts Nike believes doesn’t offer a differentiated experience.
At the same time, Nike moved ahead with opening “new and innovative retail concepts amplified by an elevated O2O consumer journey.” New stores were opened in Guangzhou, China; Seoul; Los Angeles; and Paris, with two new doors in New York City opening in the next few weeks.
As an example of Nike’s vision of retail’s future, he detailed how Nike’s new store in Ghangzhou “is a data-powered store concept that curates a 1-to-1 personalized shopping journey. We’re already seeing member checkout in our Ghangzhou store significantly outpace the rest of the fleet. This is just one reflection of how digitally enabled our future of retail is and how membership is a critical differentiator.”
Inventory at the quarter’s close was up 15 percent year-over-year although down 9 percent from the previous quarter as Nike continued to manage excess inventory resulting from a significant number of retail store closures and lower wholesale shipments globally during the fourth quarter of fiscal year 2020. Inventory had been ahead 31 percent at the close of the fourth quarter and on track to be normalized in the next 60 days.
Full-Year Sales Guidance Lifted
For the full fiscal year, Nike now expects revenues to be up in the high-single-digits to low-double-digits versus the prior year. Previously, revenue was expected to be flat-to-up versus the prior year.
Stronger than anticipated demand will be constrained in the near-term due to supply decisions taken due to the coronavirus pandemic, with growth in the second half up significantly versus the prior year.
Gross margin improvement will be linked to returning to normalized inventory levels by the end of Q2. In the second half, sequential improvement in full-price sales is expected, but higher markdown activity is expected at its factory stores to sustain conversion rates on lower traffic. For the full year, gross margins are expected to be flat versus the prior year, including 40 basis points of foreign exchange headwinds. No gross margin guidance had been provided in the fourth-quarter conference call.
SG&A is now expected to be flat versus a decline predicted previously, including approximately $200 million to $250 million of non-recurring execution costs incurred in the first half associated with Nike’s move to simplify its organizational structure that covers layoffs.
Photo courtesy Nike (shoe shown is the LeBron 18)