By Thomas J. Ryan

<span style="color: #858585;">Nike Inc. said a 36 percent hike in global digital growth drove sales and earnings ahead of expectations in the third quarter ended February 28 and helped the brand recapture lost sales due to store closures in China from the coronavirus outbreak. Digital sales grew in excess of 30 percent in all geographies for the Nike Brand as well as for Converse in the quarter.

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Digital-Led Growth Accelerating Amid Coronavirus
Further building on its digital eco-system was one of three “themes” Andy Campion, EVP and CFO, provided into how Nike planned to manage in the increasingly uncertain environment presented by the coronavirus outbreak.

On a conference call with analysts, Campion said Nike is seeing online growth accelerate due to the dynamics presented by the coronavirus. In China, which was by far the region most impacted by the coronarivus in the quarter, digital sales grew more than 30 percent in the quarter with growth accelerating in recent weeks. He implied similar patterns are already being seen in other regions as many areas face lockdowns or travel restrictions.

“From a digital capability perspective, the investments we’ve made to-date are now proving to be the foundation for our resilience amid challenge and they will be strengths as we emerge,” said Campion. For example, Campion said Nike is leveraging select team and tools to dynamically model demand, pricing, planning and allocation. The Nike membership platform and Nike mobile app ecosystem are being leveraged to inspire and enable people to be active at home, while also providing targeted product offers and services to consumers. Enterprise data and analytics platforms are fueling more agile end-to-end execution.

“We’re still in the early innings of Nike’s digital transformation,” said Campion. “But the capabilities we’ve already been building for the future are proving to be the strongest pillars within our business today…These are times in which strong brands get stronger and we’re confident that NIKE will come back stronger than ever.”

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Building on Nike Brand’s Momentum
A second theme is further capitalizing on Nike’s brand momentum in the marketplace that was on display in the third quarter. Said Campion, “As we enter these challenging circumstances, Nike’s brand leadership and business momentum have been stronger than ever and unrivaled around the world.”

Regionally, double-digit growth was seen in the third quarter in both EMEA and APLA as well as China prior to the coronavirus impact. North America would have been up 8 percent excluding the impact of the sale of Hurley and a change in its NFL licensing arrangement.

The growth was broad-based across categories in the quarter as well as across women’s and men’s, all fueled by popular platforms and franchises such as the Air Max 270, the Air Force 1 and the Air Jordan 1. The launch of the Air Jordan 11 Bred was the largest in Nike’s history with the product selling out in 28 minutes through the SNKRS App.

The Jordan brand grew double-digits globally in the quarter. The Lebron XVII, Giannis 7 Freak and the City Edition NBA Jerseys fueled basketball’s strong growth. In running, the Alphafly NEXT% drew wide attention and the Infinity React saw “very strong sell-through,” particularly with women. Apparel grew faster than footwear in the quarter with double-digit gains in sportswear, training, basketball, women’s and kid’s categories.

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Nike’s Coronavirus Playbook
The third and most comprehensive theme is Nike’s “operational playbook” to address the evolving implications of COVID-19 and drive an “expedited return to profitable, capital-efficient growth.”

Campion said Nike sees countries from a business perspective going through three phases as they address the COVID-19 outbreak. One is a recovery period, including, for example, the ramp-up of store re-openings; two, a period of normalization across consumer demand and supply; and three, a period seeing return to strong growth.

Campion said that based upon the most recent trends, China has already progressed through the recovery phase and is now transitioning into the normalization phase.

“Specifically, we are seeing accelerating strong double-digit approaching triple-digit growth in our Nike Digital business,” said Campion. “At the same time, roughly 80 percent of our 7,000 brick and mortar Nike owned and partner stores are now open. Based on the latest trends in our business, Nike Greater China Q4 revenue will likely be roughly flat versus Q4 of fiscal year ’19.”

The same playbook is being used in Japan and Korea with both markets seen entering the normalization phase, fueled by strong digital growth and significant week-over-week increases in retail traffic and demand for Nike.

Yet Campion also cautioned that each country is addressing COVID-19 differently and said the company will be retrenching in other aspects of the business.

As such, Q4 SG&A will be lower than prior year Q4 spending as the brand puts a focus on tight cost management and seeks to optimize global demand and supply optimization on a daily basis. Nike’s distribution focus will also focus to digital in the face of temporary retail store closures.

Campion added, “As a result, Q4 fiscal year ’20 and fiscal year ’21 year-over-year revenue, margin and the inventory growth rates will neither be intuitive nor linear. Our measures of success in the near term will be rooted in the amount of inventory on hand, relative to the pace of digital demand, store re-openings and traffic patterns.”

He cited that company’s financial strength, including investment-grade credit rating and ample access to capital, and strong partnerships with retatilers and factories as two of the company’s “long-standing and greatest competitive advantages” in executing its playbook.

He further said Nike had been seeing “some of the highest rates of full price sell-through” recently and the goal is to quickly return to a strong pull market globally. Said Campion, “Realigning supply and demand is our focus operationally.”

Third Quarter Tops Wall Street’s Targets
In the third quarter, revenues rose 5.1 percent to $10.1 billion, beating Wall Street’s consensus target of $9.8 million. On an adjusted basis, EPS increased 14.7 percent to 78 cents per share from 68 cents a year ago, also exceeding Wall Street’s consensus estimate of 59 cents.

Net income included a non-recurring, non-cash charge of 25 cents a share associated with the transition of its Brazil, Argentina, Chile and Uruguay businesses to a strategic distributor model that was first announced on February 6. With the charge, net earnings fell 23.1 percent to $847 million, or 53 cents a share, from $1.1 billion, or 68 cents, a year ago.

The charge to transition it South America business came to $400 million and reflected the anticipated release of associated cumulative foreign currency translation losses. Nike also completed the sale of the Hurley brand and recognized an immaterial gain on that sale. The company estimated that revenue growth in North America was adversely impacted by approximately 1-to-2 percentage points during the third quarter due to the sale of Hurley.

Overall sales in the quarter were up 7 percent on a currency-neutral basis driven by 13 percent currency-neutral growth in Nike Direct led by 36 percent digital growth and strong growth across EMEA, APLA and North America offset by the impact of COVID-19 in Greater China. Digital sales in Greater China increased more than 30 percent while brick & mortar retail sales were impacted by temporary store closures related to COVID-19.

Revenues for the Nike Brand were $9.6 billion, up 6 percent on a currency-neutral basis, driven by double-digit growth in Nike Direct and growth in wholesale — key categories including Sportswear and the Jordan Brand and continued growth across footwear and apparel. EBIT (earnings before interest & taxes) for Nike Brand were down 5.1 percent to $1.56 billion.

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North America’s Revenues Boosted by 30 Percent Plus Online Growth
In North America, sales for Nike Brand rose 4.4 percent to $3.98 billion while expanding 4 percent on a currency-neutral basis. EBIT increased 2.3 percent to $937 million.

The currency-neutral revenue gains would have been approximately 3 points higher adjusting for the sale of Hurley and its shift to a licensed business model with Fanatics relative to the NFL. In 2018, the NFL, along with Nike, inked a 10-year licensing deal that made Fanatics the exclusive manufacturer and distributor of all Nike-branded NFL fan merchandise — except for kids’ clothes — starting in 2020. On a conference call with analysts, Andy Campion, EVP and CFO, noted that while the Hurley and Fanatics transactions had a negative impact on year-over-year revenue growth comparisons, they also resulted in higher profitability for Nike.

In Q3 Nike Digital grew over 30 percent and the Nike App grew over 60 percent in North America. New York City and LA each grew double-digits, fueled by differentiated Nike consumer experiences. Campion said, “As an example in LA we launched our newest Nike Live concept store in Glendale which blew past our expectations and significantly over-indexed in terms of the women’s business.”

As of today, Nike has closed its own stores in North America and plans to reopen stores on a location-by-location basis as it monitors developments. At the same time Nike’s digital demand “has been extraordinary with Nike digital commerce sales of just the past few days approaching holiday peak levels growing triple digits over just the past week.”

Campion said Nike’s U.S. operations have been maintaining operations in distribution centers, implementing social distancing and reduced staffing while focusing on the shipment of digital orders.

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EMEA’s Growth Accelerates To 13 Percent
In the EMEA (Europe, Middle East & Africa) region, revenues for Nike Brand rose 11.3 percent to $2.71 billion and gained 13 percent on a currency-neutral basis. EBIT gained 6.9 percent to $575 million.

Double-digit growth was seen in most key categories. Women’s growth strongly outpaced men’s, apparel accelerated faster than footwear and digital was up over 40 percent.

“The Nike brand has never been stronger in EMEA,” said Campion. “In every key city in the EMEA consumers rated Nike their number one favorite and cool brand. We also gained significant market share in Q3 across both footwear and apparel driving further brand separation.”

Greater speed and agility also fueled growth and share gains in EMEA in Q3 with over 30 percent of EMEA revenue and nearly 80 percent of EMEA incremental growth flowing through its Express Lane quick-turn program. In order to help limit the spread of COVID-19, stores have been closed in Western Europe and select Eastern European markets. Similar to the U.S., Nike plans to reopen on a location-by-location basis based on developments. Nike Digital continues to grow versus the prior year and the company is maintaining operations in distribution centers with a focus on digital.

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China’s Q3 Growth Slowed By Coronavirus
Greater China’s sales for Nike Brand fell 5.2 percent to $1.51 billion and were down 4 percent on a currency-neutral basis. EBIT was off 13.0 percent to $556 million.

Through mid-January, revenue growth was on track to exceed the expectations set 90 days ago, fueled by Nike Digital and digital growth has accelerated amid the crisis. However, results overall wound up being “significantly impacted” by COVID-19. Campion said the region is seeing a spike in weekly average users on its activity apps “as we inspire and enable consumers to engage in sport at home.” The Nike App in China was launched in Q3 and already has 5 million downloads.

Campion said China is through the recovery phase and into the normalization period. Said Campion, “Today, our digital commerce growth continues to accelerate with triple-digit growth in demand just this last week. Most of our stores and our partner stores are open. Retail traffic is significantly accelerating week-over-week, and we’re beginning to see a decline from the peak inventory levels we experienced. We are confident that Nike Greater China is on track to return to growth in fiscal year ’21.”

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APLA’s Revenues Boosted By Japan And Jordan Brand
APLA (Asia Pacific & Latin America) revenues for Nike Brand totaled $1.41 billion, up 8.2 percent on a reported basis and ahead 13 percent on a currency-neutral basis. EBIT rose 14.2 percent to $387 million.

Growth in the APLA region was fueled by its key cities and was balanced across key categories, nearly all of which were up double-digits. The Jordan brand grew nearly 50 percent in the quarter, with new innovations like the Jordan Max 200, along with fresh new approaches to Jordan Icon all resonating with consumers. Performance running continued to accelerate its momentum, especially in Japan, where a record 84 percent of participants at the Hakone Ekiden race wore Nike styles. The energy around running in Japan is being fueled by the Vaporfly and NEXT% as well as a halo effect that is impacting other performance models like the Zoom Fly, Rival Fine and Peg Turbo, which all grew triple digits in Q3.

Nike Digital grew 51 percent in the APLA region and wholesale grew double-digits overall on a currency-neutral basis as the business with differentiated strategic partners grew five times as fast as undifferentiated distribution. Campion said APLA is the brand’s most diverse geography and is the impact of COVID-19 is being seen “very significantly” across Asian and Latin American countries.

Converse’s revenues rose 9.3 percent to $506 million and grew 11 percent currency-neutral. EBIT advanced 21.5 percent to $96 million. The gains were mainly driven by double-digit growth in Europe and in digital, globally.

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Gross Margins Impacted By Lower China Sales, Factory Cancellations
Gross margins decreased 80 basis points to 44.3 percent primarily as a result of impacts from COVID-19, including a lower mix of sales in Greater China which is its highest margin geography, as well as increased rebates to wholesale partners and higher costs related to factory cancellations to manage future inventory. Gross margins also declined due to changes in foreign exchange rates and incremental tariffs in North America.

Selling and administrative expenses increased 6 percent to $3.3 billion. Demand creation expense was $870 million, up 1 percent due primarily to investments in key brand moments. Operating overhead expenses increased 8 percent to $2.4 billion driven by wage-related expenses which reflect investments in data and analytics and other transformational initiatives to accelerate its end-to-end digital transformation.

Inventories for Nike, Inc. were $5.8 billion, up 7 percent compared to the prior-year period, reflecting anticipated strong demand across all geographies as well as higher inventories in Greater China due to COVID-19. APLA inventory declined due to the reclassification of inventory in Brazil, Argentina, Chile and Uruguay into prepaid expenses and other current assets as a result of the aforementioned transaction.

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Nike Forgoes Guidance
Nike said it won’t be providing financial guidance for Q4 due to the uncertainty resulting from the spread of COVID-19. For the fiscal year 2021 Nike had been planning performance in line with its long-term financial model, but Campion said the year-over-year growth rate-based comparisons will no longer be meaningful, and a new approach to fiscal 2021 guidance will be provided on its fourth-quarter conference call.

“All of that said, we are confident that executing our operational plan will position Nike for a return to profitable capital-efficient growth,” said Campion. “That will happen over time as each country addresses COVID-19 at a different pace. But our confidence in the return to growth is founded on the relatively rapid recovery and early signs of normalization we are already seeing in China, Korea and Japan.”

The CFO added, “In these challenging times, Nike’s competitive advantages are showing up as extraordinary resilience. As we emerge from these challenges those same competitive advantages will show up as strength and brand distinction. Those unique strengths include Nike’s deep authentic connection to consumers, our pipeline of innovative products, our financial strength and capacity, our industry-leading digital capabilities, our strong partnerships and most importantly our talented and committed teams around the world. I would not trade Nike’s team or position with anybody.”

Photo courtesy Nike/China Daily