Nike Inc. reported a loss of $790 million, or 51 cents a share, in the fourth quarter ended May 31, driven by lower revenue and gross margin as a result of the COVID-19 impact on operations, partially offset by lower selling and administrative expenses. Sales decreased 38 percent to $6.3 billion.
Results were well short of analysts’ expectations calling for earnings of 7 cents per share on revenue of $7.32 billion. However, the impact from the coronavirus pandemic is making it difficult to compare the company’s results to analysts’ estimates.
Highlights of the report include:
- Fourth-quarter reported revenues were $6.3 billion, declining from the prior year as the majority of Nike-owned and partner stores in North America, EMEA and APLA were closed due to the COVID-19 pandemic.
- Nike’s digital sales increased 75 percent in the fourth quarter, or 79 percent on a currency-neutral basis, with strong double-digit increases across all geographies and were approximately 30 percent of total revenue.
- For the fiscal year, Greater China revenues increased 8 percent, or 11 percent on a currency-neutral basis, marking its sixth consecutive year of double-digit currency-neutral growth despite the headwinds from COVID-19 in the second half of the year.
Nike said its fourth-quarter results were significantly impacted by physical store closures across North America, EMEA and APLA, where 90 percent of Nike-owned stores were closed for roughly eight weeks in the quarter to protect the health and safety of teammates and consumers and help slow the spread of the COVID-19 pandemic. Nike’s wholesale partners largely followed the same pattern and as a result, product shipments to wholesale customers were down nearly 50 percent resulting in lower total revenue and higher inventory. During the widespread physical store closures, Nike said it accelerated its connection and engagement with its consumers leveraging the strength of its digital ecosystem.
“In a highly dynamic environment, the Nike Brand continues to resonate strongly with consumers all over the world as our digital business accelerates in every market,” said John Donahoe, president and chief executive officer, Nike, Inc. “We are uniquely positioned to grow, and now is the time to build on Nike’s strengths and distinct capabilities. We are continuing to invest in our biggest opportunities, including a more connected digital marketplace, to extend our leadership and fuel long-term growth.”
COVID-19 Update On Operations
As of today, approximately 90 percent of Nike-owned stores are open across the globe. Retail traffic continues to improve week-over-week with higher conversion rates as compared to the prior year.**
In Greater China, nearly 100 percent of Nike-owned stores are open.
In North America, EMEA and APLA, approximately 90 percent of physical owned stores were closed during the fourth quarter with stores gradually reopening at different paces in each country beginning in mid-May. Today, roughly 85 percent of Nike-owned stores are open in North America and about 90 percent in EMEA, with approximately 65 percent open in APLA or operating under reduced hours.
“As physical retail re-opens, Nike’s strong digital trends continue, a testament to the strength of our brand and the investments we’ve made to elevate digital consumer experiences,” said Matt Friend, executive vice president and chief financial officer, Nike, Inc. “Amid macroeconomic uncertainty, we will continue to operate with agility, focused on optimizing marketplace supply and demand, cost management and leveraging our financial strength to drive long-term sustainable, profitable growth.”
Nike said as it continues to reopen retail stores and increase distribution center activity, it remains focused on prioritizing the health of its teammates and consumers and has taken proactive steps to help ensure a safe environment. During the quarter, Nike made significant investments to provide employee pay continuity and committed over $25 million to support communities impacted by COVID-19 among other COVID-19 response efforts.
- Revenues for Nike, Inc. decreased 38 percent to $6.3 billion, down 36 percent on a currency-neutral basis, primarily due to owned and partner physical store closures across North America, EMEA and APL A due to COVID-19, partially offset by growth in Greater China.
- Gross margin decreased 820 basis points to 37.3 percent as higher full-price average selling prices, despite increased wholesale discounts, were more than offset by higher product costs including factory cancellation charges, increased inventory obsolescence reserves and the adverse rate impact of supply chain fixed costs on lower wholesale shipments primarily due to COVID-19.
- Selling and dministrative expense decreased 6 percent to $3.2 billion, which included an incremental $178 million increase in bad debt expense. Demand creation expense was $823 million, down 19 percent to the prior year as retail and brand marketing spend was shifted as sporting events were canceled or delayed due to COVID-19. Operating overhead expense decreased 1 percent to $2.4 billion driven primarily by lower total wages and travel and related expenses, partially offset by higher bad debt expense.
- Effective tax rate was 1.7 percent, compared to 20.4 percent for the same period last year. This is primarily due to the mix of earnings taxed in the U.S. and favorability attributable to items such as the use of foreign tax credits.
- Net loss was $790 million and diluted net loss per share was $0.51 driven by lower revenue and gross margin as a result of the COVID-19 impact on operations, partially offset by lower selling and administrative expenses.
Total Nike Brand sales were $6.01 billion in the quarter, down 38.1 percent on a reported basis and 36 percent on a currency-neutral basis.
By region, sales for Nike Brand in North America declined 46.5 percent to $2.23 billion and were down 46 percent on a currency-neutral basis. Sales in the EMEA (Europe, Middle East & Africa) region for Nike Brand fell 46.0 percent to $1.33 billion and sunk 44 percent on a currency-neutral basis.
Faring better was Greater China, where sales for Nike Brand were down 2.9 percent to $$1.65 billion while gaining 1 percent on a currency-neutral basis. In the APAL (Asia Pacific & Latin America) region, sales for Nike Brand were down 41.9 percent to $801 million and lost 39 percent on a currency-neutral basis.
Among categories for Nike Brand, Footwear was down 35.4 percent to $4.2 billion and gave back 34 percent on a currency-neutral basis. Apparel dropped 42.4 percent to $1.64 billion and was down 41 percent on a currency-neutral basis. Equipment reached $165 million, down 53.4 percent on a reported basis and 51 percent on a currency-neutral basis.
From an EBIT (earnings before interest and taxes) perspective, Nike Brand showed a loss of $360 million in the period against EBIT of $1.74 billion a year ago.
In North America, Nike Brand posted an EBIT loss of $13 million against positive EBIT of $1.05 billion a year ago. The EMEA region for Nike Brand showed an EBIT deficit of $153 million against positive EBIT of $506 million a year ago. Greater China’s EBIT for Nike Brand in the quarter fell 15.3 percent to $571 million. In the APAL region, EBIT for Nike Brand was down 76.7 percent to $79 million.
For Converse, sales in the fourth quarter were down 37.9 percent to $305 million. EBIT showed a loss of $305 million against positive EBIT of $82 million a year ago.
- Revenue for Nike, Inc. fell 4 percent to $37.4 billion, down 2 percent on a currency-neutral basis due to the impact of COVID-19 on business operations, primarily in the fourth quarter. In the first half of fiscal 2020, prior to COVID-19, Nike, Inc. revenue was up 9 percent, or 11 percent on a currency-neutral basis, reflecting strong, broad-based consumer demand, higher full-price sales realization and a double-digit increase in digital sales.
- In fiscal 2020, digital sales increased 47 percent, or 49 percent on a currency-neutral basis, with all geographies growing strong double-digits.
- Greater China revenues increased 8 percent, or 11 percent on a currency-neutral basis, marking its sixth consecutive year of double-digit growth on a currency-neutral basis.
- Gross margin decreased 130 basis points to 43.4 percent as higher full-price average selling prices, despite higher discounts due to COVID-19, were more than offset by higher product costs including tariffs in the U.S., as well as factory cancellation charges, increased inventory obsolescence reserves and the adverse rate impact of supply chain cost on a lower volume of wholesale shipments in the fourth quarter.
- Selling and administrative expenses increased 3 percent to $13.1 billion. Demand creation expense was $3.6 billion, down 4 percent to the prior year primarily due to lower retail, brand and sports marketing expenses as sporting events were postponed or canceled and a majority of physical stores were closed globally during the fourth quarter. Operating overhead expense increased 7 percent to $9.5 billion driven primarily by higher wage-related expenses to support our continued investments in end-to-end digital capabilities and higher bad debt expense, partially offset by lower travel and related spend.
- Effective tax rate was 12.1 percent, compared to 16.1 percent for the same period last year due to increased benefits from discrete items such as stock-based compensation.
- Net income was $2.5 billion and diluted earnings per share were $1.60, down 36 percent, driven by lower revenue and gross margin impacted by COVID-19 in the fourth quarter and higher selling and administrative expenses, partially offset by a lower tax rate and a lower average share count. This also includes the one-time, non-cash charge associated with the strategic distributor partnership transition in South America, which reduced earnings per share by $0.25.
- Inventory for Nike, Inc. was $7.4 billion, up 31 percent compared to the prior-year period, primarily reflecting the impact of Nike-owned store closures in North America, EMEA and APLA as well as lower wholesale shipments in the fourth quarter due to COVID-19.
- Total liquidity at May 31 was $12.5 billion with robust cash and equivalents and short-term investments of $8.8 billion, $4.1 billion higher than last year primarily due to proceeds from a $6 billion corporate bond issuance in March, partially offset by share repurchase activity in the first ten months of the year, cash dividends and investments in infrastructure. In addition, Nike secured a new $2 billion credit facility adding to the existing credit facility of $2 billion to ensure appropriate liquidity and flexibility during the COVID-19 pandemic.
- Dividends of $1.5 billion, compared with $1.3 billion in fiscal 2019, reflecting a lower share count offset by an 11 percent increase in the dividend per share.
- Share repurchases totaling $3.0 billion for fiscal 2020 reflecting 33.5 million shares retired as part of the four-year, $15 billion programs approved by the Board of Directors in June 2018.
During the fourth quarter, Nike, Inc. repurchased 1.9 million shares for approximately $159 million before suspending share repurchase activity in March to maximize liquidity in the current dynamic environment. As of May 31, 2020, a total of 45.2 million shares had been repurchased for approximately $4.0 billion, resulting in approximately $11 billion in remaining capacity under the 2018 share repurchase program.
Photo courtesy Nike