Nike senior executives, citing persistent efforts to reduce excess inventory and a prior decision to sharply reduce buys for the spring and summer 2023 seasons, insist the company is positioned to begin its next financial year on June 1 in a healthy merchandise position. “We’re increasingly confident that we’re going to exit the fiscal year 2023 with health inventory levels across the marketplace and across channels in the marketplace,” CFO Matthew Friend said yesterday. “[…] We’re going to exit with even leaner inventory than we had anticipated given the momentum that we’re seeing.”
Group gross margin fell by 330 basis points to 43.3 percent from 46.3 percent in Q3 ended Feb. 28, as Nike’s year-over-year inventory level was up 16 percent to $8.9 billion but down $244 million or 2.7 percent from the end of the prior period. Inventory markdowns, higher product input costs and elevated freight and logistics costs all contributed to the margin erosion, partially offset by strategic price increase in the mid-single digits. During Q3, the company worked aggressively to liquidate excess apparel and realized a high-single decline in its home market.
| Nike - Income | |||
|---|---|---|---|
| 2022 | 2021 | Change | |
| Three months ended Feb. 28 ($ million) | |||
| Revenues | 12,390 | 10,871 | 14.0% |
| Cost of sales | 7,019 | 5,804 | 20.9% |
| Gross profit | 5,371 | 5,067 | 6.0% |
| Demand creation expense | 923 | 854 | 8.1% |
| Operating overhead expense | 3,036 | 2,584 | 17.5% |
| Total selling and admin. expense | 3,959 | 3,438 | 15.2% |
| Interest expense | -7 | 53 | – |
| Other income (net) | -58 | -94 | 38.3% |
| Pre-tax | 1,477 | 1,670 | -11.6% |
| Tax | 237 | 274 | -13.5% |
| Net | 1,240 | 1,396 | -11.2% |
| Diluted EPS | 0.79 | 0.87 | -9.2% |
| Nine months ended Feb. 28 ($ million) | |||
| Revenues | 38,392 | 34,476 | 11.4% |
| Cost of sales | 21,695 | 18,500 | 17.3% |
| Gross profit | 16,697 | 15,976 | 4.5% |
| Demand creation expense | 2,968 | 2,789 | 6.4% |
| Operating overhead expense | 9,035 | 7,980 | 13.2% |
| Total selling and admin. expense | 12,003 | 10,769 | 11.5% |
| Interest expense | 22 | 165 | -86.7% |
| Other income (net) | -283 | -235 | -20.4% |
| Pre-tax | 4,955 | 5,277 | -6.1% |
| Tax | 916 | 670 | 36.7% |
| Net | 4,039 | 4,607 | -12.3% |
| Diluted EPS | 2.57 | 2.85 | -9.8% |
| Source: Nike | |||
“As it relates to specifics in apparel, I think that one of the biggest learnings we had was after our factories close in the fall or late summer last year (2021), and we decided to continue to carry forward with making late product because there was so much constraint in the marketplace,” Friend said. “And I think in hindsight, we would take a do-over on that one and focus on getting seasonally right product in front of the consumer.”
Q3 Results
Total revenues rose 14 percent to $12,390 million from $10,871 million, but net income slipped by 11 percent to $1,240 million from $1,396 million. Direct and wholesale revenues increased by 22 and 12 percent, respectively, on a currency-neutral basis. Ebit declined by 12 percent to $1,477 million from $1,670 million.
EMEA
Growth was said to be strong across all Western European markets, including in the U.K., where there was some prior softness. Reported quarterly revenues rose 17 percent (26% in C$) to $3,246 million, led by a 28 percent increase in footwear sales to $2.01 billion bolstered by both the Nike and Jordan brands. Apparel sales inched up by 1 percent to $1,094 million as Nike Direct sales grew by 39 percent, and Nike Digital sales increased by 43 percent. The region’s Ebit was up 10 percent on a reported basis.
| Nike - Revenues by region | ||||
|---|---|---|---|---|
| 2022 | 2021 | Change | ||
| Three months ended Feb. 28 ($ million) | ||||
| North America | ||||
| Footwear | 3,322 | 2,532 | 31.2% | |
| Apparel | 1,419 | 1,207 | 17.6% | |
| Equipment | 172 | 143 | 20.3% | |
| Total | 4,913 | 3,882 | 26.6% | |
| EMEA | ||||
| Footwear | 2,011 | 1,569 | 28.2% | |
| Apparel | 1,094 | 1,083 | 1.0% | |
| Equipment | 141 | 127 | 11.0% | |
| Total | 3,246 | 2,779 | 16.8% | |
| Greater China | ||||
| Footwear | 1,496 | 1,554 | -3.7% | |
| Apparel | 461 | 548 | -15.9% | |
| Equipment | 37 | 58 | -36.2% | |
| Total | 1,994 | 2,160 | -7.7% | |
| Asia-Pacific, Latin America | ||||
| Footwear | 1,141 | 1,005 | 13.5% | |
| Apparel | 407 | 394 | 3.3% | |
| Equipment | 53 | 62 | -14.5% | |
| Total | 1,601 | 1,461 | 9.6% | |
| Global brand divisions | 12 | 41 | -70.7% | |
| Total Nike brand | 11,766 | 10,323 | 14.0% | |
| Converse | 612 | 567 | 7.9% | |
| Corporate | 12 | -19 | – | |
| Total Nike Inc. | 12,390 | 10,871 | 14.0% | |
| Total Nike brand | ||||
| Footwear | 7,970 | 6,660 | 19.7% | |
| Apparel | 3,381 | 3,232 | 4.6% | |
| Equipment | 403 | 390 | 3.3% | |
| Global brand divisions | 12 | 41 | -70.7% | |
| Total | 11,766 | 10,323 | 14.0% | |
| Nine months ended Feb. 28 ($ million) | ||||
| North America | ||||
| Footwear | 11,090 | 8,648 | 28.2% | |
| Apparel | 4,598 | 4,117 | 11.7% | |
| Equipment | 565 | 473 | 19.5% | |
| Total | 16,253 | 13,238 | 22.8% | |
| EMEA | ||||
| Footwear | 6,086 | 5,358 | 13.6% | |
| Apparel | 3,528 | 3,444 | 2.4% | |
| Equipment | 454 | 426 | 6.6% | |
| Total | 10,068 | 9,228 | 9.1% | |
| Greater China | ||||
| Footwear | 4,099 | 4,238 | -3.3% | |
| Apparel | 1,228 | 1,588 | -22.7% | |
| Equipment | 111 | 160 | -30.6% | |
| Total | 5,438 | 5,986 | -9.2% | |
| Asia-Pacific, Latin America | ||||
| Footwear | 3,313 | 2,914 | 13.7% | |
| Apparel | 1,255 | 1,181 | 6.3% | |
| Equipment | 167 | 178 | -6.2% | |
| Total | 4,735 | 4,273 | 10.8% | |
| Global brand divisions | 44 | 54 | -18.5% | |
| Total Nike brand | 36,538 | 32,779 | 11.5% | |
| Converse | 1,841 | 1,753 | 5.0% | |
| Corporate | 13 | -56 | – | |
| Total Nike Inc. | 38,392 | 34,476 | 11.4% | |
| Total Nike brand | ||||
| Footwear | 24,588 | 21,158 | 16.2% | |
| Apparel | 10,609 | 10,330 | 2.7% | |
| Equipment | 1,297 | 1,237 | 4.9% | |
| Global brand divisions | 44 | 54 | -18.5% | |
| Total | 36,538 | 32,779 | 11.5% | |
| Source: Nike | ||||
Greater China
On a constant-currency basis, the region’s sales were 1 percent higher year-over-year at $1,994 million but were down by 8 percent on a reported basis. Ebit was down by 10 percent on a reported basis. Footwear sales declined by 4 percent to $1,496 million, and apparel sales sunk by 16 percent to $461 million. Nike Direct sales grew by 3 percent in constant currency, but Nike Digital sales fell by 11 percent as shoppers returned to stores after the country re-opened. A rebound in brick-and-mortar traffic commenced in January and accelerated in February, with performance footwear outpacing lifestyle offerings and running up double-digits.
“It’s an environment where 6,000 mono-brand stores are a real advantage,” CEO John Donahoe said of the market. “And so, we’re going to continue to invest in China for China…We’re building hyperlocal product and storytelling ability.”
North America
Nike’s home market delivered 23 percent Ebit growth on a reported basis as period revenues increased by 27 percent to $4,913 million, with Nike Direct up 23 percent and Nike Digital sales rising by 25 percent. The company said that the Jordan Brand kicked off its 23rd year with strong double-digit growth and is poised to become the second-largest footwear brand in the market. Air Max sales jumped by double-digits.
Outlook
The group is forecasting a 250-basis-point decline in FY23 gross margin, at the low end of its previous guidance range, citing the ongoing inventory reduction actions, higher freight and logistics costs, higher supply chain expenses in North America and currency as impacts on the gross margin rate. Annual revenues are now forecast to increase by high-single digits versus mid-single digits previously. Q4 sales for the period ending in May are expected to be flat to up low single-digits.
