Nike has decided to accelerate the digital development of its “consumer-direct offence” program after suffering a 36 percent currency-neutral drop in group revenues for the fourth quarter of its financial year, ended May 31. The rate of decline would have been steeper without the fruits of its earlier investments in digital consumer engagement, which helped drive a 79 percent increase in its own internet sales over the period.
The digital component represented about 30 percent of total revenues in the quarter and 15 percent of them for the full fiscal year. It continued its strong progression in the first three weeks of June, although the majority of the corona-related retail lockdowns have since stopped.
Considering also the fact that direct sales over the internet are yielding twice the operating profit as sales through brick-and-mortar stores for Nike, the company’s management indicated that it is now targeting a 50 percent digital ratio for its turnover around 2016, two years earlier than previously planned, as part of a program to create “the marketplace of the future.” It subsequently added that the realignment will likely result in a net loss of jobs.
A select number of key wholesale partners who share the company’s vision of a “seamless” offline-online customer experience will be part of this program as Nike continues to whittle down the number of its wholesale clients.
For Nike, which wants to be regarded as a “digital-first” brand, another aspect of this program will be the addition this year of between 150 and 200 relatively small and digitally enabled stores in North America and the EMEA region. They will be based on the Nike Live concept launched two years ago on Melrose Avenue in Los Angeles, which was successfully replicated in Tokyo late last year. Two more stores will follow shortly in New York.
In order to get closer to the consumer, Nike has also decided to reorganize and simplify its category management structure. Instead of placing the strongest focus on specific sports, it is using the “gender lens” in product development and other processes, dividing the market into men’s, women’s and children’s products. It will concentrate first on performance products and then expand the range into lifestyle-oriented sportswear.
The new gender-specific brand structure was presented at the end of the release of the company’s results for the last quarter and financial year, which shows that the men’s category is still much bigger in terms of wholesale-equivalent sales than women’s and kid’s combined. The Nike app attracted 25 million new members in the fourth quarter and half of them were women. Sales of women’s products grew twice as fast as men’s products in North America.
Observers feel in fact that there is still a big potential for Nike in the women’s market now that it is going more vertical, occupying a territory that Lululemon is covering so well.
The management stressed the importance of expanding the number of members for its apps and other loyalty programs. Growth in memberships of more than 100 percent was recorded in May alone.
More members and big losses in EMEA
Memberships rose by more than 200 percent in the EMEA region during the fourth quarter, while digital sales went up by nearly 100 percent. However, the retail lockdowns caused revenues to decline by 46 percent to $1.33 billion in the region, with a drop of 44 percent in local currencies. Nike suffered an operating loss (Ebit) of $153 million in the region, higher than in any of the other parts of the world.
While claiming the leadership in apparel, whose sales in the EMEA region fell at the same rates to $398 million, the management said that it saw strong results in Germany, France and the U.K. Italy and Spain were weaker.
Nike had an operating loss of only $13 million in North America, where its revenues dropped by 46 percent to $2.23 billion, despite a jump of 80 percent on the digital front. With stores being reopened, the trend has switched to double-digit growth.
In Greater China, where all the stores are now open, Nike experienced positive comparative store sales in June. During the fourth quarter, sales in the region declined by 3 percent to $1.65 billion, but were up by 1 percent in local currencies, and they generated a profit of $571 million.
In the rest of the Asia-Pacific region and Latin America, sales declined by 42 percent in dollars and by 39 percent in local currencies, ending up with a turnover of $801 million and a small profit of $79 million. Digital sales increased by 80 percent, however, and South Korea was up b y 8 percent.
Across all the regions, footwear revenues declined at a lower pace than apparel or equipment for the Nike brand. Overall, the Nike brand and Converse saw their sales drop at the same rate of 38 percent.
The Nike brand suffered an operating loss of $360 million in the latest quarter as compared to a profit of $1,738 million in the year ago period. Converse booked an operating loss of $27 million, and the entire group ended up with a quarterly operating loss of $754 million against income of $1,255 million.
Inventory glut to be normalized by October
The Covid-19 pandemic caused the Nike group to suffer a net loss of $790 million in the fourth quarter on 38 percent lower sales of $6.31 billion, compared with a profit of $989 million in the year-ago period. A big component of the loss was a steep drop in the gross margin of 8.2 percentage points, down to 37.3 percent of sales.
With inventories rising by 31 percent from year-ago levels, the company reacted aggressively, cancelling 30 percent of factory orders in terms of volume. Combined with writedowns for obsolescent inventories, this action alone was responsible for a loss of 5.0 percentage points in the gross margin. Another 2.5 percentage points came from promotional activities.
Nike claims that it has been discounting less than its peers, moving product into the market faster and prioritizing sales through its factory outlets. The clearance process will continue, but the management is expecting a sequential improvement over the next quarters.
Inventory levels are returning to normal levels in China this month and they should become normal again by the second quarter.
Another significant component of the quarterly loss was a provision for bad debt of $180 million, which indicates that the number of retailers is likely to decline in the future. Total operating costs were reduced by 1 percent, representing 50.5 percent of revenues, with demand creation being cut by 19 percent to $823 million.
First annual sales drop since the 1980s
Nike’s management expects the group’s sales to be flat or up slightly for the current financial year, with an improvement showing only in the second half. For the past financial year, the Nike group reported an overall sales decline of 4 percent to $37.4 billion, the first one since it lost market share to Reebok in the mid-1980s. Foreign currencies had an adverse impact of two percentage points.
Revenues were down by 4 percent to $35.6 billion for the Nike brand and by 3 percent to $1.9 billion for Converse. In the Nike division, running, football and training suffered double-digit sales declines last year, whereas sportswear fell by only 1 percent and the Jordan brand grew by 15 percent to $3.6 billion.
At $23.1 billion, wholesale revenues continued to represent a big portion of Nike’s turnover, but they fell by 9 percent, whereas Nike Direct grew by 5 percent to $12.4 billion in terms of wholesale-equivalent sales. Also, sales from wholesale clients to Nike Direct rose by 5 percent to $7.4 billion.
Because of the latest quarterly loss, the group’s operating profit for the year fell by 39 percent to $2.97 billion. Net earnings decreased by 37 percent to $2.54 million
With available liquidities of $12 billion, in spite of previous dividend payments and share buybacks, the management feels that the Nike group is in a position of strength that will help it to emerge “stronger and better” from the pandemic.