Nike beats Q2 estimates on strong North American showing

The Nike group reported higher-than-expected earnings and sales in the second quarter ended Nov. 30, as a strong performance in North America offset a continued slowdown in China and persistent, industry-wide supply chain challenges.

In the quarter, Nike’s sales inched up by one percent to $11,357 million and were flat at constant currency rates, exceeding analysts’ expectations for a top line of about $11,250 million. Net profit rose by 7 percent as compared to the year earlier-period to $1,337 million, with diluted earnings per share growing by 6 percent to $0.83, comfortably above an analysts’ consensus of $0.63.

The progress came in spite of the delayed launch of new products, due to the tight supply situation, and a 40 percent increase in demand creation spending to 8.95 percent of sales. Much of it was directed toward digital marketing, resulting in increases of 27 percent in digital engagement and 50 percent in repeat purchases online. Nike’s apps have garnered over 79 million members worldwide, representing 40 percent of the digital demand.

Nike Direct sales of $4.7 billion were up by 9 percent on a reported basis and 8 percent higher at constant currency rates, led by 30 percent growth in North America. The Nike brand’s digital sales increased by 12 percent, or 11 percent in local currencies, again led by 40 percent growth in North America. Nike Digital represented 25 percent of total Nike brand revenues, up by 3 percentage points versus the prior year and more than double its share in the fiscal year ended in May 2019.

Nike-owned stores saw a 4 percent sales increase in the quarter, amid a steady normalization of physical retail trade. On the other hand, wholesale revenues declined by 6 percent, with the company justifying the trend with the group’s wish to optimize the available inventory supply. The other reason, of course, was Nike strategy of pruning the number of less desired wholesale accounts. Their total number has been cut by 50 percent in the last four years.

Revenues for the core Nike brand increased by a reported one percent to $10,816 million in the latest quarter and were flat at constant rates, supported by Nike Direct’s growth but offset by lower wholesale revenues. The brand’s operating profit (Ebit) declined by 11 percent to $1,927 million. The Nike brand’s footwear sales of $6,780 million were flat on the year earlier and down by 1 percent at constant rates. Apparel sales rose by a reported 2 percent to $3,648 million and were 1 percent higher at constant rates.

At Converse, sales rose by a reported 17 percent, or 16 percent at constant rates, to $557 million as the brand enjoyed a strong performance across all channels in Europe and North America. The brand’s operating profit jumped by 52 percent to $132 million.

Higher sales and margins in EMEA

Nike’s revenues in the EMEA region stood at $3,142 million in the quarter, up by 6 percent on both a reported and constant currency basis. The region’s Ebit jumped by 22 percent on a reported basis to $806 million. Season-to-date holiday retail sales across EMEA grew at a double-digit rate, with strong growth in all consumer segments.

Wholesale revenues in EMEA grew by 6 percent on a currency-neutral basis, due to a positive comparable effect with the prior year’s retail closures. Nike Direct also grew in the region by 6 percent, led by double digit growth in Nike-owned stores, which also benefited from re-openings, with traffic improving due to tourism picking up and the back-to-school business. On the other hand, Nike Digital was down by 1 percent in EMEA compared with the year earlier, when store closures led to “extraordinary levels” of online sales in the prior year. In the latest quarter, Nike’s full-price digital business in EMEA grew by over 20 percent, contributing to a strong year-over-year expansion in gross margin and return on sales profitability.

North American revenues grew by 12 percent to $4,447 million while Ebit increased by 21 percent to $1,235 million. “Demand for Nike remained incredibly strong, with season-to-date holiday retail sales across the total market growing double-digits, energized by the continued momentum from the return to sport and the beginning of an outstanding holiday season,” said Matthew Friend, the group’s chief financial officer. A 40 percent in the region’s online business pushed Nike Digital to 30 percent of the total North American revenues, bringing Nike Direct to represent 48 percent of the total turnover.

On the other hand, sales in Greater China amounted to only $1,844 million, 24 percent lower than a year ago at constant currency rates, and the regional Ebit declined by 36 percent on a reported basis to $569 million. However, the management said that season-to-date holiday sales across the Chinese market have trended more favorably. Nike was the #1 sports brand on Tmall during Single’s Day. Friend said the results were as expected, as its supply of full-price products decreased during the quarter due to factory closures in Vietnam. Wholesale revenues in Greater China fell by 27 percent on a currency-neutral basis while Nike Direct saw a 21 percent drop, with declines in both digital and physical retail channels.

In the rest of Asia-Pacific & Latin America (APLA), the group’s sales stood at $1,347 million down by 6 percent on a currency-neutral basis, with the regional Ebit slipping by 8 percent to $388 million on a reported basis. Double-digit revenue growth in Latin America was offset by declines in Asia Pacific countries, which bore more of the brunt from Vietnam factory closures. In APLA, Nike Direct grew by 6 percent, led by Nike Digital’s growth of 25 percent.

Overall, the group’s gross margin in the quarter widened to 45.9 percent from 43.1 percent the year earlier, led by margin expansion in the Nike Direct business driven by lower markdowns, a higher mix of full-price sales and foreign exchange rate changes. These positive factors were partially offset by lower full-price product margins, mainly due to increased freight and logistics costs. Spending on demand creation jumped by 40 percent to $1,017 million.

Inventories at Nike stood at $6,506 million as of Nov. 30, up by 7 percent as compared to one year earlier. They were driven by elevated in-transit inventories as a result of extended lead times from supply chain disruptions, partially offset by strong consumer demand.

The group said that factory re-openings in Vietnam had proceeded according to plan, with all plants now operational. Employee attendance rates have improved since the re-openings began in October. At the same time, Nike sees supply chain costs for the full year increasing as compared to its estimates three months ago, with a greater impact in the second half. So far, the factory lockdowns in Vietnam have led the Swoosh to lose the production of 130 million pairs of shoes.

Nike confirmed that it was on track to meet full-year guidance, which it cut in September as a result of supply chain difficulties. That outlook sees revenues rising by mid-single digits in the fiscal year ending next May.

In the third quarter, revenues are seen growing bylow single-digits versus the prior year, due to the ongoing impact from lost production from Covid-19 disruptions in Vietnam.

“We expect to continue benefiting from exceptional demand against the backdrop of lean marketplace inventory,” said Friend. “Full price realization will remain above our long-term target, with lower channel markdowns. However, we expect product costs to rise in the second half due to higher macro input costs.”