Nike encouraged by China, digital momentum as golden anniversary looms

Nike, Inc., which will commence its 50th anniversary in May, exceeded its latest guidance for revenues and diluted earnings per share in the third quarter ended Feb. 28, despite persistent product transit woes into its home North American market and marketplace demand that exceeded the available supply.

Net sales grew by 5 percent to $10,871 million in the third quarter, some 2.5 percent above the consensus estimate of $10.62 billion, but net profit slipped by 4 percent to $1,396 million, with diluted EPS down 3 percent to $0.87 but above a consensus estimate of $0.72. The gross margin inched up higher to 46.6 percent from 45.6 percent, as higher logistics costs were offset by a higher direct-to-consumer component, more full-price selling and favorable exchange rates. Demand creation costs rose 20 percent to $854 million while operating overhead costs rose by 11 percent to more than $2.58 billion.

Inventories were up 15 percent to $7.7 billion at period end, with transit times to North America worsening. However, the company said it had taken actions to lower its transit delay impact by four weeks compared to industry averages.

Wholesale revenues inched 1 percent higher on a currency-neutral basis. Nike Direct sales rose 17 percent on a currency-neutral basis to $4.6 billion, led by a 27 percent improvement in North America, where digital sales rose 33 percent year-over-year on double-digit growth in traffic, increases in membership and engagement and higher member-buying frequency. Bolstered by higher traffic levels, sales at the company’s own stores rose 14 percent.

Globally, Nike Digital sales lifted 22 percent higher to represent 26 percent of total Nike brand revenues. The increase was fueled by double-digit expansion in EMEA, North America, and Asia-Pacific/Latin America (APLA), partially offset by a decline in Greater China.

Nonetheless, Nike said it was “encouraged” by the momentum in its $2.16 billion third-quarter business in China despite an 8 percent fall in currency-neutral revenues and a 19 percent drop in the regional operating profit (Ebit) on a reported basis. Nike Direct was off 11 percent in China, with declines in both digital and physical retail as Covid-related lockdowns continued to impact retail traffic. Own store sales were down by 5 percent, and digital sales slipped 19 percent on ongoing supply delays. Footwear sales dropped by 4 percent, and apparel sales slipped by 11 percent. But full-price selling improved in the market, aided by the Jordan brand, localized products and the Swoosh’s most popular footwear franchises. Nike continues to target mid-single-digit growth in China for the current fiscal year ending May 31.

The EMEA region posted strong retail sales, including improvements in full-price selling and fewer markdowns that helped third-quarter revenues to grow by 13 percent on a currency-neutral basis to $2.78 billion, with momentum behind the Jordan brand and growth across all segments, including football and women. Ebit was 34 percent higher on a reported basis. Apparel sales rose 21 percent to $1.08 billion. Nike Direct sales rose 22 percent on a currency-neutral basis across the geography as sales in Nike-owned stores jumped by 44 percent. Nike Digital was up 11 percent, helped by a double-digit increase in demand for full-price products, and wholesale revenues gained 10 percent.

The North American Ebit came in flat on a 9 percent revenue increase to $3.88 billion, driven by an 11 percent gain in apparel sales to more than $1.2 billion and a double-digit sales improvement in key men’s running franchises such as the Pegasus and product updates to the Winflow and Vomero.

Nike Direct sales rose 27 percent year-over-year in the region, led by a 33 percent y-o-y jump in Nike Digital. The digital business in North America represented one-third of the geography’s sales during the period as revenues from Nike-owned stores went up by 16 percent on improved traffic trends and activations in key cities such as Los Angeles during the Super Bowl.

Elsewhere, APLA revenues rose 11 percent in the third quarter to $1.46 billion, with footwear up 11 percent and apparel increasing 8 percent to $394 million.

Converse sales were down 1 percent to $567 million.

Nike is initiating the second phase of its strategy with key wholesale accounts on the physical retail front, whose number has been slashed in half over the last four years. It is preparing to launch a series of mono-branded stores focused on Jordan, apparel, and women’s. The doors, which will measure between 5,000 and 6,500 square feet, are described as investments “to specifically address gaps in distribution” where growth opportunities exist. Nike is expected to test and modify the respective banner’s formats before ramping up the concepts in 2024 and 2025. The company is set to begin testing a Jordan-only retail concept in the latter half of 2022, a consumer retail experience that has already proven popular in China, the Philippines and Korea.

Nike promises more linkage between them and its own membership programs among its go-forward global wholesale partners. As it has already done with Dick’s Sporting Goods in the U.S., this program will be implemented with TopSports and Pou Sheng, its new connected partners in China, and others in the region.

“One other thing I just want to really reinforce because I think there was some confusion on this, that’s around Foot Locker,” CEO John Donahoe told investors. “To be crystal clear, Foot Locker always has been and always will be a large and important partner of Nike’s.” As reported, Foot Locker has just hired a former senior executive from the toymaker Hasbro, Samantha Lomow, as its president of global brands.

Nike’s current outlook calls for mid-single-digit topline growth for the 12 months ending May 31 despite an expected decline in fourth-quarter North American sales due to difficult comparisons. The annual gross margin is forecast to rise by at least 1.5 percentage points on fuller price selling and low markdown rates. Conversely, the benefit of a low-single-digit price increase later this year for the spring/summer 2023 season will be partially offset by higher input product and supply chain costs and strategic actions tied to expediting product deliveries into North America.

The company will provide more clarity about its 2023 business during its fourth-quarter earnings call. Earlier this month, several investment houses lowered their respective stock price and earnings estimates for Nike, citing, among other things, higher commodity prices. Company executives maintain that the company will continue to leverage supply chain costs and a higher mix of full-price sales to drive more productivity and hit a “high 40s” gross margin by the fiscal year 2025.

Donahoe said Nike has many production innovations coming through its pipeline over the next 3-12 months, including the Dri-FIT Alpha bra and the ISPA Link, a new proprietary platform where shoes are built with interlocking modules and connected without any glue, that is due at retail in June.