Nike net dips 5 percent on Greater China, persistent supply chain woes

The Nike group remains committed to further advancing its digital and direct strategies worldwide and anticipates a return to growth for its wholesale business in the financial year 2023 as it continues to grapple with elevated transit times for products and to recalibrate a Greater China business that has been hampered by pandemic-related closures and shutdowns. As more product flows into various geographies, the group is anticipating wholesale revenue growth in FY23 after a year where 130 million units had to be removed from the inventory pipeline due to 12-week factory closures in Vietnam. 

Net income declined by 5 percent to $1,439 million from $1,509 million in the fourth quarter ended May 31, as total revenues dipped by 1 percent to $12,234 million from $12,344 million. Period profitability was impacted by $150 million in non-recurring charges related to the break-up of Nike’s Russian operations, and the transition of businesses in Argentina, Chile and Uruguay to distributor models. Year-end inventories were up 23 percent to $8.4 billion, elevated by in-transit goods, but are said to be normalizing in EMEA, North America and APLA. The quarterly results, including EPS of $0.90, exceeded the Wall Street forecast of $12.1 billion in sales and EPS of $0.82. Still, Nike shares closed off $2.41, or 2.13 percent, yesterday at $110.50 and are down 34 percent since opening 2022 at $167.53.

Demand creation expenses were up 6 percent in the final period at $1,061 billion versus $997 million. Operating overhead costs rose 8 percent to more than $2.97 billion as Ebit fell 26 percent to $1,374 million from $1,854 million. Gross margin slipped to 45.0 percent from 45.8 percent with a positive impact from the digital and direct segments offset by a 2 percent impact from actions taken in Greater China aimed at re-igniting growth there. Nike executives point out that the group’s gross margins are up 2.6 percent since FY20 despite ongoing headwinds from shipping costs out of Asia. While it experienced some improvement in shipping backlogs late in the fourth quarter, Nike confirmed that product transit times remain elevated in the “low 80s day” range. To better manage its business, the company has decided to make some of its styles “seasonless.”

The EMEA region helped pace Nike’s expanding direct business in the final quarter, rising 25 percent as overall segment sales increased 7 percent on a reported basis and 11 percent on a currency-neutral basis. Elsewhere, direct sales were 5 percent higher in North America and expanded 43 percent in the APLA but were down an unspecified percentage in Greater China. Fourth-quarter Nike brand digital sales were up 15 percent on a reported basis and 18 percent in constant currency, with double-digit gains achieved in EMEA, North America and APLA. Nike-owned store sales fell 2 percent on a reported basis but were 1 percent higher currency-neutral. For the full year, Nike direct sales rose 15 percent currency-neutral to $18.7 billion, with digital up 18 percent and Nike-owned store sales rising 10 percent. All direct sales represented 40 percent of the group’s overall annual topline of $46.7 billion, which was up 5 percent overall from $44.5 billion in FY21. Nike says its projected growth trajectory pegs Nike direct at eventually 60 percent of annual revenues, with digital accounting for 40 percent of the total. Management said the company is convinced that digital will be its “fuel for growth…over the next 3 to 5 years.”

Nike sees its speed and agility across its supply chain escalating this year as it goes live with its enterprise resource planning (ERP) software in Greater China in July and continues building and testing the program in North America for deployment in FY24.

Currency-neutral sales rose 20 percent in the EMEA region in the final period to $3,251 million from $2,979 million, with footwear up 22 percent to $2,030 million; apparel 16 percent higher at $1,083 million; and equipment gaining 20 percent to $138 million. Ebit was 63 percent higher on a reported basis at $899 million, with a 21 percent increase in digital driven by launch sell-throughs, more full-price selling and fewer markdowns. Sport continues to power the region, particularly in running and fitness.

Elsewhere, China sales fell 20 percent currency-neutral to $1,561 million from $1,933 million in the fourth quarter, with all segment sales down, including a 40 percent drop in apparel to $350 million, a 28 percent decline in equipment to $33 million and 12 percent lower footwear revenue at $1,178 million. During the period, Nike worked to recalibrate the region’s supply and demand, including planning for a promotional marketplace in the coming months and reducing future season inventory purchases at factories. Management said the company wants to prioritize “a healthy pull marketplace” given current, ongoing risks in China. 

“But longer-term, we continue to believe that the growth potential that we see in the (Greater China) marketplace is significant,” CFO Matthew Friend told analysts.

In North America, fourth-quarter revenues fell 5 percent to $5,115 million, with footwear sales down 6 percent to $3,580 million and apparel off 5 percent at $1,375 million. The region’s equipment sales were 12 percent higher at $160 million. Ebit was down 18 percent at $1,478 million. In the APLA region, final period revenues rose 24 percent to $1,682 million, bolstered by 28 percent growth in footwear to $1,197 million and a 16 percent increase in apparel to $429 million. APLA Ebit was up 31 percent in the fourth quarter at $549 million; Converse currency-neutral revenues increased 3 percent to $593 million in the final period. 

FY22 net income increased 6 percent to $6,046 billion from $5,727 million. Full-year Ebit was flat at $6,651 million against $6,661 million. Annual gross margin improved to 46.0 percent from 44.8 percent despite a 24 percent increase in full-year demand creation at $3.85 billion and an 11 percent jump in operating overhead to $10.95 billion. Full-year EMEA revenues increased 9 percent to $12,479 million from $11,456 million, with apparel growth (+13%) to $4,527 million outpacing a 6 percent increase in footwear revenues to $7,388 million. Annual Ebit increased 35 percent in EMEA to $3,293 million from $2,435 million.

North America financial year revenues were 7 percent higher at $18,353 million, with footwear sales increasing 5 percent to $12,228 million and apparel gaining 9 percent to $5,492 million, but annual Ebit was flat at $5,114 million. Reported Greater China sales slipped 9 percent to $7,547 million from $8,290 million as apparel sales slid 17 percent to $1,938 million and footwear sales declined 6 percent to $5,416 million as annual Ebit came in 27 percent lower at $2,365 million. In the APLA region, full-year reported revenues rose 11 percent to $5,955 million, sparked by a 12 percent increase in footwear sales to $4,111 million and a 24 percent Ebit improvement to $1,896 million. Converse annual sales were 6 percent higher at $2,346 million versus $2,205 million, with the brand’s digital penetration reaching 27 percent worldwide and Ebit gaining 23 percent to $669 million.

On a wholesale equivalent basis, Nike brand sales to wholesale customers slipped 1 percent to $25.6 billion while sales directly through Nike were 14 percent higher on a reported basis at more than $18.73 billion. Currency-neutral men’s sales were up 3 percent at $18,797 million, with women’s increasing 1 percent at $8,273 million and Nike Kids’ flat at $4,874 million. The Jordan Brand posted a 7 percent annual revenue improvement at $5,122 million.

The current FY23 outlook, considering the Greater China situation and high inflation issues, calls for a low-double-digit increase in currency-neutral revenues that currency exchange impacts will partially offset. Gross margins will be flat to down 0.5 percent, and elevated ocean freight costs will continue. Nike results, however, are expected to benefit from mid-single-digit price increases and the ongoing shift to a more direct business.

On the product front, the company is excited about the prospects for its Nike Re-Creation project that collects vintage and obsolete items and turns them into new, locally designed, and manufactured products. The design, retail, and distribution-focused program began in Los Angeles and is expanding to London and Paris in FY23. In the running category, Nike’s focus on injecting performance technology into lifestyle products helped create the Spark Flyknit with the brand’s new dual-density midsole. The style responds to consumers who want a shoe for women who are on their feet all day long. Meanwhile, Nike is particularly excited about a new apparel material, set for a September launch, that is neither knit nor woven. The material will help lower environmental impact since it does not use water or dyes. In April, the brand introduced two sustainable variations of iconic styles, the Pegasus Turbo Next Nature running shoe and the Mercurial Vapor Next Nature football boot, each made with at least 50 percent recycled content by weight.

Of course, soccer will take the world’s center stage through 2023 with the upcoming Women’s Euro Championships in England this summer, the World Cup in Qatar in the November-December period and the Women’s World Cup in Australia/New Zealand in July 2023.