Nike’s inventory position improves as China recovery commences

In reporting more than a 30 percent quarterly sales increase across three global geographies, growing momentum in its digital business worldwide, better results in Greater China and an improving inventory position, Nike executives told analysts yesterday afternoon that the company “is in a position to control its own destiny.” 

Transit times continue to improve, making for a more predictable flow of supply, Nike senior management told analysts. This trend is giving Nike’s wholesale partners the ability to pull from available inventory to meet consumer demand for the first time in approximately six quarters. On the digital front, Nike realized a double-digit membership increase during the period and now counts 160 million active members. Meanwhile, more than 50 percent of the demand in Nike stores came from members during the period.

Total Q2 revenues rose 17 percent on a reported basis to $13,315 million from $11,357 million, but net income came in flat at $1,331 million versus $1,337 million for the period ended Nov. 30. Revenues were $740 million higher than the Wall Street consensus and EPS was $0.21 higher than forecasts. Ebit improved 9.9 percent to $1,650 million from $1,501 million despite an 8.35 percent increase in demand creation costs to more than $1.1 billion. Gross margin slipped 300 basis points to 42.9 percent, largely on markdowns in the North American market and higher freight and input costs that were partially offset by strategic price increases. Nike brand average selling prices (ASPs) were up year-over-year, the company said. 

EMEA revenues rose 33 percent on a constant currency basis (11% reported) to $3,489 million from $3,142 million as the region’s Ebit increased by 23 percent. Footwear sales jumped by 37 percent (14% reported) to $2,063 million; apparel sales were 28 percent (8% reported) higher at $1,281 million, and equipment sales rose by 30 percent (8% reported) to $145 million. During the period, the group added more than one million members to help celebrate the World Cup. Direct sales increased by 44 percent, and digital revenues improved by 62 percent. 

Bolstered by strong full-price footwear sales and growing momentum in its digital business in Q2, Nike is intent on getting to a healthy inventory position in North America by the end of its fiscal year on May 31. North American sales increased by 31 percent (30% reported) to $5,830 million from $4,477 million.

Units declined low-double digits in Q2 from the end of Q1, and apparel units fell in the low teens from the prior period. Inventory buys for H2/FY23 were tightened during Q1. 

In Greater China, quarterly sales rose by 6 percent (-3% reported) to $1,788 million as regional Ebit declined by 10 percent following nearly two years of disruption caused by pandemic-related shutdowns. Regional closeout inventory was down double-digits year-over-year as direct sales increased by 4 percent and digital sales rose by 9 percent. Running sales were up by double-digits in China. Nike, which focused on women, youth, and Gen Z consumers in the market, says it’s taking a “cautious approach” to China. In the APLA, Q2 revenues increased by 34 percent (19% reported) to $1,599 million from $1,347 million. The region’s Ebit was 25 percent higher on a reported basis as direct sales rose by 30 percent and digital sales by 35 percent as the group works to integrate the brand’s digital business in Korea on Nike’s global platform, focused on women’s lifestyle, global football and running. 

Nike’s current FY outlook calls for low teens (mid-single digits on a reported basis) constant currency revenue growth with Q3 sales higher than those in Q4 as gross margins slip 200-250 basis points on ongoing liquidations. H2 currency headwinds are estimated at 700 basis points. Management cited the unabated macro concerns that are impacting consumers for its conservative H2 outlook.