Even Nike Is Rethinking Its Strategy

For the first time in three years, Nike NKE posted a rare profit miss as high inflationary pressures and inventory glut cut into margins. On a brighter note, fourth quarter revenue topped Wall Street’s expectations but shares still dropped more than 4% during extended trading. In a macroeconomic environment shaped by still-high inflation, even the sportswear giant is not immune to softness in the footwear and apparel that has dimmed the demand for its products from wholesalers such as Foot Locker Inc FL who is undergoing massive turnaround for its stores with new location, products and formats.

Fourth Quarter Highlights

For the three-month period that ended on May 31st, Nike’s sales rose approximately 5% YoY to $12.83 billion topping Wall Street’s estimates ($12.59 billion) for the seventh straight quarter, as China sales showed signs of recovery. China sales rose 16% YoY to $1.81 billion, topping StreetAccount estimate of $1.68 billion. However, it’s important to note that last year’s comparable quarter, China was under a lockdown.

Sales rose across Nike’s markets. North America sales rose 5% to $5.36 billion, topping StreetAccount’s estimate of$5.29 billion. EMEA sales rose to $3.35 billion, also exceeding the analyst estimate of $3.04 billion. Asia Pacific and Latin America regions brought in revenue of $1.7 billion, only slightly missing analysts’ expectations of $1.72 billion.However, Converse came far below estimates as sales dropped 1% to $586 million, far below the $615.7 million that StreetAccount anticipated.

The wholesale channel brough in $6.7 billion in revenue, down 2% from the year-ago period as that segment started to moderate.

The resulting net income was $1.03 billion, or 66 cents per share, down from last year’s comparable quarter when it amounted to $1.44 billion, or 90 cents a share, a year earlier. Earnings were a rare miss as Wall Street expected 67 cents.

Gross margins went down 1.4 percentage points to 43.6% as it got pressured by promotions to clear inventory, as well as higher product input, freight and logistics expenses, along with unfavorable currency exchange rates.Inventory was flat from the prior-year period with value at $8.5 billion at the end of the quarter,  but is still up compared to pre-pandemic levels. 

Selling and administrative expenses have been steadily rising and during the last reported quarter, they went up 8% to $4.4 billion. Operating overhead expenses rose 10% to $3.3 billion, which the company attributed to wage-related expenses and variable costs associated with its DTC channel.

Full Fiscal Year Results

Full year fiscal revenue rose 10% as it amounted to $51.2 billion, beating Refinitiv’s estimate of $50.99 billion. However, profits for the full were also below expectations with EPS of $3.23 being short of Refinitiv’s $3.24 estimate. Nike’s net income for the year was down 16% YoY as it amounted to $5.1 billion. The sports apparel giant offloaded about $400 million in inventories.

Full Year Guidance

With the broader macroeconomic climate, consumer behavior and retail trends, the sports retailer expects fiscal 2024 revenue to grow mid-single digits. CFO Matthew Friend expects pressures to lift with above average margin improvement, with gross margins for the year anticipated improve between 1.4 and 1.6 percentage points.

Muted Quarter Guidance

For the undergoing quarter, revenue is anticipated to be flat to up low single digits while Refinitiv’s estimate a 5.8% rise. Meanwhile, gross margins are expected to be down 0.5 to 0.75 percentage points.

Increasing Competition

The fast-growing upstart On Holding AG ONON is being seen as a baby version of Nike itself. On Holding is a Switzerland-based running shoe brand whose first quarter sales rose 78% YoY with net income skyrocketing 209% to $49.7 million. Although it is still tiny compared to Nike which is the gold standard of the industry, these record results show that On Holding is enjoying a strong brand momentum across all regions, channels and product groups. North America is the biggest market for On Holding, with sales rising 92% during the first quarter and making up 64% of total sales. In the region, “cloud” technology that provides a basis for the cushioning system has developed a cult-like following but the biggest boost was certainly when the tennis legend Roger Federer invested in the company back in 2019.

The Inventory Struggle Is Not Over

Throughout the fiscal year, Nike has grappled with bloated inventory levels. Retail analyst Neil Saunders, the managing director of GlobalData finds Nike was to too slow to react to the more sluggish levels of growth that have come with a challenging consumer economy. But Nike still stated it’s in a “healthy” position and it has went back to its wholesale partners to reduce inventory levels further.

Going Back To Macy’s And DSW

Nike has recently restored its wholesale relationships that it cut when it pursued its DTC push. As of October, DSW and Macy’s will be again selling a range of its merchandise. This return has left some wondering if Nike is pulling away from its DTC strategy which is still bringing in higher revenue although it comes at a cost, but CEO John Donahoe said the primary focus is on where consumers want to shop and therefore, to provide them with both digital and physical access across channels. Nike’s Direct channel sales rose 15% YoY to $5.5 billion, with its owned stores and online channels leading the growth. Store sales jumped 24% and online revenue rose 14%. 

Rethinking The Strategy Is The Trend These Days

Besides improving the relationship with the customer and the financial performance, Foot Locker is also trying to improve the integration between its physical and digital presence by repositioning its stores. Foot Locker literally got 2023 off on the wrong foot as the first quarter sales tanked 11.4% with same-store sales dropping 9.1%. The Lace Up turnaround plan will be reducing its exposure to malls as “off-mall” stores accounted to about 35% of its store footprint during the first quarter and are aimed at reaching 50% by 2026. Foot Locker will be opening larger stores, shifting the dynamics of key nameplates and start selling more of its own apparel. 

The Focus Is On The Consumer

Member engagement metrics show that Nike’s ticking all the boxes as engagement grew across all digital digital platforms and buying frequency hit an all-time high during the quarter. But this is one of Nike’s core success secrets. Therefore, although even Nike is not immune as consumers pull back on spending, along with higher freight and logistics costs, it still remains a good long-term story.

DISCLAIMER: This content is for informational purposes only. It is not intended as investing advice.