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Nike Discounts Drawing in Deal Hunters

Nike’s inventory may still be high, but the athletic giant was able to capitalize on the mass markdowns with a strong second quarter showing.

Second quarter revenues were $13.3 billion, a 17 percent uptick compared to the prior year—well ahead of estimates calling for a 12.7 percent jump—up 27 percent on a currency-neutral basis.

And despite compressed margins, net income remained flat at $1.3 billion on diluted earnings per share (EPS) of 85 cents, well ahead of the 65 cents per share anticipated by analysts polled by FactSet.

Wall Street investors sent the stock up nearly 12 percent in after-hours trading Tuesday.

In a Nutshell: Even as it offers consumers higher discounts to liquidate excess inventory, Nike reported strong full-price sales after it raised some prices. Average sales price (ASP) increased year over year across all geographies, according to Matt Friend, Nike executive vice president and chief financial officer. Friend said ASP increased in the mid-single digits during the quarter.

Footwear sales grew 25 percent to $8.5 billion from $6.8 billion in the year-ago second quarter, or 36 percent on a constant-currency basis. Apparel’s growth was tepid amid the mass markdowns in the category, with sales increasing 4 percent to $3.8 billion from $3.6 billion, or 14 percent on a constant-currency basis. Equipment sales jumped 7 percent, or 17 percent on a constant-currency basis, to $408 million from $382 million.

“Our focus in the quarter was really around our apparel liquidation, as well as managing apparel closeouts, and both those dimensions were down mid-teens from a unit perspective versus the prior quarter,” Friend said. “We continue to see strong demand from our value partners on the wholesale side for our out-of-season apparel. We continue to be very confident in our ability to you know to continue that liquidation do the balance of this fiscal year.”

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Inventories at the Swoosh were $9.3 billion, up 43 percent compared to the prior-year period, driven by an increase in units from lapping the prior year’s supply chain disruption, as well as higher input costs. Sequentially, inventory dollars are down 3 percent and units are down high-single digits.

Second-quarter year-over-year North American inventory growth in inventory dollars decelerated to 54 percent from 65 percent in the first quarter. Total inventory units are down low-double-digits from first-quarter levels, even as spring product continues to arrive earlier as transit times accelerate, Friend said.

“The composition of our inventory is improving,” Friend said. “In North America, apparel inventory units and apparel closeout units are both down mid-teens from the prior quarter. We have proactively reduced forward supply. As I mentioned last quarter, we have tightened our second half buys to prioritize inventory health across the marketplace. As transit times stabilized, we are optimistic that we will begin to see a more normal and predictable flow of supply in a more capital efficient manner.”

Gross margin decreased 300 basis points (3 percentage points) to 42.9 percent, primarily due to higher markdowns to liquidate inventory, particularly in North America; continued unfavorable changes in net foreign currency exchange rates; elevated freight and logistics costs and increased product input costs, partially offset by strategic pricing actions.

Given the strong second quarter performance, Nike now expects low-teens full-year revenue growth on a currency-neutral basis, an improvement from the prior low-double-digit guidance. When accounting for the approximately 700 basis points (7 percentage points) of foreign exchange headwinds, full-year reported revenue growth is projected in the mid-single digits, ahead of initial low-to-mid-single digits expectations.

Third quarter revenue growth is expected to be higher than the fourth quarter, due to timing of wholesale shipments.

Nike expects third-quarter gross margin to decline at a similar rate as the second quarter, including 120 basis points (1.2 percentage points) of foreign exchange headwinds for the full year. The former Kyrie Irving partner still expects gross margin to decline between 200 to 250 basis points (2 to 2.5 percentage points) versus the prior year. reflecting ongoing liquidation actions in the second half.

Cash and equivalents and short-term investments were $10.6 billion, down approximately $4.5 billion from last year, as free cash flow was offset by share repurchases and cash dividends.

Net revenue: Second-quarter net revenues at Nike were $13.3 billion, an increase of 17 percent compared to the prior year’s $11.3 billion, and were up 27 percent on a currency-neutral basis.

Revenues for the Nike brand were $12.7 billion, up 18 percent on a reported basis from $10.8 billion in the year-ago period, and up 28 percent on a currency-neutral basis. Nike brand digital sales increased 25 percent on a reported percent on a currency-neutral basis.

Sales in Nike’s direct-to-consumer channel were $5.4 billion, up 16 percent on a reported basis and up 25 percent on a currency-neutral basis.

Wholesale revenues grew 19 percent on a reported basis and 30 percent on a currency-neutral basis.

Revenues for Converse were $586 million, up 5 percent on a reported basis and up 12 percent on a currency-neutral basis, led by double-digit growth in North America, partially offset by declines in Asia.

When dividing by region, North American sales jumped 30 percent to $5.8 billion from $4.5 billion in the year prior. Currency-neutral sales improved 31 percent.

Greater China saw significant progress, with sales declining just 3 percent in the quarter to $1.79 billion from $1.84 billion. On a constant-currency basis, sales increased 6 percent.

Sales across Europe, the Middle East and Africa (EMEA) jumped 11 percent to $3.5 billion from $3.1 billion in the year prior. Currency-neutral sales improved 33 percent.

The Asia Pacific and Latin America region saw sales increase 19 percent to $1.6 billion from $1.3 billion in the year prior. Currency-neutral sales improved 41 percent.

Net earnings: Net income was $1.3 billion, flat compared to the prior year, on diluted earnings per share of 85 cents. In the year-ago quarter, diluted earnings per share was 83 cents.

Total earnings before interest and taxes (EBIT) was $1.7 billion, up 7 percent from the 2021 quarter’s $1.6 billion. EBIT margin for the quarter 12.5 percent of sales, down from the 13.7 percent margin in the prior-year period.

CEO’s Take: Nike CEO John Donahoe addressed the improvements in China, which had been an area of concern among many industry analysts due to the brand’s recent underperformance due to the Covid-19 resurgence and lockdowns in the country.

Donahoe highlighted Nike’s performance during Alibaba’s 11.11 Global Shopping Festival, which he called “the first time in over two years that we could fully compete” in China.

“We had the supply of the right product, including some of our hottest global and local products. We had a full local marketing capability going full stream. We had our entire offense,” Donahoe said. “The results of the 11.11 holiday were quite strong, versus both what our plan was, and versus competition. We had mid-teens growth overall. We’ve been very focused on youth in China, the young consumer, both kids and Gen Z. Our Gen Z consumer grew 45 percent in demand on Tmall through 11.11.”

Donahoe said Nike was the No. 1 brand in the athleticwear category on Tmall, generating the most traffic, most livestreams and most members acquired.