Nike generated revenues of $12.2 billion in its fourth quarter, down 1 percent compared to the previous total of $12.3 billion on net income of $1.4 billion, or diluted earnings of 90 cents per share.
Despite a Covid-19 resurgence in China, which impacted more than 100 cities and about 60 percent of Nike’s business in the quarter, as well as additional ongoing supply chain headwinds, the athletic giant beat expectations and issued a strong outlook for 2023.
In a Nutshell: Nike expects upcoming 2023 fiscal year revenue to grow in the “low-double digits” on a currency-neutral basis, even as foreign exchange headwinds could impact approximately 400 basis points (4 percentage points) of revenue in the first quarter, chief financial officer Matt Friend said in an earnings call Monday. Gross margins are projected to range between flat and declining by 50 basis points (0.5 percentage points) versus the prior year with the wider-than-usual range reflecting various scenarios.
“We expect to benefit from mid-single-digit pricing actions and continued gains from our shift to a more direct business, offset by another 100 basis points (1 percentage point) headwind from elevated ocean freight costs, increased product costs, discrete supply chain investments and normalization of historically low markdown rates,” Friend said.
In the upcoming first quarter, Nike expects revenue growth to be “flat to slightly up,” with gross margin pressure exceeding 100 basis points (1 percentage point) as the company attempts to recalibrate supply and demand in Greater China, and anticipates higher promotional activity to sell seasonal inventory.
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Inventories totaled $8.4 billion, up 23 percent compared to the prior year period of $6.9 billion. The increased was driven by elevated in-transit inventories due to extended lead times from ongoing supply chain disruptions, partially offset by strong consumer demand.
For product entering North America, average lead times (counted by day) remain in “the low 80s,” according to Friend, who said transit times are still two weeks longer in the fourth quarter relative to last year.
“At this point in time, given all the variables that we see there, we’re not planning for a significant improvement in transit times in fiscal 2023,” Friend said. “So we’re managing our inventory accordingly. We’re making decisions about our assortment and product life cycles. We’re taking some of our styles to seasonless so that we can manage it on more of a rolling basis.”
Friend said that inventory supply is normalizing across North America, EMEA, Asia Pacific and Latin America. This is a good sign for Nike, which saw three consecutive quarters where consumer demand significantly outpaced available supply.
Fourth-quarter gross margin decreased 80 basis points (0.8 percentage points) to 45 percent, primarily due to higher inventory obsolescence reserves in Greater China and elevated freight and logistics costs. The decline was partially offset by strategic pricing actions, and favorable changes in net foreign currency exchange rates, including margin expansion in the Nike direct business.
Nike is currently implementing a new ERP system, which Friend called the company’s biggest investment in its digital transformation. The ERP will go live in China in July, and the company will continue building and testing in North America for deployment in fiscal 2024, which starts in June next year.
“As we shift [to] an increasingly direct to consumer future, a new ERP will be foundational for increasing speed and agility across our supply chain,” Friend said. “This will give us real-time visibility to inventory across our network, plus dynamic transactional capabilities to optimize consumer demand and inventory productivity.”
Additionally, Nike has started testing audience segmentation in North America through its app to develop personalized journeys, planning for further expansion in the coming months, he said.
The company has also scaled Express Lane, which leverages hyperlocal consumer insights to improve product speed-to-market, driving approximately 25 percent of total Nike brand revenue with higher profitability. Friend said Nike expects to build Express Lane into a larger portion of the business in fiscal 2023 and beyond.
Cash and equivalents and short-term investments were $13 billion, $479 million lower than the prior year, as free cash flow was offset by share repurchases and dividends.
Net Revenues: Fourth-quarter reported revenues at the Swoosh totaled $12.2 billion, down 1 percent compared to the prior-year total of $12.3 billion. On a currency-neutral basis, sales went up 3 percent.
Nike’s direct-to-consumer business reported revenues for the fourth quarter were $4.8 billion, up 7 percent compared to prior year and up 11 percent on a currency-neutral basis.
Wholesale reported revenues for the fourth quarter were $6.8 billion, down 7 percent compared to the prior year and down 3 percent on a currency-neutral basis.
Revenues for the Nike brand were $11.7 billion, down 1 percent on a reported basis from last year’s $11.8 billion, and up 3 percent on a currency-neutral basis. From a segment standpoint, footwear revenue was flat at nearly $8.0 billion, while apparel was down 6 percent to $3.2 billion. Equipment sales ticked up 5 percent to $387 million.
Nike’s digital business grew 18 percent and now represents 24 percent of the company’s total brand revenue.
Revenues for Converse were $593 million, down 1 percent on a reported basis and up 3 percent on a currency-neutral basis, due to wholesale revenue declines offset by growth in the DTC business.
Regionally, Asia Pacific & Latin America had the highest growth rate at 15 percent to $1.7 billion, while Europe, Middle East & Africa (EMEA) jumped 9 percent to $3.3 billion. North America saw a 5 percent decline to $5.1 billion, and Greater China’s revenue fell 19 percent to $1.6 billion.
For the full 2022 fiscal year, revenues for Nike increased to $46.7 billion, up 5 percent from last year’s $44.5 billion, and up 6 percent on a currency-neutral basis.
Net Earnings: Net income was $1.4 billion, down 5 percent from the $1.5 billion generated in the year-ago fourth quarter. Diluted earnings per share was 90 cents, down 3 percent compared to last year’s 93 cents.
Total Nike earnings before interest and tax (EBIT) was also $1.4 billion in the quarter, down 26 percent from the $1.9 billion in EBIT generated in last year’s fourth quarter.
Full-year net income was $6 billion, up 6 percent, and diluted earnings per share was $3.75, up 5 percent compared to prior year.
CEO’s Take: Nike CEO John Donahoe addressed questions about plummeting revenue in China, which had already started to decline well ahead of the Covid lockdowns in 2022 due to consumer boycotts targeting the global athleticwear giant.
“We’re continuing to do what we’ve always done. Nike’s been in China for 40 years, we’ve always taken a long-term view. We believe that China remains a growth market with significant potential to unlock,” Donahoe said. “We have very strong equity with Chinese consumers, and the fundamentals haven’t really changed. We’re taking a medium- to long-term view, and we’re as confident today as we ever have been. Coming out of this lockdown we’re seeing increased energy from the Chinese consumer.”