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Nike’s Vietnam Factories Return to Normal as Transit Times Worsen

Nike’s factory partners in Vietnam may have returned to pre-lockdown production levels, but continued shipping delays are still preventing the company from meeting marketplace demand.

In the case of North America, transit times actually worsened in the third quarter, chief financial officer Matt Friend said Monday on a call with investors to discuss Nike’s third-quarter earnings results.

Transit times are now six weeks longer than pre-pandemic levels and two weeks longer than the same period last year, Friend said. Versus industry averages, however, Nike has been able to mitigate the impact by “nearly four weeks,” he noted. The company has taken “numerous actions” to address these challenges and protect against even greater lead times, Friend added, including moving forward its buying timelines for the fall selling season.

Nike’s North America inventory levels were up 22 percent year over year at the end of the third quarter ended Feb. 28, with in-transit inventory representing 65 percent of total inventory. The company’s overall inventories, meanwhile, grew 15 percent to $7.7 billion. Friend described current marketplace demand as “significantly” above inventory supply, noting that “growth in the third quarter would have been even higher if we had greater quantities of available inventory.”

In a Nutshell: After four years of cutting ties with wholesalers amid a refocus on direct to consumer—it reduced its number of wholesale accounts by more than 50 percent over that period—it appears Nike has found its sweet spot. According to Friend, the company has “finished communicating the big account pivots” and is now moving into “the next phase” in its marketplace strategy.

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“Our go-forward growth plans are aligned with our wholesale partners,” Friend said. “Wholesale partners play an integral role in our future marketplace, first, to authenticate our brands and then to create scale of distribution through a consistent consumer experience across a larger retail footprint.”

Last quarter, Nike unveiled a new partnership model that will allow shoppers to benefit from membership perks in partner stores. This strategy, president and CEO John Donahoe said, “recognizes the importance of onboarding members in stores, which in turn accelerates in-store conversion and improve[s] customer lifetime value.”

“We will continue to build strategic partnerships with our wholesale partners, in particular around the ability to link our membership program so that consumers know that Nike knows who they are, even through the wholesale channel,” Donahoe said.

In Greater China, this model will take Nike “into a new era of marketplace transformation,” according to Donahoe. This quarter, it extended the model globally via two new connected retail partners in the country: Topsports and Pou Sheng. Moving forward, “all of our existing contracts” with Nike partnered stores in the region will follow this connected membership model, Donahoe added.

The CEO also took time to highlight Nike’s relationship with one particular wholesale partner—Foot Locker. In its own earnings call last month, the retailer revealed that Nike would be pulling back on shipments. The brand has recently accounted for the overwhelming majority of Foot Locker’s products, including 75 percent in 2020 and 70 percent in 2021. This year, however, it expects Nike will represent 60 percent of its total mix. In the long term, the retailer believes the brand’s share will sit between 50 percent and 55 percent. The shifting relationship prompted Foot Locker to project declining sales in full-year 2022 and the company’s share prices to dive more than a third in the hours after markets opened. Foot Locker stock remains down roughly a quarter.

Donahoe, however, suggested there had been “some confusion” around Nike’s relationship with Foot Locker moving forward. “To be crystal clear, Foot Locker always has been and always will be a large and important partner of Nike’s and that will continue to be the case,” the CEO said. Donahoe dubbed the retailer one of the company’s “important partners going forward” and insisted it will have “a very distinct role in our marketplace strategy as a wholesaler, with a particular focus on the culture of basketball, on the sneaker culture and on kids.”

Like many other companies, Nike is planning on raising prices. According to Friend, it implemented a “low single-digit” price bump in the second half of this year. Given transit time delays, Nike expects to see more of that hit the market in its fourth quarter. Looking forward to the fourth quarter and fiscal 2023, Friend added, the company is continuing to look at opportunities for additional pricing. “We do see some,” he said.

“Our approach to pricing and to the consumer is a careful one,” Friend said. “We evaluate the price value of our products on a season-by-season basis. And our financial model as a premium brand starts first with the value that we create for the consumer in our products. And so, we’re very careful about how we approach pricing and we take a long-term view with regards to the consumer because of that relationship that we have.”

Net Sales: Revenues in the third quarter ended Feb. 28 rose 5 percent compared to the prior year—8 percent on a currency-neutral basis—to $10.9 billion. Nike Direct sales led the way, growing 17 percent in constant currency to $4.6 billion. Its digital business grew 22 percent “fueled by strong demand” on the Nike app, Friend said. Sales at Nike-owned stores grew 14 percent amid “significant” improvements in traffic. Wholesale, meanwhile, returned to growth with sales up 1 percent.

In North America, third-quarter revenue grew 9 percent as Nike Direct saw a 27 percent improvement versus the prior year. The company’s digital business saw sales climb 33 percent versus the prior year, driven by double-digit growth in traffic. According to Friend, Nike Digital has the highest penetration in North America of all its geographies. Earnings before interest and taxes (EBIT) came in flat year over year.

In Greater China, revenues remained negative for a second straight quarter, falling 8 percent year over year. EBIT declined 19 percent. Friend said these results—a sequential improvement from the previous quarter—were “in line” with expectations. Nike Direct was down 11 percent in the region amid a 5 percent decline at Nike-owned stores and 19 percent decrease in digital. Friend attributed the decreases to ongoing supply delays that negatively impacted timing of product launches and challenges to retail traffic from Covid-related lockdowns.

In Europe, the Middle East and Africa, third-quarter currency-neutral revenue grew 13 percent, with growth across all consumer segments. EBIT grew 34 percent on a reported basis. Russia and Ukraine, where Nike’s owned stores and digital commerce operations remain paused, both represent less than 1 percent of total company revenue, Friend noted.

In Nike’s Asia Pacific and Latin America region, third-quarter revenues grew 19 percent on a currency-neutral basis and EBIT improved 17 percent on a reported basis. The quarter was the largest and most profitable in the region’s history, Friend said, with double digit, currency-neutral growth across “nearly all” territories, led by Korea and Mexico.

Net Income: Nike recorded a gross profit of $5.01 billion during the third quarter, a 7 percent improvement over the prior quarter. Its gross margin increased 100 basis points to 46.6 percent.

The company’s net income declined from $1.45 billion, or 90 cents per diluted share, a year ago to $1.4 billion, or 87 cents per diluted share.

With one quarter left to go in its financial year, Friend said Nike believes it is on track to hit the mid-single-digit sales growth it projected in September. Regionally, it anticipates it will see revenues decline during the fourth quarter due to year-over-year comparisons. In Greater China, it expects to see another quarter of sequential improvement. Friend noted that Nike will “closely monitor” the operational impact from recent Covid lockdowns.

Nike now expects full-year gross margin to grow by at least 150 basis points versus the prior year as strong consumer demand continues to fuel full-price sell-through, low markdown rates and low customer returns. Benefits from “strategic” pricing in the fourth quarter are being partially offset by elevated product costs due to higher macro input costs, supply chain costs and strategic actions to expedite North American deliveries, Friend said. According to the executive, Nike has absorbed more than 100 basis points of unplanned costs this year associated with supply chain, logistics and wages to move product.

Looking beyond to fiscal 2023, Friend said the company is “optimistic.” With several “new dynamics creating higher levels of volatility,” however, Nike pushed off providing more specific financial guidance until the fourth quarter earnings call.

CEO’s Take: “Our confidence as we look long term hasn’t changed one bit,” Donahoe said. “We’ve been resolute in fueling innovation and our brand is as strong as ever. Nike’s unique strengths continue to set the pace and keep us in the lead.”