Nike’s better-than-expected third-quarter results illustrate the athleticwear giant’s resilience after a slow 2022 marred by excess inventory.
But the Just Do It company admitted to a rare gaffe in how it managed apparel inventory last year by deciding to go with a seasonless approach when longer lead times met strong demand in the wake of post-pandemic reopenings.
“After our factories closed in the late summer and early fall of [2021], we decided to continue to carry forward with making late product because there was so much constraint in the marketplace. I think in hindsight—we would take a do-over on that one and focus on getting seasonally right product in front of the consumer,” said Matthew Friend, chief financial officer of Nike, during the company’s earnings call on Tuesday.
During the holiday quarter, Nike cleared through $421 million worth of goods using an aggressive markdown strategy, paring its total inventories down to $8.9 billion. While inventory remains 16 percent above the prior-year third quarter, Nike has drastically cut down on the influx of product coming in on a year over year basis.
In a span of four quarters starting with the period ending February 2022, total inventories climbed 15 percent, 23 percent, 44 percent and 43 percent on an annual basis. But with the inventory spikes finally falling back to manageable levels, Friend believes the Swoosh will exit the current fiscal year with “even leaner inventory than we had anticipated.”
Apparel saw relatively modest sales growth in the quarter (5 percent) thanks to the liquidation efforts, with total apparel units down year-over-year, according to Friend. In North America, apparel units were down by high-single digits.
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With this progress, Nike now intends to move through even more units by year-end than it had previously considered.
Friend attributes the successful liquidation to strategically cutting back on inventory commitments for both the spring and summer seasons, which will help both Nike and its wholesale partners get rid of both the inventory surplus they already have, and stock that arrived ahead of schedule.
“The benefit of us moving so fast against the excess and early arriving inventory that we’ve had is that we’re now actually watching the timing of delivery of current season product up significantly versus prior quarters and now starting to rival the levels of deliveries that we were seeing in pre-pandemic,” said Friend.
As a result of the pullback, Nike does expect wholesale growth to moderate for the next few quarters despite a notable 18 percent currency-neutral revenue jump in the third quarter.
Wholesale is a segment that the brand appears to be rethinking amid its wider direct-to-consumer (DTC) push. Foot Locker CEO Mary Dillon already said at the shoe retailer’s investor day that its Nike allocation was stronger than expected in the third quarter—a significant turnaround in sentiment from last year when it was scrambling to bring in more product from non-Nike brands including standouts such as Adidas, Hoka and On.
Nike CEO John Donahoe made a point of highlighting the company’s partnership with one of its remaining preferred wholesalers, Dick’s Sporting Goods, which offers a “connected membership” experience for shoppers who are members of both brands.
“We can provide a personalized experience to a shared Nike and Dick’s member in a way they can’t get elsewhere that benefits us and benefits Dick’s,” Donahoe said in the call. “Baseball season is about to be upon us. So we can find a Dick’s consumer that is a baseball consumer, and we can send an e-mail focused on Nike’s baseball cleats, along with a Dick’s bat and a mitt. Consumers are responding to that very personalized messaging from Nike and Dick’s. So clear, early positive benefits for both.”
Donahoe said he hopes Nike can expand similar approaches “in a very thoughtful way with our other strategic wholesale partners.”
Ahead of the call, Williams Trading analyst Sam Poser said the growth of Nike’s Consumer Direct Acceleration (CDA) program “is not sustainable,” suggesting that prioritizing wholesale should be the priority this year.
Still, Donahoe touted the CDA’s success, which saw faster currency-neutral sales growth than the wholesale channel at 22 percent.
“What creates separation for Nike in this dynamic environment is our innovative product, brand scale and direct connections we have with our consumers,” Donahoe said. “It’s these connections that serve as one of our greatest competitive advantages as we translate insight into innovation.”
Count Cowen as one of the believers in the CDA program. The investment bank said in a Tuesday research note that it thinks the DTC expansion and overall strategy “could create a multi-year inflection in gross margin past prior peaks,” also indicating that earnings could reach $6 per share through the 2026 fiscal year. In comparison, full-year diluted earnings reported last June totaled $3.75 per share.
Nike executives also discussed a topic rivals such as Adidas and Skechers are thinking about as well: China.
Nike saw Greater China sales decline 8 percent to $1.99 billion on a reported basis, which translates to 1 percent growth on a currency-neutral basis. But the company also saw inventory declines of 4 percent in the region year over year, which Friend said conditioned the company well for selling in the market.
“In December, we managed through disruption from the country’s shift in Covid policies with widespread door closures,” said Friend. “Starting in January, we began to see a rebound in brick-and-mortar traffic with strong retail momentum around Chinese New Year, accelerating into February, especially as our clean inventory position enabled us to serve consumers with fresh seasonal assortments.”
Donahoe sought to alleviate some concerns related to the market as it opens up from lockdowns, noting that “we got to see [the Chinese consumer] in person for the first time this quarter in three years.” He also put a spotlight on several sneakers including the LeBron 20, the G.T. Cut and the Invincible 3 as products that resonate among the market’s Gen Z consumers.
“Bottom line is we feel good about our momentum in China. It is a very large market that’s growing. Sport and wellness is a key trend and tailwind there. There’s a desire for innovation and style, and the key to winning in this market is, simply put, having great innovation and connecting with Chinese consumers in a locally relevant way. And so that’s what we’re doing.
The CEO touched on the product planning for the spring 2024 season. While he didn’t share any details on the upcoming product assortment, he called the pipeline “very exciting” and “powerful.”