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Nike: 3-Week Shipping Delays Dampen North American Sales

While overall third-quarter revenues at Nike were down 1 percent to $10.4 billion year over year on a currency-neutral basis, below the $11.02 billion expected by analysts polled by Refinitiv, the athleticwear and footwear giant was largely held back by its biggest market due to pervasive supply-chain issues that have rattled all of apparel.

North American revenue tumbled 10 percent on a currency-neutral basis, with Nike attributing the decline to two usual suspects: global container shortages and West Coast port congestion.

These obstructions caused up to three weeks of delays in North America, largely impacting the flow of inventory and timing of wholesale shipments, Matt Friend, executive vice president and chief financial officer at Nike, said in an earnings call Thursday.

In a Nutshell: Friend said that Nike expects to capture the revenue it lost from the fourth-quarter delays.

“Across the marketplace, we were anticipating to have more available supply in the queue in the third quarter than ultimately what we were able to have to satisfy demand across both the direct side of the business, and across our wholesale partners,” Friend said. “We’ve now effectively absorbed the longer lead times through our third quarter. And so we do expect a more consistent flow of inventory in the fourth quarter.”

Inventories for Nike were $6.7 billion, up 15 percent compared to the prior year period, largely driven by higher in-transit inventory in North America due to U.S. port congestion and temporary store closures in the EMEA region. North American inventory jumped 31 percent.

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Despite the continued supply disruption, inventory units held in Nike’s distribution centers declined nearly 20 percent due to the continued strong consumer demand leading into the spring season. The company’s marketplace inventory was down by high double digits versus the prior year, with Nike expecting continued full-price momentum.

Also leading to the revenue miss—35 percent of Nike’s owned stores in EMEA are closed as of Thursday, while up to 45 percent were closed at some point in the last two months of the quarter ended Feb. 28.

Despite the closures, Nike’s back end continues to send the right products to the right place and generate shorter overall lead times. Friend said that the company doubled its “Express Lane” capabilities in the quarter to “deliver and create hyperlocal products to celebrate” the Chinese New Year. Products in the Express Lane are manufactured via a digital staging system for raw materials that need quick deployment in on-demand product lines.

“It continues to have significant impact not only on localizing product…but also speed and agility in the marketplace through our fulfillment models,” Friend said.

In the call, Friend pointed out that Nike’s owned e-commerce business has grown more than 70 percent year to date, and that its mix of owned and partner-driven digital sales now exceeds 35 percent of the total business. Nike’s goal is to reach 50 percent of total sales via digital sales as part of its Consumer Direct Acceleration strategy.

China continues to be a growth driver for Nike, with total sales in the market increasing 42 percent on a currency-neutral basis to $2.3 billion in the quarter.

Gross margin increased 130 basis points to 45.6 percent, driven by higher full-price product margins due in part to the company’s geography mix, and favorable e-commerce mix, partially offset by lower margin rates in the company’s direct-to-consumer mix, as Nike continues to manage inventory levels.

Cash and equivalents and short-term investments were $12.5 billion, $9.3 billion higher than last year.

For the full year, revenue is expected to reach low-to-mid teens growth versus the prior year. Nike expects a monster fourth quarter when compared to last year, when 90 percent of its stores were closed due to the pandemic. Sales are expected to be up 75 percent year over year.

CEO John Donahoe touched on Nike’s recent Datalogue acquisition, which he said will enable the company to “process, analyze and act on the data we enjoy.”

“Thanks to our scale advantage, this lets us harness the full power of our data, turning it into more actionable insights and enabling greater speed,” he added. In a recent organization realignment, the Oregon firm also “put our data teams alongside the creative teams to unlock this opportunity,” Donahoe noted.

“Nike has always married the art and science of product creation, and the move towards deeper and more dynamic insights, along with our talent and investments in data science and machine learning, creates a capacity that no other brand has,” he said.

Net Sales: Total revenues for Nike increased 3 percent to $10.4 billion compared to the $10.1 reeled in during the third quarter last year, but were down 1 percent on a currency-neutral basis.

Sales for the Nike brand were $9.8 billion, a slight bump of 2 percent from the $9.6 billion last year, but a decrease of 2 percent on a currency-neutral basis.

These sales were largely implicated by the declines in the company’s wholesale business caused by the port delays in the U.S. and mandatory store closures in Europe.

Double-digit growth in both Nike’s digital operations and the Jordan Brand managed to offset most of the losses. Nike e-commerce sales increased 59 percent, or 54 percent on a currency-neutral basis, with strong double-digit increases in all geographies. North America saw its first-ever $1 billion e-commerce quarter, while the Jordan Brand grew 15 percent worldwide.

Nike’s direct-to-consumer sales, which the company has aggressively sought to pivot toward with the Consumer Direct Acceleration, reached $4.0 billion. The Direct channel significantly outperformed its remaining wholesale channels as expected, up 20 percent year over year on a reported basis, and up 16 percent on a currency-neutral basis.

Donahoe said Nike members are stepping up their digital interactions with the brand, with an increase of more than 60 percent in monthly engaged users for the quarter, led by the SNKRS app, “where we’re seeing four times the engagement in monthly active users versus last year.”

Revenues for Converse were $570 million, up 8 percent on a currency-neutral basis, led by strong digital performance in North America and Europe.

Net Earnings: Net income was $1.4 billion, up 71 percent from $847 million in the third quarter of 2019, with diluted earnings per share at 90 cents, increasing 70 percent from the 53 cents per share in the year-ago period.

The 90 cents per share outperformed the 76 cents per share that analysts were expecting, based on Refinitiv data.

CEO’s Take: As far as where Nike is meeting the consumer, Donahoe reiterated that the athleticwear giant will continue to consolidate its wholesale operations in favor of its own properties and “differentiated” retail partners.

“As we segment it, we’re leaning in with those partners that see the world the same way we do,” Donahoe said. “And the good news is those are the partners that have the most robust business with our shared consumers today. I think you’ll see even more movement from undifferentiated retail into a smaller number of partners and our own stores will provide that seamless premium experience.”