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Nike CFO Brands This Tech a ‘Critical Enabler’ After Blowout Q1 Earnings

Nike had a strong reversal of fortunes in its fiscal first quarter after seeing a net loss of $790 million to close out fiscal 2020, with net income climbing to $1.52 billion, or 95 cents per share, from $1.37 billion, or 86 cents per share, a year earlier. The earnings per share far outperformed the 47 cents per share Wall Street analysts were expecting, based on Refinitiv data. Nike stock jumped as much as 13 percent in after hours trading upon the earnings release on Sept. 22.

And while revenues, which reached $10.6 billion, were still down 1 percent and flat on a currency-neutral basis, digital sales across all channels increased a currency-neutral 83 percent powered by double-digit increases across North America, Greater China and APLA (Asia-Pacific and Latin America) and triple-digit growth in EMEA.

The $10.6 billion revenue total topped the $9.15 billion analyst forecast, with major regions such as Greater China, EMEA, Japan and South Korea returning to sales growth. Though North America saw sales decline 2 percent, the region’s sales totals of $4.2 billion still surpassed analysts’ predictions for $3.4 billion.

Nike said it expected fiscal full-year revenue to rise between high single digits and low double digits versus last year, saying second-half sales would be “up significantly,” even though first-half growth would be flat. Analysts forecast a fiscal 2021 sales rise of 5.9 percent, according to Refinitiv.

Inventories at the athletic and footwear giant totaled $6.7 billion, up 15 percent compared to the prior year, but down 9 percent from the previous quarter, with the company continuing to strategically manage excess inventory stemming from the global store closures and lower wholesale shipments during the lockdowns. In an earnings call, Matthew Friend, executive vice president and chief financial officer at Nike, said inventory was “on track to be normalized in the next 60 days.”

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Gross margins decreased 90 basis points to 44.8 percent primarily as a result of impacts from Covid-19, including higher promotions to reduce excess inventory across the marketplace and higher supply-chain costs.

“As we look ahead, our margin will continue to be a function of supply and demand management because our top priority is to normalize inventory by the end of the second quarter,” Friend said. “And we expect the second quarter will probably be more promotional than what we saw in the first quarter because of holiday and the seasonal consumer moments like 11.11 in China. This year, we’ve got Cyber Monday in the second quarter, whereas last year it slipped into the third quarter, and we also are seeing despite our strong performance a lot of inventory still in the marketplace.”

Friend noted that the company is expecting sequential improvement in gross margins in the second half of the year due to a higher mix of expected full-price sales as the company reduces excess inventory at lower promotional levels relative to the overall marketplace. Nike still expects to rely on promotions and discounts in its factory stores, since it is not anticipating traffic to recover to prior-year levels.

RFID, robotics, predictive analytics spend reinforce Consumer Direct Acceleration

Nike is throwing investments into various areas such as digital fulfillment and inventory visibility to bolster its Consumer Direct Acceleration, which is designed to get the business toward to bringing 50 percent of total sales online in the next several years.

For example, the business has tagged 100 percent of its footwear and 75 percent of its apparel with RFID, covering more than 1 billion units at 99.99 percent readability, which “enables us to see our inventory now across all of our factory stores,” according to Friend.

RFID is going to drive improved inventory holding costs and it’s also going to help us reduce our transportation costs, both in direct and in wholesale and we believe that’s going to be a critical enabler in order for us to create a fully connected marketplace for Nike products across both our own stores and our strategic partners,” Friend said.

The company also increased ship-from-store capabilities in its North American brand full-line stores, which now represent over 20 percent of revenue in enabled doors. These capabilities are expected to be enhanced by the RFID investments. The company also is scaling robotics and automation in its logistics operations, accelerating digital throughput and cutting order cycle times by up to 50 percent.

Nike’s new regional service center near Los Angeles went live in September and uses predictive modeling to anticipate consumer demand and ensure the product is available and will arrive within one to two days. The company aims to achieve this level of service at a lower fulfillment cost over time.

“The real story is data, right? The way data then infuses that with the Celect acquisition, where we’re able to forward deploy inventory to be able to predict demand reliably enough, where we can forward deploy inventory, so it’s within one- to two-day ground shipping to a large number of consumers across the country,” Nike CEO John Donahoe said in an earnings call Tuesday. “And again, that’s where the scale [becomes a] competitive advantage comes from in our supply chain because we’ll be able to forecast demand, get the right inventory in the right places to get it to consumers quickly, both for ourselves and maybe even over time as an added benefit for our strategic wholesale partners.”

Nike’s cash and equivalents and short-term investments were $9.5 billion, $5.8 billion higher than last year primarily due to proceeds from a corporate bond issuance in March and positive free cash flow, partially offset by share repurchases and cash dividends.

As of Aug. 31, Nike has total liquidity of $13.4 billion, which includes cash and equivalents and short-term investments as well as committed credit facilities which remain undrawn.