Nike Q1 revenue up, margin down due to higher costs and inventory

Nike, Inc. reported revenue of $12.7 billion for the quarter ending August 31, 2022 (up 4% year on year), with Chairman and CEO John Donahoe citing “the depth and breadth of the NIKE’s global portfolio” as allowing the sportswear titan to deliver a “good start” to fiscal 2023 and helping it “continue to manage volatility”. Also up for the first quarter were NIKE Direct sales, which reached $5.1 billion, up 8% on a reported basis, and NIKE Brand Digital sales, which increased 16%, driven by a growth of 46% in the EMEA region. The sales momentum “even in this environment puts Nike above its peers,” said Neev Capital managing director Rahul Sharma. declared Thursday.

Geographically, Nike’s revenue in North America grew 15% year-on-year to $5.5 billion, driven by a 17% increase in footwear sales. Sales in “Europe, Middle East and Africa” rose 23% to $3.3 billion, again helped by an 18% increase in footwear sales. The tough market for Nike for the quarter was of course Greater China, where revenue fell 16% from the first quarter of 2021 to $1.65 billion, with apparel sales down 18% and footwear by 11%.

While revenue was up in the first quarter, the Swoosh is not without its problems for the quarter. Profits were dragged down by “high transportation and logistics costs” and high inventory levels, which forced Nike to “liquidate excess inventory.” Nike revealed that inventory rose 44% year-over-year to $9.7 billion at the end of the first quarter, “due to higher inventory in transit due to continued volatility in the supply chain. supply, partially offset by strong consumer demand in the quarter. “Taken together, the result was lower gross margins, which fell 220 basis points to 44.3%; analysts had expected 45.4%, according to IBES data from Refinitiv. Meanwhile, net profit fell to $1.47 billion from $1.87 billion for the same period last year.

Looking ahead to the second quarter, Nike expects revenue to grow in the “lower double digits”, while gross margin is expected to continue to decline – this time by around 350-400 basis points from the second quarter. quarter of 2021. The company says it will focus on clearing inventory in the second quarter, saying about 65% of its North American backlog is currently in transit.

Tuesday’s earnings call was dominated by questions from analysts about inventory — no mention of RTFKT, Nikeland’s ongoing partnership with Roblox, non-fungible tokens or virtual goods from Nike or analysts despite the emphasis ongoing Nike on the virtual goods front. (Donahoe may have alluded to this, saying that “Nike’s growth is getting stronger quarter over quarter,” thanks in part to “the fundamental shift in consumer behavior toward digital,” a comment that may ‘extend beyond pure e-commerce business to the metaverse, where Nike actually generates revenue.)

In terms of inventory, CFO Matt Friend said the problem was “mainly clothing, [and] it is mainly in North America. Nike expects “total inventory to improve as we move forward from Q1,” and while North America is “obviously the geography where we’ve seen this increase the most more important,” Friend said the company “expects to see it decline.” Regarding what the Swoosh is doing to address excess inventory, Friend claimed that “because we have some of that inventory that’s not seasonally relevant, we’ve decided to take that inventory and liquidate it. more aggressively” – by way of in-house markdowns, as well as offloading to third-party discount retailers – “so we can put the newest, best inventory in front of the consumer in the right places. “.

Regarding the Chinese market, Donahoe is “enthusiastic”, saying that “Chinese consumers are emerging from these lockdowns with a real thirst for innovation, quality and dynamic storytelling” – and in particular, “innovation and hyper-localized narration”.

Reflecting on the company’s results, Sharma said: “Despite the hysteria over a European recession, consumer-facing companies – from Nike to Zara – are doing very well there”, noting that ” Tough times could be coming, but the US margin implosion is a huge contrast as companies seem to have mismanaged US inventory very badly. For Nike, this has translated into more days of inventory (136 days now vs. 95 pre-Covid), as well as a 14% increase in inventory “a bit in the last quarter, despite significant US markdowns,” he says, with more inventory issues expected to follow.

Nike’s margin “will increase nicely once inventory is depleted,” according to Sharma, but it “will take time – we may not even have peaked inventory yet.”

Sallie R. Loera