Q4 2020 Nike Inc Earnings Call
Good afternoon, everyone welcome to Nike Inc.'s fiscal 2024th quarter Conference calls.
For those who want to reference todays press release, you'll find it had each TPP going forward Slash sports posh investors start Nike dotcom.
Leading todays call is engineered VP investor relations.
Before I turn the call already was merely let me remind you felt participants on this call will make forward looking statements based on current expectations and those students are subject to certain risks and uncertainties that could cause the actual results to differ materially.
These risks and uncertainties are detailed in the reports filed with the FCC, including the annual report filed on form 10 dashboard.
Some forward looking statements, making certain expectations of future revenue growth or gross margin.
In addition, participants may discuss non-GAAP financial measures, including references to constant dollar revenue.
References to constant dollar revenue are intended to provide context, that's at the performance of the business eliminating foreign exchange fluctuations.
Participants may also make references to other non public financial into the school information and non-GAAP financial measures.
To the extent non public financial and statistical information discussed.
Some patients of comparable GAAP measures and quantitative reconciliations will be made available nike's website H.P. vehicle imports exports lush investors start making.
Now I'd like to turn the call over to engineering VP Investor Relations.
Thank you operator.
Hello, everyone and thank you for joining us today to discuss Nike Inc.'s fiscal 2024th quarter and full year results.
As the operator indicated participants on today's call may discuss non-GAAP financial measures.
You will find the appropriate reconciliations in our press release, which was issued about an hour, though or add a website investors dot Nike dotcom.
Joining us on today's call will be Nike, Inc., President and CEO, John Donahue, and Chief Financial Officer match Fund.
Following their prepared remarks, we'll take your questions.
I would like to allow as many of you to ask questions as possible in our allotted time [laughter]. So we would appreciate you limiting your initial questions to one.
In the event you have additional questions that are not covered by others. Please feel free to weeks you and we'll do our best to come back to you.
Thanks for your cooperation on that.
I'll now turn the call over to Nike Inc., President and CEO, John don't help.
Thank you Andy and let me congratulate you on your new role leading Investor Relations.
I also want to congratulate Matt on becoming our CFO and express a deeply confident I am in Nike's financial management under Matt leadership.
Before I get into our Q4 performance I want to take a moment to acknowledge the environment in the U.S. right now.
Over the past month, we've seen racial tragedies exposed systemic prejudice and justice in America.
And Nike has a long history of standing up again in a quality driven by our values and rooted in the power sports.
Today, we are uniting behind our blackout fleets teammates and community is Nike continues to lead with purpose.
And we're taking action to help create lasting change to address systemic racism in our society.
Including a combined hundred 40 million dollar commitment from Nike Converse, the Jordan brand and Michael Jordan.
And while we continue to lead externally, we also strives to be even better internally to meet the high bar, we set for ourselves could be a truly diverse and inclusive company.
We're also continuing to deal with the Cobot 19, pandemic, which has had a profound impact on the lives of so many across the globe.
And brought all of this we have led with our values, we executed with empathy and decisiveness.
We prioritize the health and safety of our teammates by closing stores offices and other facilities.
We committed to provide pay continuity for all of our teammates even while our facilities remain closed or had altered schedules.
And we have maintained this important investment over the past 12 weeks.
Our renovation teams designed to deliver personal protective equipment to health systems across the country.
We donated footwear and apparel to help frontline workers around the globe and.
And we've committed more than $25 million for Cobot 19 response in our communities.
I must say that I've been so impressed and inspired by how our Nike teammates around the world have come together and responded to this crisis.
They have moved with speed and empathy and have demonstrated creativity courage and true resilience I could not be more crowded everyone on the Nike team.
As we look back on this quarter. It demonstrated once again that nike's competitive advantage is driven by our team and by our brands ability to connect with consumers.
And this is fueled by our strategy the consumer direct offense and.
And that's why I continue to believe no one is better positioned than Nike to navigate the current environment.
[noise] no Matt will go deeper on Q4 in a minute.
So all that hit on five quick observations from the quarter.
First the power Nike brand continues.
Leading with our values is drawing us closer to consumers.
We used our ecosystem of Nike activity in commerce apps to directly engage with consumers in their homes as they focus on health and wellness.
During this difficult time, Nike has inspired and offered hope.
As a result worldwide affinity for our brand deep and during Cobot 19, with our you can't stop US campaign, receiving more than 2 billion impressions today.
Across all 12 of our key cities Nike remains consumers number one favorite brand.
Second greater China has returned to currency neutral growth.
Over the quarter, we strengthened our consumer connections and translate them into meaningful relationships.
For example in March and April China's monthly active users on the Nike training and increased over 350% since the beginning of the calendar year.
This direct engagement with consumers allowed our business in China to return to growth in Q4.
Third we're seeing a true step function change in our digital transformation.
As you know this has been an area of investment over the past few years as we build our digital advantage, but covert 19 has accelerated the pace.
In Q4, Nike digital grew 79% and we surpassed a billion dollars an annual digital revenue in both greater China and to me up for the first time.
We've seen the strong digital momentum continue throughout the quarter and into early June even as stores have begun to reopen.
Looking at our App ecosystem in Q4, a couple of stats jump out is we see an extraordinary leap and digital demand and engagement.
Workouts on the Nike trainee club that more than tripled, peaking in April at nearly 5 million workouts per week during the month.
Since February the Nike Commerce, App has been downloaded more than 8 million times.
An increase that's triple last years level proving the power of our investment in digital.
And in fiscal year 20, sneakers reached an impressive milestone reaching a billion dollars in global demand for the first time.
Fourth observation on the quarter, the Jordan brand resonates deeply in Q4 with the airing of yesterday in the last dance documentary.
The response, we saw from the cultural conversation around each episode to the rapid sell through at the AJ five fire Red demonstrated the low for the Jordan brand all over the World in fact, the Jordan brand in greater China grew more than 50% in fiscal year 20 approaching a billion dollar.
There's an annual revenue.
In women has played a key role in Jordan's growth and we see significant opportunity for Jordan to achieve even greater scale.
As we create more products for women expand lifestyle offerings and grow the business internationally.
And even during a pandemic Jordan drove some of the quarters biggest launches, including the AJ, one and AJ 13, a reminder of the continued strength of our consumer demand.
Fifth and finally innovation continues to be Nike's greatest competitive advantage.
We continuously bring fresh new product to market supported by compelling storytelling that helps drive consumer demand.
In Q4, we saw strong demand for the Pegasus 37, particularly with women and for the Air Max 2090, a new sportswear silhouette that reimagine the future of air.
We also launched space hippy in our international geographies during June with early success offering even more proof of global consumer appetite for sustainable product.
And our unmatched investment and product innovation.
Even during a pandemic will be proven with our most sustainable product ever the Vapormax 2020 launching in July.
As I said earlier Nike is in a position to emerge from the cobot 19 pandemic, even stronger due to our consumer direct offices.
The global pandemic has made it clear that consumer behavior is changing rapidly providing the opportunity for us to accelerate the pace of our transformation.
Over the past few years, we have shifted from a legacy wholesale distribution model to investment in a model that gives our consumers a more premium shockey shopping experience.
And this is a change that is catalyzed our digital growth as part of our true consumer direct offense.
And Corbett 19 has shown that our strategy is sound.
And so as we look to the future here is what is not going to change.
Our purpose will continue to guide us.
The power of sport will always be at our center.
And product innovation will continue to drive distinction for our brand.
With these strengths in mind, we plan to accelerate our focus and investment on the key areas, the putting even sharper point on our highest growth opportunities.
So today, we're announcing a new digitally and powered phase of our consumer direct strategy the consumer direct acceleration.
We arent settling for our current leadership position with consumers or in digital we're pursuing even further separation.
We're transforming Nike faster to define the marketplace of the future now is the time to act.
Let me walk you through three areas of strategic acceleration.
The marketplace of the future, our new consumer construct and our end to end Technology Foundation.
First.
We will create a market place of the future.
One more closely aligned with what consumers want need.
Digital has redefined the industry over the past several years and Nike has led that change you recall that in fiscal year 18, we set a goal to reach 30% digital penetration both owned and partner by fiscal year 23.
We will reach that goal more than two years ahead of plan this coming year.
And looking ahead, we now expect our overall business to reach 50% digital penetration.
As we look at opportunities to build deeper and more meaningful relationships with consumers. Our vision is to create a clear and connected digital marketplace to match.
Consumers want modern seamless experiences online to offline. So we're accelerating our approach.
Our one Nike marketplace strategy leads with Nike digital and our own stores.
And embraces a small number of strategic partners, who share our vision to provide a consistent premium shopping experience.
Connected data inventory and membership will give consumers greater access to the best of Nike with more speed and convenience than ever.
We've talked about a membership as a growth driver and differentiator before but now will align our business to make it central to everything we do.
And as part of this strategy, we will also scale our investment in smaller format digitally enabled monobrand stores with integrated online to offline capabilities.
We believe this will be additive to what in the market.
These modern brand stores will accelerate the growth trajectory of nike's largest market your opportunity like womens apparel driving long term profitability.
Our second area acceleration under consumer direct Celleration.
Thank you operate under a new simpler consumer construct.
We know that our consumers don't see themselves is only runners are younger practitioners.
They don't think in terms of performance versus sportswear.
Instead, we know how they shop across men's women's and kids.
And so will realign the company to reflect a simplified men's women's and kids approach.
Our category focus will be more specialized across this consumer construct.
Importantly, this consumer construct will allow us to significantly simplify our organization and focus more of our resources on the capabilities and opportunities that will for our future.
In particular will be reinvesting in our women's and kids businesses.
These intentional organizational focus is what touch every area of our business, including innovation product creation marketing merchandising and distribution.
Through this new consumer construct we can serve performance sport with more specificity, while also broadening the definition of sport.
This approach allows us to better focus on the individual consumer and unlock new opportunities to more nimbly serve their exact needs.
And third and finally, we will invest in digital capabilities and our end to end technology Foundation to accelerate our transformation.
Simply put we will more aggressively leverage technology to make Nike better.
This single integrated technology strategy across our business will accelerate how we serve consumers.
Specifically will speed up in unify our investments across demand sensing insight gathering inventory management and more.
This simplified approach will unlock more efficiency for the business, while driving speed and responsiveness as we serve consumers globally.
Consumer direct acceleration is more than just the next phase of our strategy.
It's the spark that will at night and empower our entire company to serve consumers our business and our teams better.
As we shift or operating model. The fueled this strategy Nike leadership position will become even stronger in the future as sport continues to resonate with consumers amid a global shift toward health and wellness.
And then over the past few months, we have navigated unprecedented conditions.
But are purposeful actions will allow us to emerge from its stronger and better than ever before.
The strength of our brand.
Our deep connections to consumers and our unmatched product innovation give us an advantage to create and define or future.
Fueled by the consumer direct acceleration Nike will shape, the marketplace and extend our brand leadership for years to come.
And with that I'll now turn the call over to Matt.
Thank you John and Hello to everyone on the call.
I also wanted to take a moment to welcome Andy Muir to her first call. The she expands our responsibilities and provides leadership over Investor relations.
Before discussing our fourth quarter results I must recognize and thank our incredible team around the world.
I've personally been inspired to watch everyone come together to face our current challenges.
Embracing new ways of working and decisively taking actions to serve our consumers in the face of unprecedented conditions.
I could not be proud to be a part of this team.
This quarter was certainly like no other and Nike's history.
As John mentioned to protect the safety of our employees and to help prevent the spread of cobot 19.
90% of our own stores outside of greater China in South Korea, we're close from operation for roughly eight weeks in the quarter.
Similarly, our wholesale partners largely followed the same pattern.
And the sale of product through physical retail channels came to a halt.
Digital quickly became the primary channel that we could engage with inserv consumer demand.
And Nike was well positioned to respond.
We accelerated growth of our digital business, the 79% on a currency neutral basis.
And drove nearly triple digit acceleration in member digital demand.
All told Nike digital represented nearly 30% of our total business in the fourth quarter.
And reached five and a half billion dollars for the full year.
The net result of these two marketplace dynamics within Nike Inc. Q4 revenue declined 38% on a reported basis.
And yet even in the midst of this global pandemic, we saw the tower and distinction of the Nike brand translate into growing business momentum throughout the quarter continuing into June.
Greater China return to growth in Q4.
And Nike digital also accelerated growth each month in the quarter.
Including triple digit growth globally in May.
Even as physical retail reopened.
These trends of sustained through the first three weeks of June.
And in some markets digital growth has accelerated even further.
We believe this digital acceleration is more indicative of a strategic shift towards a new future marketplace, rather than being a reflection of temporary challenges to the mostly physical marketplace of the past.
Now as we look ahead to fiscal year 21, three key themes stand out from a financial and operational perspective.
Nike supply and demand management Nike's financial strength.
And Nike is digital acceleration.
Let me take a few minutes to unpack each of these.
First.
The end of Q4 inventory increased 31% versus prior year.
In mid March we immediately went into action to rebuild our plans to recalibrate marketplace supply and demand around the world.
As we've said before supply and demand management is critical to sustaining a healthy premium brand.
And over the past three years, we've enhanced our capabilities to manage through situations like this.
Let me share a few specifics regarding what we have already done.
First.
We modified our near term inventory buying plans and proactively canceled pre cobot 19 factory purchase orders for the fall and holiday seasons by roughly 30% on a unit basis.
And while this had a negative impact on gross margins in Q4.
It was the right decision to tighten future inventory movement through our supply chain and utilize the inventory we have on hand.
Second we implemented a plan for a seasonless flow of inventory by shifting product offer dates. So we can use relevant summer and fall product to meet near term demand.
We also added product lines by up to 15% to improve SKU productivity.
Third we quickly shifted available inventory to digital.
And we increased digital fulfillment capacity by more than three times in North America and EMEA.
And finally, we've invested in targeted promotions and markdowns to accelerate the liquidation of excess inventory.
While we protect the long term health of our product franchises.
Including increasing the volume of liquidation through our factory store fleet.
In greater China. This playbook has worked.
And we expect our business will return to normalized marketplace health metrics by the end of June.
In fact, we're already seeing inventory levels globally improve as well.
And with our deliberate actions, we are confident that Nike inventory will be rightsized and in a normal position in Q2.
This leads me to the second theme.
Nike's financial strength enabled us to stay focused on the long term, creating even greater competitive advantage in times of dislocation.
In an environment, where most companies are solely focused on survival Nike is financial strength scale and adaptability allows us to make appropriate near term decisions, while investing to fuel long term growth.
We finished the quarter with $12.5 billion in total available liquidity, including nearly $9 billion of cash and short term investments.
All supported by a strong investment grade credit rating and a high return on invested capital.
We continue to operate from a position of strength.
And I would not trade our position with anyone.
Our current focus is to reduce discretionary spending while we invest in the digital capabilities necessary to further our competitive advantage in the marketplace.
This includes improving the user experience on our digital platforms through enhanced digital commerce analytics.
Marketing technology for better consumer targeting and segmentation.
Online to offline marketplace capabilities, and enhanced inventory pricing and supply management tools.
We will continue to increase the scale and efficiency of our digital fulfillment capabilities.
In Q4, we already pivoted, our new adapt to distribution facility in North America to fully support digital demand.
And we plan to open a new regional service center on the West Coast before the holiday season to forward deployed digital inventory leveraging advanced analytics and demand sensing capabilities from our acquisition of select.
Simply put we have operating principles in place the prudently manage costs in the short term, while we scale investment in key capabilities underpinning our digital transformation.
We will continue to do this while managing SGN a tightly in the first half of fiscal year 21.
And last a more digitally connected Nike is a more valuable Nike.
The underlying value proposition of Nike's consumer direct offense is that the consumer adoption of digital across all aspects of life now provides nike with an opportunity to create deeper more direct consumer relationships at scale without disintermediation.
As we've said before the transformation to a more digital and direct business is financially accretive to Nike.
Our business results over the last seven quarters pre cobot 19 proved this point.
As compared to our long term financial model Nike has driven higher constant dollar revenue growth and roughly double the annual gross margin expansion on an operational basis, excluding the impacts of foreign exchange headwinds in tariffs.
The current economics that this transformational shift illustrates my point.
On average a sale of an incremental unit via digital generate double the revenue versus the sale to wholesale.
The higher gross margin translating into two times the operating income dollars.
And so to reiterate what John said and why this is so important.
We now see that are owned and partner digital could grow to 50% of our total business in the foreseeable future.
Plus our measured investment in Monterrey brand stores will further catalyze digital growth and create new distribution for our largest growth and market share opportunities in women's and apparel.
We're calling this next phase of the consumer direct off its an acceleration for a reason.
Because it will drive greater growth.
It will scale Nike is direct consumer connections in our most profitable channels driving higher consumer lifetime value and it will enable us to reposition our resources to accelerate our transformation to a digital first company.
Now, let's turn to the details of our fourth quarter financial results and operating segment performance.
Nike Inc. Q4 revenue declined 38% down 36% on a currency neutral basis, reflecting the impact of Nike owned store closures and lower wholesale shipments, partially offset by growth in Nike digital.
Gross margin decreased 820 basis points in Q4 as higher full price average selling prices. Despite increased wholesale discounts were more than offset by higher product costs, including factory cancellation charges and increased inventory obsolescence reserves as well as the adversely impact.
Act of supply chain fixed costs on lower wholesale shipments due to covert 19 dynamics.
SDMA declined 6% in Q4.
We reduced costs through clear enterprise wide cost management principles, including reduction of marketing spending due to the cancellation of life sporting events and retail store closures.
It's important to note that the decline in FCD in a quarter included a roughly a 180 million dollar charge related to bad debt reserves.
Our effective tax rate for the quarter was 1.7% compared to 20.4% for the same period last year due to the mix of earnings taxed in the U.S.
And favorability attributable to the use of foreign tax credits.
Fourth quarter diluted net loss per share was 51 cents reflected with was 51 cents, reflecting lower revenue and gross margin related to cobot 19, partially offset by lower SNA expenses.
And full year diluted EPS was $1.60.
Which includes a onetime noncash charge associated with the anticipated strategic distributor partnership transition in South America, which reduced EPS by 25 cents.
With that let's turn to our reported operating segments.
Last quarter, we discussed how each of our markets would progress from a business perspective as they emerge from the cobot 19 outbreak.
First a recovery period, including the ramp up of store Reopenings.
Second a period of normalization of supply and demand.
And third a period in which we returned to growth.
In Q4, greater China, and South Korea returned to growth.
North America, AMEA and the remainder of Npls are still in the recovery period as stores began to reopen throughout may and early June.
In North America, Q4 revenue declined 46% on a currency neutral basis.
However, Nike digital grew 80% and the Nike App grew triple digits and now represents 30% of our North America digital business.
Women's full price apparel grew 200%.
It was powered by strong new member growth with women representing over half of new member acquisition in the quarter.
As retail began to reopen in mid May.
We saw strong double digit growth in retail sales for our brand across the total North America marketplace.
These trends have continued into early June.
Including Nike digital growing triple digits.
Physical retail traffic remains below prior year and is being offset by higher rates of conversion due to promotional activity as well as significant shifts to owned and partner digital.
And as of today, approximately 85% of Nike owned stores are open.
In EMEA Q4 revenue declined 44% on a currency neutral basis.
Digital grew nearly 100% with continued brand momentum and significant new member acquisition and engagement across the Nike training club and the Nike Nike running club apps with with active new member growth of over 200% and more than 18 million workouts logged in the quarter.
And Nike gain market share across both footwear and apparel, becoming the number one apparel brand doing during Q4 in key markets for the first time.
As retail began to reopen in May we saw a slight growth in total retail sales versus the prior year across the marketplace with better performance in Germany, France, and the UK offset by slower recovery in Spain and Italy.
Retail sales have now accelerated in June, including Triple digit Nike digital growth.
Traffic levels conversion trends and consumer shifts towards digital are similar to what we're seeing in North America.
And as of today, approximately 90% of Nike owned stores are open.
With that let's turn to greater China, where we return to growth of 1% on a currency neutral basis, and the sixth consecutive year of double digit growth.
Growth improved each month of the quarter, including strong double digit growth in may on a currency neutral basis.
Digital grew 53% outpacing the industry.
And the Nike App, which launched in Q3 is already resonating with consumers with nearly 11 million downloads driving over 10% of total digital demand in the fourth quarter.
As of today, 100% of Nike on stores are open.
In June we have seen a return to positive comparable store sales and Nike owned stores with higher conversion and higher units per transaction more than offsetting lower traffic.
Nike digital growth has accelerated to triple digits.
Finally in our Apiay geography.
Q4 revenue declined 39% on a currency neutral basis.
We saw very koby 19 impact across countries in the region with South Korea emerging the fastest delivering 8% growth in the quarter.
And digital growth was nearly 80% led by strength in Japan, Korea, and Brazil with women's growing two times the rate of men's on Nike digital.
As of today, approximately 65% of Nike owned stores are open with a higher percentage in South Korea, Japan and Australia.
While stores across Latin America remain largely closed due to efforts to contain the spread of coated 19.
Fiscal year 21, well continue to be a time of uncertainty as economies rebound from the effects of cobot 19 and seek to contain further outbreaks of the disease.
We will be agile and resilient because we understand that each market recovery will not be linear.
We remain focused on what we can control.
So that Nike can manage risk and aggressively attack opportunities created in this environment.
Given the uncertainty Thats still remains.
We will not be providing specific guidance.
Today, However, I will share the approach we are taking to fiscal year 21 planning.
In general we expect to see sequential quarterly improvement in our financial results.
As retail reopens.
Each market normalizes supply and demand.
We expect revenue in the first half of the year to be below prior year levels.
Less of a decline than experienced in Q4.
As we continue to reopen stores in fuel our digital business.
We expect revenue in the second half to be up significantly versus the prior year.
With a healthy marketplace and normalizing full price sell through across our channels.
For the full fiscal year, we expect revenue to be flat to up versus prior year.
And of course, we will have greater clarity on our full year outlook 90 days from now.
Gross margin will continue in the short term to be a function of our supply and demand management actions as we prioritize the return to normalized inventory levels in Q2.
As I said earlier, we have tightened our buys in the first half and are focused on moving through the inventory we have as profitably as we can.
We expect SGN Ada declined versus the prior year.
The financial and operating principles that will carry us through these unprecedented times.
Are the same ones that have guided us over the decades.
And our brand momentum and deep consumer connections.
Our differentiated product and continuous flow of innovation, our digital advantage and our operational capabilities have never been stronger.
In addition, consumer interest in sport fitness health and wellness has never been greater leaving Nike is market opportunity larger than ever.
And though we can't predict short term trends due to the dynamic nature of this pandemic interestingly enough.
We can now see our brands long term future even more clearly.
With that we'll now open the call for questions.
Ladies and gentlemen in order to ask a question you will need to press star one on your telephone please stand by or could be compose kamineni roster.
Our first question comes from Alexander of Office with Goldman Sachs. Your line is open.
Good evening. Thanks, so much for taking my question here and thank you for all the.
Comments in the prepared remarks, some very interesting on the longer term outlook for the business.
I wanted to take a little bit more into the consumer direct acceleration that's on the paid out annual annual remarks.
Can you talk about the plan for new stores do you have any color on.
The number of new stores that Youre planning to roll out on can you talk about.
Is being planned for the wholesale.
Business, perhaps in terms of points of distribution.
And is that you're targeting over time.
Sure Alexander.
Yes.
Funny way I would characterize this investment in these new doors as a continued investment in our digital future.
And here as we look at everything to the eyes the consumer.
And consumers as you know are becoming accustomed to getting what they want when they want it how they want it right and as pandemic is really demonstrated the shift toward digital being at the center of everything they do.
But they want modern and seamless experiences they don't necessarily just want to buy digitally and how that ship from home you are seeing during the pandemic and we believe it will continue.
They want to buy it.
On their digital advice and go pick it up in the store or with soft goods like apparel. They may one reserve it online and tried on in the store.
They may want to being a store and buy something that don't there is not in the store because of inventory and the associate uses a digital device to buy it gets shipped toman, so consumers increasingly want a consistent seamless.
Physical and digital experience.
And so that's what we're committed to providing and we're committed to providing those through.
First and foremost our own digital capabilities.
Well as our own digital stores, both factory or I'm, sorry on physical stores factory indirect.
A very important piece of this is our strategic partners our strategic wholesale partners, we we envision having fewer of them, but focusing on those that we'll share our vision of providing a seamless experience a consistent seamless experience with physical points of presence.
And then we think theres, an incremental opportunity in the market and a need to provide a model brand experience, particularly around women's and apparel. We we've actually seen this first hand in China as you know in China with a relatively modest investment there are monitored brand stores that dramatically ups.
Scale, how we serve consumers I had a chance to see this first hand during my first weeks at Nike in China, We signed long for ticket back out on the road get back out in the market get back out with consumers.
Thats comment again, I know, but I got to see first hand, the power of those mater brand stores and so we'll be opening somewhere between 150 200, new stores, there will be small footprint digitally enabled model brand stores in North America and EMEA.
It's we've been testing this format with Nike live and have a great understanding of how to best delivered this experience and so.
We will precede ahead this year with more test and learn example, debit and scale. It for the next couple of years and again to be clear. We believe this is incremental to whats in the market today, it's complementary to what we're already doing at our partners are doing and.
At the end of the day, we believe that Nike owned physical and digital working hand in hand, with our key partners online and offline. We can create one nike marketplace that meet that demand of consumers now and in the future.
And I might just jumping Alex and say that as John mentioned, we've been testing the Nike life concept, we started in Melrose in Southern California, We've opened a store in long beach and in Glendale. We've also been testing the concept and should we are in Tokyo and in the first half of the year, we intend to shift to Nike owned doors in New York to the life.
Concept and as we've continued to test the concept we've been testing the assortment. We've been testing member engagement, we're seeing that members engage more frequently it's serving to help us retain numbers.
And so as John mentioned this is why we see this is being a catalyst to digital growth, having local stores that numbers can engage with that Tokyo store inventories driven by consumer demand digital demand, it's constantly changing based on what's moving so it's great example of a digitally connected future.
Okay. Thank you operator next question please.
Our next question is from Omar Sam with Evercore ISI. Your line is open.
Thanks for taking my question I'd be interested to hear you talk more category often has been such a strong.
Initiative at the company for many years I'd Love to hear your talk more about the shift to mens womens kids.
How does category up its fit fit into that maybe a little bit more behind the impetus behind that and what's the end result here that.
Hi revenue growth better margin, it's more dynamic product line. Thanks.
You know Omar the first thing I'd I'd say is the category offense is working.
Right and Triple double makes complete sense and our growth drivers are spot on.
And they were working frankly, when we came into the pandemic and depend demick in many ways was a stress test for them.
And it really proved that our current strategy is working.
So what we're talking about here is how do we take how do we take what might have taken a three to five years to make happen and make it happen in two and we think theres some pretty fundamental shifts in consumer behavior that give us. This this opportunity to accelerate our progress.
One shift as digital right as I said a minute ago digital is no fundamental and central to everything consumers do and we are the clear leader in digital will double down on that the second I just talked about was a marketplace of the future right, where we believe we can drive for one Nike marketplace with our own capabilities and those of our partners.
But third in directly your question is aligning organization against.
Hey of more simple construct of men's women's and kids, but also ones that help us unlock what we think our great growth opportunities right womens apparel kids and frankly, the emerging health and wellness.
Opportunity. So this is not to be crystal clear not abandoning the consumer direct offsets. This is accelerating it and refining it so that were more directly connected to the biggest opportunities like women's I'll just created a great example, womens we have less than 10% of the women's apparel market. The U.S. women's grew.
This quarter two times the rate of men.
And this will allow us to align our organization and focus our resources more directly and that opportunity as well as on others and so we viewed as an acceleration and I think it will result in and more directly connecting and building deep consumer relationships, which will result in higher growth market share and as Matt said in his remarks, we bill.
We've also this is also healthy for profitability.
Yeah, I know more I would just add the category offense is has enabled us to sharpen our focus on performance sport and the lifestyle sport and this shift is going to enable us to specialize and get deeper insights to.
The performance category and the lifestyles for category through the gender lens and so if you think about it from innovation to the way we create product to the way we bring it to market. We believe that this is an opportunity to move from insight to innovation in creating products, specifically for the consumer and ensuring that we did it to market.
Okay that we intended when we create when we captured the insight and created.
The product, which we believe will accelerate growth against these these big long term opportunities.
Thank you.
Next question.
Next question is from Erinn Murphy with Piper Sandler Your line is open.
Great. Thanks, and thanks for taking my question I guess on new customer acquisition, you talked about real strength in the quarter I guess, if you look across the fleet of asking your own dot Com, where did you see the Hyatt uptake of new customers, maybe if you can share a little bit more about what you saw from that as well and then how is that shaped your growth strategies around here.
App and that's your broader digital ecosystem.
Thanks.
This gets to this gets too you know membership and why we think memberships that the center of everything we do.
And if you think about it in simple terms memberships and big word, but in my mind it based on three simple things.
Do we have a one on one relationship an identified one on one relationship with the consumer.
Can we increased our level of engagement with that consumer in value at ways, and then does that increased engagement lead to greater retention and share of wallet. If there have their purchases and and in terms of acquiring new members in the quarter, we had a phenomenal quarter 25 million new members registered that soaked up over 100%.
Half those came from our activity apps and have to new members were women, which is a very encouraging sign.
And then that those new members and our existing members were highly engaged particularly around next trading club.
Running club our sneakers that the stats are just I think I listed a few of my remarks, and Matt did but you know NTC.
Weekly active users, which is really important metric because because someone mainly by footwear and apparel a few times a year, but engaging with us each week, maybe even each day brings nike into their lives and so we grew weekly active users.
Triple digits in the quarter 25 million workouts with women alone in Q4.
And that which is and so we think the activity levels in engagements growing and then it's really clear that increased engagement leads to increased purchases and so the Nike commerce that saw triple digit growth in both downloads and monthly active buyers as well is the sneakers Apple over $1 billion and.
First time use and so directly connecting with consumers engaging them with our powerful portfolio of activity up and then translating that into the kind of both digital and online and offline relationships, where they they purchase more as it's kind of quarter to quarter the strategy that the one.
Nike marketplace. If you will is designed to address that directly.
Great. Thank you.
Your next question is from Matthew Boss with Jpmorgan. Your line is open.
Great Thanks, and congratulations on the positive momentum.
So thank you thanks spending maybe as we think about the acceleration of the consumer direct strategy that you outlined how best larger picture to think about the impact on gross margin annually as we think about 50 basis points a year. Prior SGN I think the prior target was slight leverage multi.
Here are maybe just said differently is there any constraints hindering this overall acceleration being a relative acceleration of your mid teens bottom line annual algorithm.
Well, Matt the way I would answer your question is that our long term financial model has always been principled and it starts with creating value for the consumer, which then translates into creating business value and ultimately value for the shareholders and our focus is on creating sustainable profitable long term growth.
As I mentioned in my prepared remarks, the shift to digital is financially accretive to Nike and we believe that that this will be an enabler for us to sustain that momentum longer term.
In the near term or in any given period, obviously, we deal with foreign currency, we deal with anomalies that can have an impact on a on an interim period, but we're very confident in.
And how this strategy will enable us to sustain that growth long term.
What I would tell you because you asked the question about investment.
We have been this quarter in particular was indicative of an opportunity for us where we managed SG in a very tightly, but we actually accelerated investment the way we needed to enable our employees to work from home to enable digital demand to do the things that we needed to do in order to be able to accommodate the environment in which we're operating.
And as we look to the future, while we will accelerate investment against the areas that I referenced we also see equal opportunity for us to shift resources that sit in our PML in legacy forms.
Which we can redeploy against the future and so.
That's going to be our focus as we look towards the future we will be investing but we're going to try to we're going to accommodated within the confines of our existing financial model.
That's great to hear thanks.
Your next question is from Bob Drbul with Guggenheim. Your line is open.
Good afternoon.
I guess I guess couple of questions on on the inventory and I think the plan just sort of have it right size.
The second quarter.
Can you just talked through.
The major strategy that you have the flexibility that you have the sort of utilize your outlets versus off price versus the digital piece and that just walk us through some of the major initiatives in terms of getting back there.
On the supply demand piece of this.
Sure sure Bob.
As you know.
Nike has always tried to carefully manage supply and demand and as a premium brand we maintain our premium nature, because we try to optimize a full price.
Really a full price marketplace across our channels season after season after season.
And so when the pandemic hit it became clear that there was going to be excess inventory for a moment for a period of time and and we pulled many of the levers that we have at our disposal in order to be aggressive in addressing this issue and in particular we.
Said, our first in primary principle was to get inventory clean in the marketplace as fast as we possibly can.
And so we now feel confident based upon the actions that we've taken that we will have inventory rightsized and clean.
By Q2 or in Q2 and in China as I referenced given they faced the pandemic a little bit earlier, they're going to clear and come out of.
The situation from an inventory perspective by the end of June and so we feel very good about about the actions that we've taken to your point.
We are the marketplace is more promotional.
We have shifted more units of liquidation through our factory store fleet, because that's a brand right way for us to liquidate our inventory at a higher profitability level.
But we all we are also seeing.
Some discounting that's happening across the marketplace.
But but our discounting is less than what we're seeing across the broader marketplace and arse, our strong brand and our consumer connection is causing us to liquid to liquidate and move through inventory faster than what we're seeing across the rest of the marketplace and so through the first three weeks of June as I referenced we feel like we're on track against this plan are we.
Are on track against this plan and and are confident that we're going to be positioned.
For the consumer and for the market in the second half of the year.
Great and.
Just a quick follow up is.
On Wednesday, and be a season looking to return.
Any early picks in terms of are you guys think when the title in the back half.
Bob we are so happy that basketball is going to be back.
We just want someone wearing a nike uniformed or when we feel pretty good about that predict.
Turning to thanks very much.
Your next question is from James So with CBS. Your line is open.
Great. Thanks, So much met you talked about.
Okay inventories and drug consumer and increase the digital capacity reacts to meet the demands to do so just talk a little bit more about that like what that means and going forward is there any constraints that will from a capacity perspective that will.
Slowed the company's growth to doing ecommerce, 50% of the total business going forward.
Sure Jay So I'm incredibly proud of our teams that work in our global operation and logistics because.
They delivered no small feat in the quarter, increasing the amount of volume that we could ship by three times in North America in EMEA.
Without much of an increase in costs on a per unit basis and the reason why they could do that is because our current distribution capabilities are omnichannel.
Which means we can shift the wholesale customers, our factory stores and to digital and and that enabled us to be agile in the moment to increase our demand our demand our digital demand fulfillment sorry.
As we look forward I mentioned that we're going to be investing in a new facility on the west coast of the U.S. in order to be able to fulfill demand through holiday and we expect that we will continue to invest in regional service centers in order to be able to fulfill demand closer to the consumer but we're also enabling.
By online we've also enabled buy online pickup in store and ship from store from our stores, which will also be away that we fulfill demand closer to the consumer so I guess, a long way of saying that we feel confident that we can continue to.
To meet this digital demand and and our team continues to be able to expand capacity without compromising our cost per unit. In fact, they continue to do what they can to mitigate cost per unit and we believe it's a.
Long term opportunity for us as well.
And I may just to add a little bit of color in that.
Okay. We for last I had a chance to go out and visit our teams in Memphis, along with Andy Campion, but by the way Andy's not.
On the earnings call anymore, but he's working full time as our COO on just what Matt was talking about into had a great job and Andy and banking and I went out and saw our teams and and Memphis and got to see this adapt facility to that Matt talked about it was initially constructed to serve wholesale but has now been completely redeployed.
Sure of direct to consumer.
And I think that you referenced the power of data right the tower that select anup.
That select acquisition, where advanced analytics and data demand sensing capabilities can allow us to get.
The right product as close to the consumer in the right time.
Which offers enormous efficiency opportunities right and by the way that's a scale game.
Thats can allow us to build scale that others won't be able to match and we want to share that scale with our wholesale partners and others as we embrace this and so.
Really great to see that team and they've done a phenomenal job as as our there their counterparts in Europe and in China.
Operator, I think we have time for one more question.
Our last questions from John Kernan with Cowen Your line is open.
Hey, good afternoon, everybody. Thanks for taking my question and congrats on all the momentum.
Hey, John.
Hey, Matt maybe.
Little more detail on the inventory obsolescence, the bad debt in the fixed supply chain costs.
The level that you get paid that in the fourth quarter, obviously pretty significant how do we think about those line items in the first quarter and as as fiscal 21 Abbas.
Sure John Let me, let me break it down for you a little bit.
First thing I would say is is that a year to date through the first three quarters of of fiscal year 20, we delivered strong gross margin expansion about 70 basis points, excluding the impact of active FX and that was on the back of a really strong product portfolio innovation and then ultimately our digital business.
In the fourth quarter, our gross margin was impacted by coded 19, and the decision that we took to prioritize cleaning and rightsizing our inventory.
Bike into Q2, and so the plans that we aggressively put in place to rebalance supply and demand did have an impact on our margins in Q4, but let me break down. The 24, you maybe a little bit more about 500 basis points of the impact was related to factory BPO cancels.
Inventory obsolescence as we were making decisions about the value of our inventory and our plans to liquidate it and then the negative rate impact due to lower wholesale shipments in on our supply chain costs, what that last point really means is that as our press release said, our wholesale shipments were down 50%, but because our costs are mostly fixed you see a rate.
A negative rate impact as a result of that and so as.
Wholesale shipments start to pick up you will see less of an impact as you look towards the future.
And then we also had 70 basis points of FX headwind in the quarter.
As we look ahead to next year, we do expect the market to remain promotional in the first half and in Q4, we had about 250 basis points impact from promotional activity across our own stores and our partners as we were investing to liquidate inventory across the marketplace as we've looked at the first half of next year.
We expect that the marketplace will continue to be promotional as we and our partners are moving through this inventory to achieve our goal.
But as I said in our in my prepared remarks, we expect to see sequential improvement.
Relative to what we delivered in Q4, as we move quarter by quarter through the first half I.
I think you also asked about bad debt, so bad that fits in SDMA. It doesn't sit in margin and it was $180 million in the quarter I think that's really more reflective of.
The wholesale marketplace and our risk assessment of some of our wholesale customers and the impact that this pandemic has had on their ability to pay Nike for receivables that were owed and so if you. If you if you connect the dots to what John said in terms of our strategic acceleration, we do believe that theres going to be concerned.
In addition, and dislocation in wholesale distribution in North America and in EMEA and that's why we're taking a measured approach to growth in those two goes as we look forward to next year and embracing the great wholesale partners that we think will be the real winners along with us in partnering as close as we can with them to to build.
That marketplace in the future.
Excellent. Thank you excited to see their refinement of the Umer direct offense best of luck.
Thanks, Thank you John.
Thanks, everyone for joining us today, and we look forward to speaking with you next quarter.
Take care they say.
Ladies and gentlemen, this concludes todays conference call. Thank you for your participation and you may now disconnect.
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