Q1 2021 Nike Inc Earnings Call
[music].
Good afternoon, everyone welcome to Nike Inc.'s fiscal 2021 first quarter conference call.
For those who want to reference today's press release, you'll find it at http. Equal importance that supports us investors don't Nike dotcom.
Leading today's call is engineered VP investor relations before.
Before I turn the call over to Ms. mere let me remind you that participants on this call will make forward looking statements based on current expectations and.
Those statements are subject to certain risks and uncertainties that could cause 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-K.
Some forward looking statements, making certain expectations or 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 as to the performance of the business eliminating foreign exchange fluctuations.
Participants may also make references to other nonpublic financial and statistical information and non-GAAP financial measures.
To the extent nonpublic financial and statistical information is discussed presentations of comparable GAAP measures and quantitative reconciliations will be made available at nike's website H.T.D. people imports exports last investors don't Nicky duck.
Now I would like to turn the call over to Andy mere VP Investor Relations.
Thank you operator.
Hello, everyone and thank you for joining us today to discuss Nike Inc. fiscal 2021 first quarter without.
As the operator indicated participants on today's call may discuss non-GAAP financial measure you want.
You will find the appropriate reconciliations in our press release, which was issued about an hour ago or at our website <unk> factors that Nike Dotcom [noise] Joy.
Joining us on today's call will be Nike, Inc., President and CEO, John Donahoe, and our Chief Financial Officer, Matt Brad.
Following their prepared remarks, we will take your questions.
Like to allow as many of you to ask questions as possible in our allotted time 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 reach you and we will do our best to come back to you.
Thanks for your cooperation on that.
Ill now turn the call over to Nike, Inc., President and CEO John Donna.
Thank you, Andy and Hello to everyone on today's call.
Before I get into our Q1 performance I want to take a moment to acknowledge the passing of Jon Thompson last month.
As many of US called him was a beloved remember the Nike family, having served on our board of directors for over 30 years.
He was a true leader and an icon in the world of sports and we will Miss him.
And here on the West Coast, we're continuing to deal with the wildfires that have hit, Oregon, Washington, and California.
Health and safety remains our first priority, so weve closed facilities in stores where appropriate.
Are those teammates have been impacted by evacuation orders Weve made additional benefits to support available and the Nike Foundation has donated $1 million to provide relief efforts for the Oregon wildfires.
Focusing on both intermediate and longer term needs.
Moving to our business results. This quarter, we continued to demonstrate nikes full competitive advantage over the.
Over the past several months, we have established clear objectives for our business and we have been relentless in our focus on those objectives and the results are reflecting that are.
Our revenue trend is improving with Q1 flat to prior year on a constant currency basis.
Greater China, EMEA, Japan, and South Korea have already returned to growth.
But more to the financial results. It's the continued strength of our brand. The response, we're seeing from consumers and our unique position to be able to capitalize on our potential that excites me even more were going.
We're getting stronger into places that matter most.
And even in the midst of disruption we are on the offense we have.
We have continued our unmatched pace of launching innovative product generating a continuous flow of brand moments that connect with consumers and open groundbreaking retail concepts as we unlock significant long term opportunity in a very dynamic environment.
We can navigate in fact, we can thrive in this environment, thanks to our digital advantage and the full breadth of our global portfolio.
Building on our foundational strengths there are three structural tailwinds that play to nikes advantage.
The accelerated consumer shift towards digital is here to stay.
The definition of sport to include all facets of health wellness and fitness.
And it's a deeply connected authentic brands with scale that will win.
[laughter] nikes strengths amid these evolving conditions help keep us in the lead.
These advantages allow us to stay aggressive and that's why I believe that no company is better positioned to emerge from this period than Nike.
Over the past quarter, we continue to prove this out across four key areas.
As always it starts with product innovation as I met.
As I mentioned, our innovation pipeline and cadence has not slowed even during this uncertain environment.
Second our brand continues to deeply connect through the power of sport, we are creating hope and inspiration at a time when the world needs. It.
Third we continue to take greater advantage of our vast digital opportunity is the shift in consumer shopping preferences accelerates and.
And fourth this digital focus is guiding how we create the future of retail as we continue to launch seamless premium brick and mortar experiences.
Let me briefly touch on each of these four themes.
Our belief and innovation is embedded in everything we do new.
New innovation continues to resonate with our consumers with key innovation platforms, becoming an even bigger part of our mix in Q1.
We had many product highlights this quarter, let's just take a look at a few.
We continue to bring fresh points of view to our most beloved footwear airforce, one air Jordan, one and our deep lineup of Air Max.
By continuously adding new styles, we expand these popular probe platforms.
And we're also focused on fueling a constant cycle of new scalable distinct platforms. For instance, we re energize the iconic air Max 90, this year and it was one of the quarters top growth drivers.
We also push what's possible in sport as seen in the latest launch of our Nike next percent footwear platform.
We had kept show he broke the two hour barrier in a prototype of the air Zoom Alpha fly and X percent and.
And now the consumers have access to this innovation, we've heard from Mehdi that they're running their fastest times ever.
This summer we also released a training shoe thier zoom tempo next percent, bringing the measurable benefit of next percent two runners focused on pace and endurance.
And we're continuing to execute on the incredible opportunity, we see in women's apparel and.
In Q1, we launched Nike Nike's first dedicated maternity collection.
We also introduced a new Nike Yoga collection that serves all genders and body types with performance fabric innovation Thats. The result of more than two years of development.
The response to this best in class Yoga collection has been amazing and is already driving incredible growth for our women's yoga business.
And last but not least our sustainable footwear platform known as space it'd be so amazing sell through in our highest heat innovation launch ever.
Hold with the popularity we solve for Vapormax 2020, we are seeing real consumer appetite for sustainability, especially with our youngest consumers.
Sustainability will continue to be a key aspect of our innovation agenda going forward.
This is how Nike leads innovation is deeply ingrained in this company and over the past three months as most companies focused on just surviving we are continuously bringing forward new compelling product to market, our innovation pipeline demonstrates both our strengths as well.
Well as our endurance.
At Nike innovation is a systemic approach and it's how we extend our lead.
Second the power of the Nike brand continues to be felt all over the world.
And all 12 of our key cities Nike remains consumers number one favorite brands.
In challenging times, we know how to drive meaningful connections with our consumers you can.
You can see this in our market share gains across the Nike and Jordan brands most.
Most notably during the pandemic, we've seen an acceleration of share gains in U.S. womens and apparel two areas of strategic focus.
And as always we connect with consumers through the power of sport.
We continue to see strong consumer engagement in the you can't stop sport campaign with over 2.6 billion impressions as we've reached more than 800 million unique consumers around the world.
Our latest film celebrates sport as a source of inspiration.
Trups Arena, and Venus Williams, and you can't stop sisters to us.
To a sport seller a spot celebrating Kobe Bryant, who continues to inspire athletes.
All over the world on and off the court that.
The consumer energy around this broader campaign is testimony to Nike's brand appeal at a time when so much is going on in the world.
And at the same time, we create experiences and services that inspire and enable our members to keep pushing themselves further in Q.
In Q1, we saw an all time high of the percentage of our members working out on the Nike training club App with more than 50% of our members worldwide starting a workout in Q1.
And then the Nike running club we.
Weve seen four consecutive months of more than a million downloads each month of our audio guided runs.
For those that have missed the camaraderie of group runs during the pandemic renters are telling us they are enjoying the connection and extra push offered by this feature.
And in Q1 for the first time ever women completed more these runs than men.
We're also connecting to our purpose and values as our brand continues to be culturally embedded throughout the world to sport and beyond.
Our athletes are doing the same just.
Just this month you saw Naomi a socket give voice to the black lives matter movement by sitting out the finals of the tournament just prior to the U.S. open before returning to the U.S. open and winning it.
With leadership from global Sports icons like Neil me and be a players like Lebron and yon us as well as the thousands of others, who have stood up and spoken out our athletes are having a profound impact in our society.
All in all from the cultural residents of our brand to our expansion of what sport can mean Q1 was a quarter that showed our relentless focus on deepening connections with our consumers matters.
Third I continue to be excited about the opportunity I see for Nike in digital.
We know that digital is the new normal the consumer today is digitally grounded and simply will not revert back our Nike digital business is already meeting our mix school at 30% nearly three years ahead of schedule and we will continue to grow from here.
This quarter, our own to digital channel grew 83% on a currency neutral basis, driving almost 900 million of incremental revenue versus the prior year and an acceleration versus the prior quarter, even as our doors at retail reopened.
Our engagement and membership metrics show incredible momentum for us.
For example, we're seeing almost 200% growth in demand for our Nike Commerce, App with triple digit growth in monthly active users.
This is significant for us as it speaks to the increasing consumer adoption of our EPS.
And while we've had tremendous success in digital and quickly pivoted to the accelerated consumer shift.
I truly believe that Nike is just scratching the surface of what's possible with our.
With our breadth and depth no. One has the advantage in this space that Nike has to directly connect with consumers.
Nike is digital transformation strategy is not easily replicated simply put.
Scale matters and.
And Nike leads and we will continue to lead in this space for all the reasons Ive already mentioned our.
Our size, our incredible product our brand strength and infinity.
The direct consumer relationships, we deepen each day and our ability to create seamless and differentiated shopping experiences that is how we drive continued separation.
Now we know this is a multiyear journey and we have.
And we have a bright future and lots of opportunity, but in many ways. We are just getting started today.
To date, we've done some impressive things to achieve scale highlighted by our Apple ecosystem, our RF I'd investment and our Omnichannel distribution centers.
As part of the consumer direct acceleration, we have some clear immediate priorities, including scaling OTO, improving personalization and creating a consistent end to end technology platform.
And of course, we remain focused on increasing member engagement to unlock value for both Nike and our consumers.
After all we know a consumer who connects with us on two or more platforms has a lifetime value. This four times higher than those who don't.
And in particular I'm focused on how we will leverage consumer data and insights and our digital ecosystem to understand and serve consumers better and ultimately increase our competitive advantage.
We'll use data to stay a step ahead and help us create a better product is consumer insights power our business end to end toward even greater growth.
Fourth and finally digital is fueling how we create the future of retail this.
This is the first quarter since the start of the pandemic, where our retail was essentially opened.
The elevated OTO journey.
This is our vision for the marketplace.
A digitally connected experience where membership is a true differentiator.
And just as our continuous product pipeline, we continue to innovate in the retail space.
We're accelerating the shift we discussed last quarter to one Nike marketplace as part of our digital.
CDK acceleration.
As you recall, our one Nike marketplace approach leads with Nike digital and our own stores as well as the smaller number of strategic partners, who share our vision to provide a consistent and seamless consumer experience.
In fact during the quarter, we took focused actions to proactively shift in North America marketplace as part of our strategy to serve consumers more consistently and more personally.
Simply put we are on the offense and accelerating toward this future vision.
And this is evidenced by our new and innovative retail concepts amplified by an elevated OTO consumer journey.
Just in Q1, we launched new stores and Guandjo, China sole Los Angeles, and Paris with two new doors in New York City coming in the next few weeks. These.
These stores range across many different formats from our house of innovation concept in Paris to a new Nike factory store.
In the Watts neighborhood of L.A. as we deepen our connection in key cities.
And all of these concepts are underpinned by digital.
I'll go a little deeper in one just as an example, our new store and one Joe is a data powered store concept that cure rates, a one to one personalized shopping journey we're.
We're already seeing member checkout entered one Joe store significantly outpaced the rest of the fleet.
This is just one reflection of how digitally enabled our future of retail is and how membership is a critical differentiator.
Personally one of the things I am most thrilled about is the return to organize sport.
In fact, there was a day earlier this month when you could watch the NVCA NFL Major League baseball Wnbc, a NHL tennis us open.
Golf tournament and about six different global football leagues, all taking place within the same 24 hours.
No health and safety remain Paramount you can just feel the optimism and excitement of sport coming back and EPS.
And as we look to the Tokyo Olympics next summer Nike remains in a unique position to serve our consumers and fuel their passion for sport.
And so as you can see even during market uncertainty, we're not slowing down now.
Nike is staying on the offense and looking to extend our leadership position.
We have that ability.
And as I've said before these are times when the strong gets stronger and I'm energized by our incredible potential.
And in closing I want to thank our teammates all over the world to continue to innovate execute and show tremendous resilience throughout a challenging year I could.
I could not be more proud of them and we can't wait to show you what we're going to do next.
With that I'll now turn the call over to Matt.
Thank you John and Hello to everyone on the call.
Nike entered the pandemic with unparalleled brand and business momentum.
And while we continue to navigate through uncertain dynamics sport has returned interest in activity in health fitness and wellness has never been greater.
Consumer connection and engagement with our brand is growing.
Nike is transforming the way we operate to better serve all consumers.
Looking forward, we believe that Nike is stronger and now even better positioned to drive separation than prior to the pandemic.
As I reflect on the first quarter, there are three key strategic and financial themes that stand out.
First Nike is recovering faster fueled by brand momentum and our relentless focus on execution.
Second we are.
We are accelerating investments in capabilities and services that will create value for the consumer.
While simultaneously accelerating productivity.
And third our consumer led digital transformation is clearly a catalyst for long term revenue and earnings growth.
Let me take a few minutes to walk through each of these points.
First as discussed on previous earnings calls, we implemented an enterprise wide operational plan at the onset of the pandemic.
Our teams have navigator with agility and focus to recalibrate supply and demand to increase digital distribution capacity to secure liquidity and to tightly manage costs, all while ensuring the health and safety of our employees and consumers as it.
As a result, Nike Inc. first quarter reported revenue declined 1% versus prior year and was flat on a constant currency basis.
And reported EBIT grew 13% versus prior year, all a sharp acceleration from last quarter and exceeding our internal plans.
There are a few elements that are important for me to highlight here.
Despite ongoing uncertainty more countries are emerging from containment and have returned to growth, China, Japan, South Korea, the UK, France, and Germany, just to name a few more.
Marketplace inventory is healthy and within our targeted guardrails.
Nike inventory levels have improved since may with Q1 inventory growing 15% versus prior year as compared to 31% growth in Q4 and.
And is on track to be normalize in the next 60 days.
We are reducing excess inventory at lower promotional levels relative to the overall marketplace highlight.
Highlighting the strength of our brand and the value of our key product franchises.
And we ended Q1 in a net cash position generating positive free cash flow and increasing our liquidity to over $13 billion.
These financial results offer clear evidence of a faster marketplace recovery for Nike fueled by consumer demand for all our brands.
Our momentum is building and more importantly, our market share is accelerating around the world.
We now expect reported revenue to be roughly flat versus prior year in the first half of fiscal 21.
This leads me to the second theme.
We are accelerating investments in capabilities and services that will create value for the consumer while simultaneously accelerating productivity.
As you've seen over the last two quarters, our priorities are clear.
We will continue to both accelerate investment against our digital transformation.
And prudently manage other spending.
At the same time, we are focused on amplifying our brand impact.
Over the past two quarters as we have seen demand for our digital business rapidly accelerate we've invested to further increase digital fulfillment capacity and inventory visibility.
Our new regional service Center near Los Angeles went live this month and uses predictive modeling to anticipate consumer demand and ensure the products are consumers want is available and will arrive within one to two days we.
We will achieve this level of service at a lower fulfillment costs overtime.
We've scaled ship from store capabilities in North America's Nike brand in line stores.
Which now represents over 20% of revenue in enabled doors.
These capabilities will be enhanced by our RF I'd investments highlighting dramatic improvement, we are making in our auto service performance.
We are scaling robotics and automation in our logistics operations accelerating digital throughput and cutting order cycle times by up to 50%.
Especially during times of heightened safety measures due to Covance 19. This allows our teams to serve higher levels of digital demand with greater efficiency in precision.
We've already deployed this automation in North America, Japan, and EMEA and we'll continue to scale. These critical improvements further as delivery becomes increasingly important in consumer buying decisions.
And while we double down on the strategic capabilities required to fuel our digital acceleration, we are simultaneously driving a sharper prioritization and sequencing of our investments.
For example, we drove significant leverage in our demand creation spending versus prior year in the last few quarters Q.
Creating fewer but significantly more impactful brand campaigns.
We were also able to increase the return on performance marketing investment driving accelerated digital demand and greater digital engagement.
The Nike and Jordan brands are stronger than ever delivering historic records of engagement through nearly 5 billion social media impressions just this quarter.
Another example is how our organizational restructuring will simplify the way, we work eliminate duplication and redundancy and realign our resources to focus on our biggest growth opportunities.
While we will incur a nonrecurring charge to effect. This plan in fiscal 21. This.
This restructuring will also create a similar level of recurring annual cost savings that will help fuel the acceleration of our digital transformation.
In this moment the pandemic has allowed us to accelerate where and how we will invest olson.
Ultimately, we will drive deeper consumer connections and continue to amplify our brand strength using technology to operate more efficiently and at greater scale.
This brings me to my final theme, our consumer led digital transformation is clearly a catalyst for long term revenue and earnings growth.
Our digital business grew 83% in Q1 on a currency neutral basis, and as John mentioned digital across owned and partner now represents over 30% of our total business up more than 10 points of share versus the prior year, but more.
But more importantly, we saw tremendous momentum in the measures of success that matter most to create scale and drive long term profitability.
These include member engagement and owned digital market share.
In Q1, Nike active members increased nearly 60% with even higher growth in buying members.
We also drove strong double digit growth in Contactable members.
We saw owned digital market share gains across both the us and key countries in EMEA, which.
Which gives us confidence in our ability to sustain and to grow our digital penetration even as physical retail traffic continues to recover.
What's even more important though is that we can see several strategic and financial benefits from accelerating our digital transformation.
First by leveraging data to enhance membership personalization and consumer oriented OTO services across the marketplace.
We can drive greater inventory efficiency and unlock accelerated growth in key opportunities like women's and apparel.
Second in a normalized period, we earned roughly 10 points higher gross margin rate on our digital revenue versus wholesale.
And while we will need to continue investments to expand digital fulfillment capacity, we can improve operational efficiency to predictive modeling tools to.
Data driven number personalization and inventory staging.
And finally, we will manage digital transformation within our SGN any guardrails as.
As we accelerate the pace of investment a technology foundation will enable us to unlock operating efficiency through automation and increased productivity across the organization.
Further as we grow digital engagement and we retain a higher proportion of engaged members with increased buying frequency.
We will be lowering customer acquisition costs, increasing our return on AD spend and changing the shape of our demand creation investment.
As John said earlier, we know that digital is the new normal and as we drive continued separation in the market through connected seamless and modern consumer experiences, we will fuel growth and profitability.
Now, let's turn to the details of our first quarter financial results and operating segment performance.
Nike Inc. Q revenue declined 1% and was flat on a currency neutral basis as Nike direct grew 13% led by strong digital growth offset by declines in our wholesale business.
Gross margin decreased 90 basis points in Q1 versus the prior year as a result of impacts from Covance 19, including higher promotions to reduce excess inventory across the marketplace and higher supply chain costs.
These factors were offset slightly by favorable full price product margins and the reversal of certain reserves associated with purchase order cancellations due to higher than anticipated consumer demand.
SGN a declined 11% in Q1, we type.
We tightly managed operating expenses, including lower and more effective marketing spend as live sporting events slowly started to resume.
While investing to support accelerating digital growth and transformation.
Our effective tax rate for the quarter was 11.5% compared to 12.4% for the same period last year, primarily due to benefits from stock based compensation offset by a reserve for a discreet tax matter.
First quarter diluted earnings per share was 95 cents up 10% versus prior year.
With that let's turn to our reported operating segments.
Despite very recovery curves and macroeconomic dynamics, our geographies have some key themes and comment in Q1.
First strong digital growth and increasing member engagement.
Second women's outperformance versus men's and a growing Jordan brand and third.
And third lower physical traffic in our Nike owned stores versus last year, although substantially improved versus the prior quarter traffic.
Traffic trends were partially offset by higher conversion rates and higher spend per transaction.
In North America, specifically Q1 revenue declined 1% on a currency neutral basis, and EBITDA increased 18% on a reported basis.
Digital was up nearly 100% driven by triple digit growth in full price sales and fueled by strong momentum and iconic styles like the Air Force, one and air Jordan, one along with women's apparel, which grew nearly 200% in the quarter demand.
Demand on the Nike App grew 150% in Q1, highlighting the continued shift to mobile experiences.
Finally, as we cut purchase orders to recalibrate supply and demand in North America. During the first half of fiscal 21.
We shifted product allocations to fuel higher demand in Nike digital and our smaller group of strategic wholesale partners the risk.
The results with high single digit growth in differentiated wholesale offset by a decline of over 20% and undifferentiated wholesale all with a higher full price realization versus the prior year. This is.
This is a trend that we expect to continue throughout this fiscal year as we change the shape of the North American marketplace.
In EMEA Q1 revenue grew 5% on a currency neutral basis, and EBIT grew 14% on a reported basis.
Recovery in Italy, and Spain continues to lag recovery across the rest of Western Europe.
Nike direct grew over 25% with over 100% digital growth driven by lifestyle products as the consumer focus on comfort continues.
Apparel in EMEA grew 11% on a currency neutral basis led by the performance categories of running training basketball and global football, which featured our biggest club launch ever with Liverpool FC.
EMEA also continues to lead globally with our express lane offense.
Maximizing supply availability and actively managing inventory, while capturing emerging trends Express lane drove revenue growth and generated higher full price realization in the quarter.
With that let's turn to greater China, which continued its strong momentum with 8% growth on a currency neutral basis with mainland China delivering double digit growth.
Nike direct grew over 20% with more balanced channel growth as digital grew nearly 30% and Nike owned stores were up double digits fueled by key consumer moments like 618, where Nike was the number one sports brand on T Mall.
Nike sportswear and basketball drove double digit growth in the quarter with strong sell through of key innovation launches like the Alpha fly next percent space to be and the AJ one flies.
Retail sales in the China market place are accelerating with an increasing proportion of full price sales.
Physical retail traffic continues to grow and is approaching prior year levels and we are also well positioned for singles day in November.
Finally in our ABL age geography, Q1 revenue declined 12% on a currency neutral basis.
Including digital growth that exceeded 90% we.
We continue to see very impacted cobot 19 across countries in the region.
With growth in the Asia Pacific region, being led by Japan Pacific and South Korea, while recovery in Latin America, and certain countries in Southeast Asia continues at a slower pace.
Performance footwear resonated with consumers and Npls this quarter as we saw strong results from the Alpha flight X percent and the Pegasus 37.
Jordan has also continue to excite the consumer with locally relevant product like the AJ 34, Rehashing, Florida, which was Japan best selling basketball launch ever.
As I said last quarter fiscal 21, we will continue to be a time of uncertainty because virus containment patters patterns around the world remain volatile.
Therefore, each market recovery will not be linear and the comparisons with prior year will become increasingly less intuitive.
We are focused on what we can control deepening our consumer connections, while we manage risk and uncertainty in this environment.
We are tightly buying inventory and are focused on ensuring the long term health of all of our brands and our key product franchises.
With the first quarter now complete I will update our full year financial outlook.
Despite the continued uncertainties, we now expect revenue to be up high single digits to low double digits versus prior year. So.
Stronger than anticipated demand for our brands will be constrained in the near term due to the supply decisions. We took in the face of the pandemic with growth in the second half to be up significantly versus prior year.
Our gross margin outlook will continue to be a function of prioritizing a return to normalized inventory levels by the end of Q2.
In the second half, we expect to begin seeing sequential improvement in full price sales, but we do expect a continuation of higher markdown activity in our factory stores to sustain conversion rates on lower traffic.
For the full year, we now expect gross margin to be flat versus prior year in.
Including 40 basis points of foreign exchange headwinds.
We now expect SDMA will be flat versus prior year, including approximately $200 million to $250 million of nonrecurring execution costs incurred in the first half associated with simplifying our organizational structure.
Nike is poised to emerge from the current environment stronger and better positioned with a.
With a sharper focus.
A clear view of our low brand long term future and with a team that is energized to compete and to win.
At the same time, we are managing our business to deliver financial results that will set a strong foundation for growth and profitability in fiscal year 2002 and beyond.
The future for Nike as bright I wouldn't trade our position with anyone.
With that we'll now open the call up for questions.
Ladies and gentlemen in order to ask a question you do need to press Star and then one on your telephone please.
Please standby, we compiled acuity roster.
Our first question is from Bob Drbul with Guggenheim Securities. Your line is open.
Hi, guys good afternoon.
Good afternoon Bob.
I guess just the first question that I have really is on if you could maybe spend a little bit more time on the.
Gross margin performance and can you just give us the buckets in that very soon is there any quantification around the promotions the supply chain.
Full price selling just help us get our hands around the various drivers of the gross margin this quarter and maybe Matt If you could just a little bit more around you gave some commentary for the full year, but maybe just the driver.
The drivers of that performance for the remainder there would be very helpful. Thanks.
Sure Bob.
So in the first quarter, our gross margin was down 90 basis points versus prior year and.
You see that was a substantial improvement versus the results we had in the fourth quarter.
Really reflecting the strength of nikes market recovery.
However, Q1 did benefit from about 55 basis points of one time accrual reversals that we incurred in Q4, the biggest of which related to factory Po cancellations, which we reinstated some supply due to the strong demand we were seeing in the quarter. So.
So if you add that back you get to a gross margin is down roughly 145 basis points versus the prior year and that's driven by markdown activity to work through and normalize our supply.
As we look ahead to Q2, Bob 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 and we expect Q2 will probably be more promotional than what we saw in Q1 because of holiday.
The seasonal consumer moments like 11, 11 in China and then this year, we got cyber Monday in Q2, whereas last year it slipped into Q3 and we.
And we also are seeing despite our strong performance a lot of inventory is still in the marketplace.
And so thats how were looking at the first half of the year as we looked at the second half as I mentioned in my remarks, we're expecting sequential improvement with a higher mix of full price sales.
And we'll start to see the benefits in our supply chain from exiting the extra storage that we needed for inventory in the first half we all.
We also expect though that we're going to need to.
Maintain an investment investment in India.
And discounts in our factory stores, because we're not anticipating traffic to recover to prior year levels in the balance of the year and so we're assuming that there will continue to be some promotional activity in the second half of the year to maintain conversion rate in unit velocity.
As we keep as we continue to operate through the balance of the year.
Great. Thanks, Harlan all logic that just nets to about a flat versus prior year.
Okay perfect. Thanks, I guess, just and just a follow up quick question is.
Have you guys considered deal with the Cactus Jack.
Maybe some sort of collaboration with Mcdonald's in terms of like do the happy meal with the cactus Jakone and get a pair of shoes or anything like that is that in the pipeline at all.
Bob I can give a one word answer to that question no.
All right, thanks, very much nice quarter guys splitting up.
Bob.
Our next question is from Kimberly Greenberger with Morgan Stanley. Your line is open.
Great. Thank you so much.
Appreciated your comments, Matt on the digital.
Total margin, obviously, a very nice I think you said 10 point higher gross margin.
Wholesale and your digital channel I'm wondering if you can just cover some of the key unlock.
That you add visualized or that you envision happening over the next few years that.
That will basically allow that digital operating margin to track higher over time overall.
And never lower customer acquisition cost is it more efficient fulfillment of orders or scale any of those.
Any color on that would be helpful. Thanks.
Sure Kimberly you almost answered the question for me there hitting the points, but yes. So it starts with where John where where John was in his prepared remarks, we obviously believe that scale for our digital business is going to drive significant financial benefits as we continue to grow the size of that business.
And and leverage the capabilities that we continue to develop I think theres, probably three key drivers of.
Of of operating margin improvement that we see from leveraging scale of our digital business. The first one just relates to leveraging data and the data that we continue to gather as a as a growing business to create personalized product offerings for consumers and the.
And the benefit that that will drive is higher full price realization and less markdowns of product that we're selling digitally to consumers. The second piece is also kind of connected to data, which is where do we place our inventory and how do we flow. It so that we can be closer to the consumer and ultimate.
We lowered our facility costs and we believe that we'll continue to do that will be a driver as well as continued gross margin expansion and then the third piece kind of tie back to what I referenced on our performance marketing investment and marketing we have got to move deeper into the funnel.
Less new man.
Moving from attracting and acquiring new members to retaining members, knowing those numbers and driving more engagement and frequency of purchase within our existing member base and we believe that by running that often we will see more productivity in our demand creation spend at a higher rate.
Return on our demand creation spend and by doing that we should be able to also drive additional operating margin expansion.
Fantastic. Thank you.
And next question is from Michael Binetti with Credit Suisse. Your line is open.
Hey, guys. Thanks, a lot for taking my question and nice job on the quarter and in a very tough backdrop.
I guess.
Yes.
The North America and May be EM, EMEA EBIT dollar growth significantly outpacing revenue growth in those markets I guess dovetailing off Kimberly's question, how how helpful was improving digital markets Jumpstart digital margins in those markets. In this quarter is that something thats already on the move as you see the growth rates that you are.
That you're seeing in those markets with the digital business.
Yes, Michael So we are seeing a benefit from increased digital penetration on our margins within those two geographies.
But I would I would also want to highlight that the strategy and the focus on.
Shifting the marketplace exiting on differentiated wholesale distribution and focusing on our direct business and our our.
Our strategic partners drove higher full price realization as well and both of those markets in the quarter, which also fueled our gross margin and so those two factors in particular were large drivers of gross margin per foot.
Performance in the quarter and then we also had some SGN a leverage in those geographies in the quarter as we were managing spend and working through new ways of working.
From a corporate perspective, and that also helped to fuel EBIT growth relative to revenue growth in the quarter.
Gotcha, and then I guess as as a.
As a follow up as you look at North America, John as you've gotten into the business and had a chance to kind of.
Think about the different regions the sales growth in North North America has been very strong for a couple of years that in a few billion dollars over the last few years, but the margins have been fairly stagnant there. Despite the brand being very strong obviously gaining momentum.
You know you you some more pronounced shift in the business and wholesale here in the quarter some of that probably force than you buy the D and the macro backdrop, but what do you. What do you think about the margin evolution in in North America from here as we normalize and get on the other side of the of this coded period and look out to the second half of this year and into 2022.
Well, Michael if I, if I step back I would say the North America market, the North America retail market is the.
Most fragmented and least far along of where it needs to get two of the major markets in the world and so in this world where consumers want.
A seamless did.
Digital and physical experience they want to know if they want to know who they are they want.
They want consistent premium modern experiences the North America retail market today is the furthest away from that and so that's what's driving our one Mike Nike marketplace, where we lead with digital directly connect with them for all the reasons mass already described we then follow with our.
The direct where we have very premium experiences that are often digitally infused.
And then we work with fewer strategic partners, who see the world. The same way, we see the world and want to provide us consistent.
Experiences for our consumers want to provide the same level of of knowledge and understanding so consumers know who they are regardless of where they are shopping consumers want what they want when they want how they want it and so we are simply accelerating that transition we're accelerating what we probably would have happened in the retail environment on it.
Naturally in the next four to five years, we're going to try to drive it for our business in the next one to two years and that well for all the reasons. Matt described that will have that'll have fun.
Financial benefits that'll profitability benefits in addition to having growth and market share benefits, which is what we're really focusing on.
John that thanks, a lot for that.
Great.
Next question is from Omar Saad with Evercore ISI. Your line is open.
Thanks for taking my question. Thanks for all the information in a quick clarification on the digital.
Trends I believe last quarter, when you spoke to us I think to the exit rate was triple digits. In June obviously is still a huge number for the overall quarter, but maybe just help us understand that digital rates low at the stores and the conversion came back in and the bricks and mortars part of your DTC business and I'd also love and I know you are an updated kind of view.
And outlook on the return of team and organized sports the NDA playoffs NFL US back do you think this is going to continue to build over time, even at the youth and collegiate level as well and how you guys capitalizing on your integration and deep roots and although sports. Thanks.
Sure Omar why don't I take the first part and then maybe Jamul grabbed the second piece of it so.
So yes, when we had our last earnings call. We referenced that we were seeing strong triple digit growth in digital in the month of June and what I'd say is that in North America, EMEA and La we continue to deliver above or at 100% triple digit growth in digital in the quarter the place where we.
We saw more balanced growth in the quarter was in greater China, where retail traffic has recovered closer to prior year levels and is approaching prior year levels, but digital was still the fastest growing channel in that marketplace at over 30% growth. So the only thing that I would say.
That that might even remotely sound like a d. celebrate deceleration is is greater China growth as the marketplaces normalized but we continue to believe that digital will lead the way of growth for greater China.
And Omar the second.
You know how cool is that to be about a weekend to watch literally within hours and BA NFL MLB NHL College football Us open tennis.
Your golf tournament and.
First I have sat to just congratulate the commissioners of the major sports leagues.
Who have just done a fabulous job of bringing sport back safely safely for the players and coaches and then providing what are unprecedented viewership opportunities.
And so we are thrilled about that we're trying to work very closely with them.
To help encourage that wherever possible, we think that's good for consumers and it's ultimately good for Nike.
And does that continue and does it cascade down to college and high school and use.
No I say my prayers every night and hope so I think the you know that obviously safety is paramount.
And the more you get into distributed environment unless controlled environment, obviously, the more challenging that is and so.
You know we completely embrace balancing safety, but also were turned sport and I you know I think I think the other part of this is not organized sport, but we're saying is I take and I think these things that related people are more engaged just sort of this movement toward health and fitness and wellness.
This which I think started when people being confined to their homes.
We're seeing it continue to accelerate you watch a game on TV and you want to go out for a run rate you go shoot baskets in the in the driveway and so and so I think I think sport is so healthy for the world right now and we're going to do everything we can including by the way some of the brand moments that we're trying to celebrate the to reinforce.
I, just love the venous and serene a spot that just celebrate the power sport has in connecting with consumers and so you know you hear the excitement in my voice I can tell you all 75000 people here at Nike loves sport loves Port coming back and we're cautiously optimistic that will continue till we get.
Through this pandemic.
Thanks, John Thanks, Matt Best wishes.
Thanks Omar.
Next question is from Jim Duffy with Stifel. Your line is open.
Thank you low everyone terrific rebound in the business.
My question I'm, hoping you can provide an update on the RF ideas implementation and benefit to NIM was inventory management demand forecasting and then maybe talk about how these benefits materialize in the model in coming quarters and years, what are some of the key metrics, we should watch for the progress.
Hi, Matt.
Okay.
[laughter], so Jim in the quarter.
We continue to rollout RF I'd across our cross both our supply chain in our stores.
And given.
Given where things are sitting in the pandemic at this point in time.
We we were able to leverage the inventory visibility in order to be able to take advantage of some of the.
Take advantage of the demand that we had across the marketplace.
Entered into and across our our retail stores.
We now have a 100% of our footwear as I think we've told you before and 75% of our apparel tag. So we've got over 1 billion units at 99.99% readability, which enables us to see our inventory now across all of our factory stores.
And their lives in our own doors, and they've helped to accelerate our own capabilities.
By providing a clear line of sight to the inventory levels.
Our idea 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 product across both our own stores and our strategic partners and and I did go.
On that what Matt talked about last quarter, it's a real issues. The rails that started as data right the way data than infuses that with a select the select acquisition, we're able to forward deploy inventory be able to.
Good.
Predict demand reliably enough, where we can forward deployed inventory so its within one to two day ground shipping to a large number of consumers across the across the country and again, that's where the scale competitive advantage comes from and our supply chain, because we'll be able to forecast demand get the right inventory in the right places.
As to get it to consumers quickly both for ourselves and maybe even overtime as an added benefit for our strategic wholesale partners.
[noise] very helpful. Thank you guys.
Thanks, Jim.
The next question is from Jamie Merriman with Bernstein. Your line is open.
Thanks, Patrick Hi, John and Matt you both talked about some examples of the digital investments that you've made so far you know the ecosystem.
Selman capability is inherently heats.
So I'm wondering as you think about the business from here. It's not you talked a lot about continuing to win that are there particular areas, where you feel like you need to invest further you know is it.
Greater data capabilities is it just building out on more emphasis on the option like the one you have on the West Coast, where are you now at the point, where you can start to leverage some of that investment behind that.
Data and our idea is it really just a matter of town.
Jamie it's interesting because I have a little bit of insight in point of view of this and I must say from a board perspective I saw the investment Nike was making in digital and boy you see the result to that the fact that we have a clear digital advantage today.
That said, having had a technology background I feel like there is so much opportunity remaining.
We're still just scratching the surface of what's possible and so in particular the way we think about it is consumer facing digital right demand sensing a little things. This quarter, we turned on machine learning on search and a little bit of improvement drove greater conversion by the way that's continuous so the ability to use.
AI and machine learning digital demand sensing insight gathering digital marketing membership personalization.
Even the inventory optimization I think I think we still got ample benefits an ample opportunity in the consumer facing side of things and those are things like in technology. They are not big banks. It's a it's a whole series of continuous and ongoing improvements that by the way, a very measurable and enhance growth or improve profitability and then b.
Beyond that where I think we still have huge opportunities. We now have one integrated technology roadmap and we're applying that across our entire company end to end and so whether it is the manufacturing through supply chain and the automation opportunities that that exists, whether it's using robotics or or other ways to to improve.
The efficiency and effectiveness, our whole product creation area up one of the people that as most excited about the opportunity to digitize is our head of design, John Hope and just how digital can really enhance not only the productivity, but also the creativity of our designers.
And so we now have a three a clear three year roadmap.
That to bring technology to every element of our of our operation in every element of our our end to end business and the nice thing about that is in almost every case you can define measurable benefits whether its enhanced growth.
Deeper connection with consumers or improved efficiency with with automation and.
And you know use of intelligent use of technology. So.
I think all of US do this is a real opportunity.
We hardly have John.
Operator, we have time for one more question.
Last question comes from the line of Matthew Boss with JP Morgan Your line is open.
Great Thanks, and congrats on a nice quarter.
So on the on the financial algorithm and as we think through the accelerated shift to digital and I think you had said within the guard rails Divesture DNA that you've you've outlined are there any offsetting headwinds constraining your ability to potentially out he outlined high single digit topline and mid teens earnings growth rate, because we think moving.
Forward.
Well, Hey, Matt Thanks for the question.
You know as I mentioned in the last call we.
We believe that that the consumer direct acceleration is clearly a.
A tailwind or a fuel to our long term financial model our goals in our principles related to how we financially manage the business are really unchanged to deliver sustainable profitable and capital efficient growth over time, obviously right now were in the middle of that quite an uncertain moment and pandemic and while.
We are sharing with you our perspectives on the opportunities that we see as we look towards the future.
The reality is is that this environment right now is quite uncertain and so on.
What we're going to be focused on over the next 90 to 120 days is.
Continuing to clean our inventory continuing to create those consumer connections like we've been talking about and really focused on our one Nike marketplace strategy exiting on differentiated wholesale distribution and focusing on the opportunities that we see for Nike directing our strategic partners and.
We believe that this strategy will fuel growth and profitability in line with the long term financial model that we've previously communicated obviously there are a number of factors that are outstanding that that may create disruption over periods of time as we look at it and the most obvious one right now is just that the pandemic.
The impact that has on consumer demand and consumption.
And then in the near term and so we're continuing to focus on the strategy and the shifts because we think it's the right thing to do long term.
And and that's where our focus and attention is going to be at this time, we're investing in building this business for the long term and that's where our focus is.
<unk>.
Great Congrats best of luck.
Thank you Matt.
And thanks, everyone for joining us today, we look forward to speaking with you next quarter take care.
Thanks, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.
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