Q2 2021 Nike Inc Earnings Call
[music].
Good afternoon, everyone welcome to Nike Inc.'s fiscal 2021 second quarter conference call.
For those who want to reference today's press release, you'll find it huh investors Don Nike Darko.
Leading today's call is Andy Nir VP Investor Relations.
Before I turn the call over from Izmir, 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 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-K.
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 as to the performance of the business eliminating foreign exchange fluctuations.
Since may also make references to other non public financial and statistical information and non-GAAP financial measures.
To the extent non public financial and statistical information is discussed.
In patients of comparable GAAP measures and quantitative reconciliations will be made available at Nike swim thing investors Don Nike Dotcom.
Now I would like to turn call over to Andy Amir VP Investor Relations.
Thank you operator.
Hello, everyone and thank you for joining us today to discuss Nike Inc.'s fiscal 2021 second quarter without.
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 ago or at our website investors got Nike dotcom.
Joining us on today's call will be Nike, Inc, confident and CEO, John Donahoe, and our Chief Financial Officer, Matt friend.
Following their prepared remarks, we will take your questions we.
We would 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 re queue and we will do our best to come back to you. Thanks.
Thanks for your cooperation on this.
I'll now turn the call over to Nike, Inc, President and CEO, John Dot Hill.
Thank you, Andy and Hello, and happy holidays to everyone on today's call.
Before I get into our Q2 performance I want to acknowledge the global environment right now.
We continue to deal with the Kobe 19 pandemic.
Searches across the U.S. and in many countries around the world.
In fact, consistent with social distancing norms, Matt Andy and I are doing this call from our homes.
So if this audio sounds a little different that's life in the zoom world.
And we're feeling optimistic.
With positive news on vaccines.
But in the meantime, we hope everyone stays safe out there.
Looking at Q2, our strong business results reflect a relentless focus on our objectives.
I'm going to talk this quarter about the same themes I talked about last quarter.
At most probably next quarter I'll talk to you about them again.
The reason for this consistency is that our strategy is sound our strategy is working and.
And we're excited by what we're seeing as we continue to execute it.
In Q2, we returned to growth of 9% on a reported basis. This revenue improvement reflects currency neutral growth across all of our geographies.
Nike digital up 80% globally and women's growth outpacing our overall growth.
Well beyond any one quarter's results the clear momentum we have right now is evidence of our product innovation and brand strength that allows us to connect with consumers worldwide.
I've said it before these are times when strong brands gets stronger.
A structural tailwinds, we're seeing.
Including permitted shifts toward digital athletic footwear, and health and wellness continue to offer us incredible opportunity.
And of course as organized sport returns around the world that energy creates yet another tailwind from Nike.
For example, we were excited to see so many runners participating in the Shanghai Marathon two weeks ago.
Speaking of greater China. The growth we saw there in Q2 is evidence of the progress we've made to order end to end digital transformation.
Which allows us to better manage volatility and deliver strong growth.
As a result in Q2, greater China grew 19% on a currency neutral basis, and 24% on a reported basis.
Our success in greater China was also driven by a triumphant singles day and wedge Nike yet again was the number one sport brand.
With the highest store demand and highest traffic on T mall.
This growth underscores how we engage with consumers on singles day, bringing more than 4 million new members to Nike.
Overall singles day drove more than a half a billion dollars in digital demand.
More broadly this holiday season also was highlighted by the record setting digital sales we saw during black Friday week.
Which is shown on the power of our digital transformation all over the global.
Digital is now woven into everything we do as a company.
It's how we operate and prioritize from.
From how we engage with members to how we operate our supply chain.
How we serve consumers in the marketplace.
Good day I'd like to focus on two key areas of increasing competitive advantage for us.
Our leadership and innovation and our incredible brand momentum.
Let's start with product and innovation.
Innovation has always been our light flooded Nike.
It's what continues to create separation between us and our competition.
Our return to growth this quarter was fueled by our relentless innovation pipeline.
In the last 90 days, we've introduced exciting products at an impressive pace.
And this will continue going forward.
Through innovation, we are serving consumers in ways no other brand can.
We are using digital to connect product to consumers like never before from.
We're bringing more athletes into sport through inclusivity.
And we're scaling sustainable materials further in our product portfolio.
This quarter's launches is basketball, including the Lebron 18 in the Kyrie seven has sold incredibly well.
I am, particularly excited that both were launched digital first.
Hello brand 18 was introduced in September through an integrated Lightstream with 10 cents in greater China.
Driving deeper connection to local hoops culture.
And we launched the Kyrie seven by announcing four color ways available only as ministry purchases through the sneakers.
In women's our end maternity collection is connecting with consumers in the marketplace with a 100% sell through of tights and the first two days.
Due to high consumer demand for our new maternity wear we're bringing more units into the marketplace and rolling out more content and inspiration for women pre and post part of on our activity EPS.
This is a great example of how we start with product.
And then scale further through engagement to deepen our connection with consumers.
We also have growth sport through inclusivity.
For example, we continue to extend our size offerings as we give more consumers access to sport.
For example in womens we know of more than 100 styles of extended sized apparel across Nike and Jordan and we will continue to further increase our offerings.
And this quarter, we launched extended sizing and our kids business in North America with a plan to increase to 25% of our kids assortment next summer.
Finally, sustainability will always be core to our innovation efforts.
5% of our recently launched hcg apparel collection contains more than 90% recycled materials.
And we'll also continue to scale sustainability through our sport we're icons.
In fact, just this past quarter, we launched our new sustainable creator foam in both Air Force, one and waffle racer.
The demand for these products and more shows that consumer hunger for sustainability continues to accelerate.
We are proud of this innovation pipeline and we have no plans to slowdown income.
In coming quarters, New innovations will include exciting new women's product in Jordan brand.
Our new running style designed to help reduce injury.
And our current performance shoe in our sustainable footwear platform.
Innovation differentiates Nike.
We don't settle for the lead and our ability to innovate remains unrivaled.
It's so fundamental to us that we increased our investment in innovation day.
During the uncertainty the pandemic to create even further separation.
This is how Nike stays in Italy.
Moving to our brand strength, our deep connection with consumers through authentic brand moments a global scale also continue to expand our leadership position.
As I said earlier, the strong are getting stronger and our scale is unmatched.
In Q2, Nike generated over 7 billion brand impressions across social platforms globally directly connecting with consumers on the platforms, where they spend their time.
For example, our never too far down film became the number one AD that consumers chose to watch our new two during 2020.
And these touch points led to over 400 million social engagements. It's clear, we're not just reaching our consumers where.
We are creating dialogue and opportunities for action that continue to exceed our own internal benchmarks.
This deep and meaningful connection has a direct result of Nike membership since.
Since the pandemic began we've added more than 17 million new members globally.
And we are deeply focused on the member bundle outcomes, including new member buying reactivation and retention.
And it's working.
Importantly, buying member growth is outpacing new an active member growth.
Growth in member demand is outpacing total digital growth.
As we drive our membership efforts, we continue to innovate how we serve members.
This quarter Nike hosted our first ever globally coordinated member days, which demonstrate how we continue to create value for Nike members.
This unique retail moment offers first access to product.
Rewards for activity and exclusives across stores and digital.
This event reached over 60 million members across 25 countries drive.
Driving higher engagement and conversion metrics for the quarter.
And in Q2, we once again use the sneakers out to push digital retail to the next level.
Sneakers remains one of Nike is greatest competitive advantages delivering truly innovative features for consumers.
For example, this quarter, we launched sneakers live with our first ever product drop via live streaming.
Resulting in a 100% sell through of the Eric Jordan for PSG and under two minutes.
This live streaming capability is now fully launched in both North America, and EMEA with plans to expand in Japan.
Live interaction creates stronger member engagement with Nike.
Giving them better access to our best products and experiences.
We see so much value here that we opened a brand new live streaming studio in greater China, just in time for singles day.
Simply put the Nike brand is strong.
We have a scale that is unparalleled and the brand is creating meaningful connections everywhere the Swedish exists.
Just look at our results this quarter our brand power. This year has been second to none.
Before I wrap up I want to give a little more context for number I mentioned earlier, our 80% Nike digital growth this quarter.
We've now had three straight quarters of roughly 80% digital growth.
As Weve said this growth won't always be so uniform, but.
But we are growing the pie and taking share from competition.
This is the sharp point of our strategy.
The consumer shift to digital is permanent and our digital penetration will only increase in years to come.
Across the quarter, our innovation pipeline and brand strength positioned us to continue to navigate a dynamic environment with agility.
We have a proven playbook led by digital.
The foundation of this playbook is our commitment to product and consumer connection.
The fundamental truth of Nike is that our innovation and brand strength continue to set the pace.
No Matt will give you more detail on our playbook, but.
Before he does.
I'd like to finish by saluting our teams around the globe.
Since the start of the pandemic.
We've said that we would stay on the offense.
And the credit for that continued effort and execution goes to our team.
Around the world in every facet of our business and our organization.
They continue to demonstrate commitment resilience and creativity.
I could not be prouder of everyone on the Nike team and I genuinely thank them.
And now I'll turn things over to Matt.
Thank you, John and Hello, and happy holidays to everyone.
As I said on our last call Nike is recovering faster.
Sold by our unparalleled brand momentum and sharp focus on operational execution.
Consumer engagement with our brand continues to grow in frequency and depth.
The power of our product franchises and fresh storytelling delivered through improved digital and physical experiences.
Our financial results from the second quarter and for the first half of fiscal 21 are proof that Nike has recovered and is moving forward.
We have a new consumer offense and a clear vision for how we will engage in served consumer demand for our brands through digital.
Leveraging a technology enabled operating model, which is being built for greater speed efficiency and effectiveness.
While uncertainty due to the global pandemic persists. Our teams are now better equipped than ever to navigate through the dynamics we face.
We continue to leverage our operational playbook and we learn more every week.
Our leadership momentum and trajectory in greater China is helping to shape decisions, we are making around the rest of the world.
Our teams are sharply focused on the key metrics that matter most to accelerate the pace of our recovery.
And return to sustainable profitable growth.
In June we set clear measures of success for the first half of this fiscal year.
And now six months later, we have exceeded those goals let.
Let me share a few of the highlights.
We said inventory would return to healthy a normalized level by the end of Q2.
And now through intentional supply and demand management actions marketplace health has been restored across all geographies without compromising the value of our brands and product franchises.
Nike owned inventory is clean ending Q2 down 2% versus prior year, while delivering 9% revenue growth on a reported basis.
We said the digital acceleration brought on by COVID-19 was indicative of a new future marketplace and not a temporary phenomenon.
In Q1, we exceeded our digital penetration goal of 30% across owned and partnered almost three years earlier than planned.
Now in Q2, our momentum continues with 80% Nike digital revenue growth on a currency neutral basis.
And we increased our digital penetration further by improving product availability through search optimization, moving inventory across marketplace channels, and increasing digital fulfillment capacity through scale and automation.
We said, we would tightly manage costs and in the first half of fiscal 20, Onest DNA declined 6% versus prior year.
Over the course of the last six months, we have reduced discretionary spending and non priority areas, while accelerating investments to support our digital transformation and realigning our organization to a new consumer construct.
And finally, we set our product pipeline would remain robust.
And you've seen us continue a consistent flow of innovation and new story, telling around our most important product franchises.
This is translated into deep consumer engagement with our brands and market share gains driving first half revenue growth of 4% versus the prior year.
Simply put we've executed on our plan and Nike is now even better positioned to compete and serve consumers than prior to the pandemic.
Now as we look ahead to the second half of fiscal 21 and beyond.
I want to share some perspective on how we will strategically and financially manage the company.
You've heard me talk about these principles before.
And I will continue to reiterate them as we execute against our strategy and transform our business.
First and foremost this.
Despite the short term uncertainty we.
We are managing the business and making decisions for the long term.
Consumer interest in sport fitness health and wellness has never been greater.
And Nike is market opportunity is as large as ever.
While short term consumer demand may continue to be impacted.
We are focused on moving faster against the most important elements to position Nike for the long term.
Deepening relationships, our three brands have with consumers.
Failing direct connections with Contactable members excel.
Expanding capabilities to manage a rapidly growing digital business and transforming and elevating the marketplace.
Second.
We will continue to optimize supply and demand with speed and agility, maintaining healthy inventory levels and increasing full price realization.
Capabilities like Express Lane now operationalized in all four geographies and representing almost 20% of our total business enables increased flexibility and responsiveness in certain consumer demand, while driving higher profitability.
Third we will capitalize on the relative speed of our recovery and our financial strength.
Accelerating investment levels from the first half.
Our investment priorities will be focused on a few key areas.
We will begin to rebuild investment in demand creation active.
Activating against major sports moments athletes and innovation and expanding the reach and impact of significant growth opportunities in womens apparel digital and our Jordan brand.
We expect demand creation as a percentage of revenue will gradually increase versus recent quarters although.
Although new capabilities and a member focused digital marketing model will enable greater return on investment overtime.
We will create a digital first supply chain built on a strong technology and analytics Foundation.
In order to optimize service cost convenience and sustainability.
We already see return on our investments in North America.
Where we ramped up our new regional service center in Los Angeles to serve peak holiday demand aided by capabilities from our select acquisition.
As a result, we delivered over 100% Nike digital revenue growth in Q2 in North America, while lowering digital fulfillment cost per unit versus the prior year.
We will accelerate the technology enablement of our operating model to change the speed with which we directly engage with and serve the consumer.
From online to offline services digital marketing personalization and digital at supply and demand management.
In North America, we leverage new tools to make dynamic pricing decisions during black Friday.
We also continue to scale RF I'd capabilities across our stores in America.
Enabling better product allocation and replenishment.
And we began testing consumer facing RF I'd capabilities like self checkout in our stores in Korea.
In the marketplace, we will increase the pace of opening new stores.
As we create an elevated differentiated and digitally connected experience for our consumers.
In Q2 alone we opened two Nike life, and six Nike unites stores, which is our next generation factory store concept.
And we plan to open an additional 30 stores in the second half of this fiscal year and even more in fiscal year 2000 to.
Enabling accelerated growth in womens digital and apparel.
And finally, we will drive strong free cash flow growth and consistent balance sheet management, as we target leverage down towards pre pandemic levels.
We recently announced a 12% increase in our annual dividend and when appropriate we will resume share repurchase activity.
The underlying benefits from our business shift towards Nike digital and Nike direct are becoming increasingly clear.
And these principles will enable us to move faster towards our long term strategic vision of consumer direct acceleration.
Now, let's turn to the details of our second quarter financial results and operating segment performance.
Nike Inc. Revenue grew 9% in Q2 up 7% on a currency neutral basis as Nike directories, 30% led by strong Nike digital growth of 80% and partially offset by declines in our wholesale business.
Gross margin decreased 90 basis points in Q2 versus the prior year, resulting from higher promotional activity to reduce excess inventories.
Performance in the quarter was impacted by nonrecurring costs associated with the organizational realignment, which reduced gross margin by approximately 30 basis points.
SGN day declined 2% in the quarter as disciplined expense management and lower marketing spend on brand and sports events was partially offset by increased investments in digital marketing.
This quarter SGN day was also negatively impacted by approximately $135 million of nonrecurring costs associated with the organizational realignment.
Our effective tax rate for the quarter was 14.1% compared to 10.7% for the same period last year, primarily due to changes in our earnings mix and an increase in tax associated with recently finalized us tax regulations and increased benefits from stock compensation.
Second quarter diluted earnings per share was 78 cents.
Up 11% versus the prior year.
With that let's turn to our operating segments.
In North America, Q2 revenue grew 1% and includes non comparable items in the prior year, such as the sale of Hurley and the transition of our NFL licensed business the fanatics.
And Q2, EBIT increased 17% on a reported basis.
Q2 provided more clear evidence on the state of our marketplace transformation and shift in channel mix.
Despite a 14% decline in wholesale revenue and traffic and Nike owned stores remaining well below prior year levels, North America was able to grow 1% overall due to more than 100% growth in Nike digital.
Nike digital now represents nearly 25% of our North America business and it continues to serve a broader consumer base.
In Q2 member days drove records for weekly member metrics and engagement.
With strong Nike digital performance in womens apparel, and sub $100 product all areas of significant growth opportunity.
Within wholesale we continue to shift the marketplace towards differentiated retail.
And to give you some context on our progress leading up to the pandemic over the last three years, we have reduced the number of undifferentiated accounts in North America by roughly 30%.
While still delivering mid single digit growth on average.
And in Q2, as we managed product supply in response to the pandemic. We took further steps towards account and channel consolidation by Reprioritizing product allocations to benefit our strategic partners and Nike direct.
As a result on differentiated wholesale revenue declined at an even faster rate compared to total wholesale.
Looking forward over the next two years, we will more aggressively accelerate change with larger undifferentiated accounts.
As we and our strategic partners together Reprofile, the shape of the marketplace and recapture short term demand dislocation.
In EMEA Q2 revenue grew 12% on a currency neutral basis.
An EBIT grew 29% on a reported basis.
Despite a resurgence of COVID-19, and lockdown restrictions in November EMEA continued to drive momentum in Q2 through strong weekly sales growth and higher full price realization.
Nike direct grew 25% on a currency neutral basis and wholesale grew 6% in the quarter led by strong double digit strategic partner growth in JD sports and Zalando.
Partially offset by double digit declines in non differentiated wholesale.
Nike digital grew nearly 100% driven by cyber week that broke records across revenue and member engagement.
In our Nike owned stores, we continued expansion of services to consumers.
We piloted virtual expert sessions at Nike town, London, driving increases in conversion and basket size with plans to scale this capability across EMEA.
And we utilize digital queuing and additional self checkout options to improve the consumer experience and safety.
Our express lane often from EMEA once again drove significant growth in Q2, increasing more than 30% versus the prior year.
This is a key enabler to navigating the current environment through a more flexible inventory strategy.
We lowered futures bookings for holiday and leveraged express lane to replenish inventory on a significantly shorter lead time and responding to current retail trends.
And with the recent locked down measures announced this week.
We will be agile and managing ongoing uncertainty by leveraging our operational playbook.
With that let's turn to greater China, which achieved its first $2 billion per quarter and grew an incredible 19% on a currency neutral basis in Q2 with EBIT growth of 28% on a reported basis.
As John mentioned earlier singles day drove significant growth in the quarter with over a half a billion dollars in digital demand.
In order to fulfill the record level of orders, we implemented several initiatives to maximize flexibility and responsiveness and our supply chain from enabling multi node network fulfillment to employing robot delivery and green packaging the greater China team was prepared to deliver on elevated consumer expectations and it paid off.
As we shipped out all units within 48 hours and delivered nearly half with same day or next day delivery.
And digital wasn't the only growth driver across greater China every marketplace channel grew versus last year.
Including year over year growth in traffic in our Nike owned stores.
The first quarter to achieve this since the start of the pandemic.
All while continuing to expand conversion rates versus the prior year.
Finally in our Elliott geography, Q2 revenue grew 5% on a currency neutral basis, and EBIT grew 12% on a reported basis.
Nike digital grew more than 90% on a currency neutral basis, as we significantly expanded our digital footprint with the local launch of Nike Dot Com in Mexico and through key digital partnerships across Mexico, Japan, and South East Asia.
We opened the first Nike unites store globally in Korea, and this generated the highest revenue in the first 10 days of any Nike store opening ever.
Nearly 90% of transactions were linked to a member and it's indicative of the broader engagement, we are seeing across the geography and the strength of our membership offense.
In December we successfully transitioned our business in Brazil to a strategic distributor model in partnership with Grupo SPF, the largest sporting goods retailer in Brazil and across Latin America.
We look forward to continuing to serve our consumers in Brazil through a more efficient and profitable operating model.
That being said Nike and Grupo Axio have mutually agreed to terminate the sale and purchase agreement for the transition of Nike business in Argentina, Chile, and Uruguay we.
We will continue to own and operate the businesses in this region in the near term, while we assess future prospects to move to a distributor model in all three countries.
I will now turn to our financial outlook.
Fiscal 21 continues to be dynamic, including a new wave of government restrictions implemented across Europe and parts of North America.
We remain focused on what we can control deepening our consumer connections, while we manage risk and uncertainty in this challenging environment.
We are tightly buying inventory and are focused on ensuring the long term health of all of our brands and product franchises.
With that in mind, we are increasing our full year outlook for revenue.
And now expect low teens growth versus the prior year.
In the second half, we will continue to take a cautious approach to supply and demand to maintain healthy marketplace inventory amidst continued uncertainty.
And to ensure that we set a strong foundation for growth and profitability.
Fiscal year 22 and beyond.
Our gross margin outlook is also improving with.
With stronger than planned return to normalized inventory levels and lower than expected markdown activity across our portfolio.
For the full year, we now expect gross margin to expand up to 50 basis points versus the prior year, including 35 basis points of foreign exchange headwinds.
We expect to continue to see quarterly sequential improvement with Q3 gross margin expansion to be roughly flat versus the prior year.
For the full year, we expect cash DNA will now grow low single digits.
Driven by increased variable costs associated with our improved revenue outlook as well as amplified investment in demand creation to further strengthen our brands and drive higher member engagement.
Across gross margin and SGN day.
We continue to expect approximately $315 million of nonrecurring execution costs associated with simplifying our organizational structure.
Of which approximately $220 million was incurred in the first half Inc. This fiscal year.
And last we expect our effective tax rate to be in the mid teens range, reflecting an increase in tax associated with finalized us tax regulations.
Nike is navigating the current environment with an even clearer vision of our brand long term future along with a sharp focus of near term and long term priorities.
The team is highly engaged and executing with a passion to win.
While we expect continued volatility in the short term due to the pandemic a faster first half recovery has mitigated the largest operational risks.
We are now better positioned to accelerate investment in our business and create even greater competitive separation as we pursue our full potential with consumers around the world.
I could not be more excited about the future with.
With that let's open up the call for questions.
Ladies and gentlemen in order to ask a question you will need to press Star and then one on your telephone keypad. Please.
Please stand by while we combined the acuity roster.
Our first question comes from Adrian Yee with Barclays. Your line is open.
Good afternoon, and congratulations on the progress really nice to see the inventory ahead of plan.
So just sticking with that that dramatic on inventory I was wondering if you could talk about the quality or the mix of the inventory entering this next quarter.
Promotional ads exited behind where they.
Which was the promotional piece of the business and 700 dollar category or were there any characteristics.
That we can glean from the promotional activity.
And then as you look forward to the inflection sort of the global reopening how are you thinking about the capacity that tape inventory, particularly in the high project. Thank you very much.
Sure Adrian and thanks for your question.
As us as a starting point.
As we mentioned several quarters ago, our focus has been on managing supply and demand and we talk specifically about our focus of trying to normalize inventory by the end of the second quarter.
And so the work that we've done around the world not only to cut supply, but also to work with our marketplace partners and to try to capture and drive demand over these past six months has been significant in order to be able to put us in this position that we're in today.
I mentioned in my in my remarks that we've seen markdown levels.
Which continue.
Continue to be worse than the prior year.
Better than we had anticipated and better broadly than what we're seeing across the rest of the marketplace indicative of the strength of our brand.
And so as we finished this quarter the health of our inventory and the health of the inventory across the broader marketplace is exactly where we were hoping for it to be.
As we look forward.
We're obviously still in the midst of a pandemic and so I've said a couple of quarters in a row now that we continue to take a cautious.
Approach to supply and demand management as we look at the second half we.
We're still in a pandemic and we know things won't be linear until we see.
The pandemic and the virus under control are contained.
And so what we've been focused on is ensuring that we protect the value of our brands.
And our product franchises.
And ensure that we set the company up for healthy growth and profitability.
In fiscal year 2002, and for the years after that so.
So thats really been was guiding our approach I did mentioned the express lane in my remarks, and it's a tool that we have been using around the world, It's almost 20% of our business today.
It's not equally 20% across every geo its largest in EMEA as we've been talking about for several quarters and it's absolutely a useful tool for us that we continue to intend to use.
To grow as a larger portion of our business, but also as a really critical lever to be able to manage supply and demand is we're reading the marketplace on a weekly basis.
So that's going to end up being.
A critical component of our future as we look forward in a much more responsive way than the way we've been able to operate in the past.
As far as high heat product in those things we were managing those styles in those franchises. The same way, we manage the rest of our franchises and so on.
We continue to have plants and and we use those as as great tools to create grand energy in the marketplace, but also to give consumers what they love and we're not managing those franchises any differently than we would.
Manny manage any other franchises in this time, we're managing them for the long term and and Thats, what we will intend to do in the second half.
Very helpful Best of luck and happy holidays. Thanks same to you. Thanks.
Next question is from Bob careful with Guggenheim Your line is open.
Hey, guys good evening.
Our first question Hi. This is the first question that I have I.
I guess when considering the call date, what what are the gating factors between choosing Friday evening or Saturday morning.
What we called your assistant and we asked through other when you would be most available as she thought that this would be a better time.
Always there wouldn't be as it wouldn't moving on.
[laughter].
So I guess the other question that I have is can you talk in Europe, specifically the play between some of the locked down in the various countries in your digital annual bricks and mortar can you just talk about how that's really materializing and you could maybe just talk through a little bit here in the U.S., what you're seeing in some of the.
Yes, but the markets, where the the virus is spreading and impacting the stores over the last few weeks. Thanks.
Sure Bob.
So what I would say is is that the situation has been dynamic since March and and we've watched wave after wave of the pandemic hit different markets in different timelines around the world and really the only marketplace, where we've seen continued sort.
Sort of trajectory in terms of managing the virus has been China.
But.
We expect the marketplace to continue to be pretty dynamic I think I mentioned that we are seeing waves of more restrictions happening across Europe and in parts of the us.
And we.
We're expecting that the situation is going to continue to be unique here as we as we finished the holiday season and enter into this into the later part of winter.
However, we are we are looking at and have raised our guidance to low teens revenue growth because we feel like the momentum that we have the brand strength and the playbook that we're employing is giving us confidence that we can continue to manage through this.
As it specifically relates to what we're seeing now our retail sales across the marketplace for holiday have continued to track very well versus the prior year.
But in Europe, where we're seeing more restrictions of shutdowns physical retail continues to be the area, where we're seeing the largest impact.
Stores continue to open and close on different cadences, they have to manage through traffic capacity constraints and at this point in time as of today about 80% of our stores are opened in EMEA.
But many of them are still operating under modified and reduce or reduced hours.
So it's the situation is dynamic to say the least we're also watching carefully potential bottlenecks in the supply chain and to date, we've been able to continue to meet hdds with consumers on our digital business and and we're leveraging the relationships that we have with carriers and other wise in order to to Tim.
Manage our business through this time, but it's definitely something that we're watching Bob and its dynamic.
I guess, what I wear I'd, probably finish is just to say that we know the path isn't going to be linear.
And we've been saying that for several quarters, but.
But we think we're better positioned at this point to manage through the uncertainty probably than we were prior to the pandemic. We've learned so much over the last nine months and the way that we're operating as a team gives us a lot of confidence that we can continue to manage through this and as I said earlier. We're just we're focused on setting a strong foundation for growth.
And profitability in fiscal year, 2002, and beyond and so we're making decisions in the midst of the uncertainty here to.
To do that and to position ourselves to to accelerate once the pandemics behind us.
And Matt maybe two things I'd just add on.
One just to shout out to our stores, our direct team and our stores team who have just been just amazing through this period of the open close open close our store athletes, our frontline store fleets, our tire stores team and our supply chain and distribution chain.
They have been sort of the unsung heroes I think.
Through what has been a very dynamic time.
And as you noticed that said, while we're where we're opening and closing physical retail Digital's open seven days, a week 24 hours a day.
And what's fascinating to watch is the consistency of the growth across digital.
And so I think there is there's we have increasing evidence that when a consumer wants to get something.
Physical retail close they're coming to us digitally and our ability to reach consumers digitally in a variety of matters is just getting better and better as this pandemic goes on.
Our next question is from Michael than any with credit Suisse Your lines.
Hey, guys. Thanks for all the detail here today.
And taking our questions and congrats on a nice quarter on.
I want to ask you John on North America on wholesale I think you mentioned or I guess, Matt you mentioned down 14% in the quarter a bit of a deceleration from last quarter. Any you did talk about accelerating the strategy and transforming the end markets, but I know there was a very purposeful.
Focus on getting the inventories aligned so I'm curious as you look at the at the North America wholesale outlooks.
Is it is second quarter is that is it is it smart to think that that might be the peak of the of the pullback in the near term and that and that drag it's a little better from here with the inventories more aligned or would you say to think about is still being down at that level. As you go forward are you kind of keep working on the marketplace.
Sure Michael I'll take that and then John if Theres anything you want to do you want to layer in here. Please do.
Yes, so look to overall wholesale was down 14% in the quarter and we referenced that we had to make some real time decisions in the quarter in order to address.
In order to address the realities of the situation in the marketplace and I.
I think in the last call I said, something along the lines of or maybe it was two calls ago I said something along the lines of as we were adjusting forward looking supply we took a more aggressive action in North America, because we did not believe the recovery curve in North America was going to look the same as what we expected to see in China Asia or even in Europe, given the way that.
We were seeing differences in response to the different countries response to the virus and so when we got close to the second quarter and into the second quarter, we had to make some decisions about how to allocate that inventory and we focused it on our strategic partners and serving consumer demand through Nike direct and so we saw greater.
Reduction in non differentiated wholesale.
As we look forward, we're going to be more.
More aggressive.
In adjusting our plans with undifferentiated wholesale.
But what I would tell you is that we believe that we and our partners are very well positioned to capture demand.
Demand that get dislocated from sales from changing the profile in the shape of the marketplace and so I think looking at this quarter I think this quarter was more indicative of the way, we manage supply and demand in the face of the pandemic and the challenges that that created in the short term versus it say.
An indication of trends for that line of channel of business, Okay, but as we look forward, we are going to be more aggressive with larger on differentiated customers that we that we have been working with and we're working closely with our strategic wholesale partners.
The city by City Mall by Mall Street by Street basis to to to work together to determine how we're going to recapture that demand and that's absolutely our plan because we believe longer term as we've said before we believe that that.
That premium consistent experience for consumers across the marketplace connected to digital is the type of markets Foundation that we think we need as as a premium brand to create it and to be the foundation for long term growth in the North America marketplace.
Okay.
Kind of follow that with a question on China and its nice to see the margin the EBIT margin their return back to expansion in the quarter. Some of our work suggests there's quite a bit of inflation in that market and areas like free but more so in marketing and cash digital customer acquisition cost as the.
The top line trajectory there.
Offset a lot of that inflation is in our the prior peak margins that we saw in that market.
Still still attainable or is it do you feel like that market.
More more appropriate to focus on profit dollar growth and margin expansion back to historical levels as we kind of come past cobot here.
Yes, I mean, it's a great question and as we have been working our way out of co bid in China.
The thing that we're just reminded of is how large of a market opportunity that is for us and we continue to see it.
We continue to see it again this quarter, we're not able to meet the full demand that we see in that China marketplace and.
And we continue to see the strength of our brand increasing quarter after quarter after quarter I think that as it relates to cost we have been in a really high on we've been we've been driving.
Forgive me for forgetting the number but.
In attendance the twentys of quarters of double digit growth in that greater China marketplace, and we've done it while maintaining a very strong profit profile. So what you saw over the last two quarters was more indicative of us working through the dynamics in China with inventory and those things as a result of.
Of managing through co bid versus there being an underlying theme of.
Profit erosion long term I think we believe that the China marketplace continues to be a great opportunity for us and.
Were we manage the business top to bottom Michael So we're looking at pricing, where we can we're consistently looking at opportunities.
You know to grow the business in dimensions, where we have less of a of share, but we're really pleased to see the growth in our market share in that marketplace and we believe that profits will continue to grow at an accelerated rate overtime.
That's great. Thank you.
Matt what I'd just add to that is the strength of our brand in China.
Both Nike and Jordan.
Very very strong and I think that is partly what's driving the share gain there.
Thanks, a lot Jan.
Our next question is from Kimberly Greenberger with Morgan Stanley. Your line is open.
Okay, great. Thank you so much.
That digital growth from.
It's really impressive and sustaining at such a high level.
Yes.
Consistently I'm wondering do you think that's a function of just the additional digital touch points you've acquired this year.
Or more.
More savvy digital marketing strategy I'm, just wondering if you could.
Hypothesized about some of the drivers there and when you take a look at that digital TNL.
Thank you mentioned over 100% growth for example, here in North America.
Or in the U.S. helped by the New Labour Regional Service Center.
Are you are you hitting the point, where you're starting to see.
From an inflection in your incremental margins in that business either for scale or because of some of the unlocks like in that regional service center. Thanks, So much.
Matt maybe why don't I take the first part of Kimberly's question you'd take the second.
Sounds good so Kimberly yes, our digital business has been a.
Sure I think tremendous growth, 80% globally, 100% of the U.S., our Nike App group.
Grew 200%, our Nike mobile App grew 200% this quarter.
And I think I think what's underlying that is that digital is the new normal on consumer behavior and we believe the trends that we're seeing are here to stay in fact, as we've said now to.
A couple of quarters, we believe that.
Well past the 30% of our overall business and we think it will be more in the range of 50% in the near future.
And it's an area we have a clear lead.
When you ask about what's driving it again, we go back to it a simple mindset through the eyes of the consumer which is consumers want to get what they want when they want it how they want it.
And that that means obviously, great digital experiences mobily through our apps sneakers and others online, but also consumers actually they don't differentiate digital and physical in the same way they used to so they may want to buy online pickup and store they buy it.
Buy online habits ship from store they may want to go try it on and then have it shipped home and so we are driving our.
Our digital transformation and to end alright, so yes, it's impacting our digital our digital experiences no doubt thats getting better and better and better words, better search better the digital experiences are getting better each quarter.
Come back to membership, which I think is key.
As Matt said, we're building out our stores working with our strategic partners that offer that consistent seamless experience that consumers expect and frankly, the supply chain don't underestimate the impact of this digital on translating our supply chain, Matt talked about we've done in greater China.
300% increase in digital fulfillment capacity in North America, 400% in EMEA up robots played a huge role over a million over 1 billion boxes shipped by robots.
And the productivity that comes from that so to be a great digital copper you got to be end to end.
But I would say if theres one thing I'd highlight is the backbone to membership right, having a direct connection with consumers and we are growing our membership and its simple how do we bring more people into the top of the funnel and establish a direct connection with them how do we engage them engaged from through engaging.
Whether it's Nike running club Nike training club sneakers that.
Live streaming as a way to engage consumers and what we know is more engaged consumers by mark.
And one of the most I think exciting things we saw in the quarter with these member days, where it's really the first time, we have really targeted at our members provided more personal recommendations, we've allocated scarce product for them offered them first access.
And the conversion rates the conversion rates were very impressive.
And so I think this is a virtuous cycle that if we get better and better at the whole membership funnel the full funnel that.
That we can have a more direction can connection with consumers, we can offer more personalized and target its offerings.
I think the opportunity to expand with women digitally is significant so it's no one thing and I learned this from my.
My my days in the digital World.
No.
It's a lot of little things that make a difference to be a great digital company and we're clear leader here I think we are extending our market share lead digitally and we're going to continue doubling down.
That you will take the second piece of cameras, yes, sure I'll just start from the second piece I guess, what I'd say Kimberly as your question specifically about the regional service Center and John sort of hit it I mean, our focus at the start was his capacity we needed more capacity because we were watching demand shift rapidly to.
To digital and so not only did we opened that regional service center in L.A., but we'd leverage omnichannel capabilities and our existing distribution centers in order to be able to do the 300% or 400% increase in volume that John referenced to fuel that business.
As I think about the impact on the financial model and I've, probably said this a couple of times before but I'll use a frame that John just use getting consumers, what they want where they want and how they want we're.
We're investing in technology and the supply chain. So that we can better predict where to put inventory, where we think consumers want the inventory and the benefits for us in that are in gross margin. It's more full price realization, it's lower cost to fulfill and frankly, it's better for the environment, because it's less shipping and it's less moving.
So from that so its better we're investing in technology to create OTO capabilities in the marketplace and while we don't have the largest store footprint today that that.
Relative to maybe pure vertical retailers, we are investing in stores with the intentionality of having stores in more places with OTA own capabilities with capabilities like buy online pickup in store more pickup points shipping from store shipping to store. So that we can serve that demand more closely to consumer.
Again, lower cost better for the environment better sustainability, and then I guess, the last thing I'd, probably hit on and John referenced that vis-a-vis member days in the member funnel. We're spending we're investing a lot of money in digital marketing today, but the marketing the opportunity that we see with greater.
Acknowledgement of who our consumers are and how they shop across the marketplace is more personalization and it's a greater return on those marketing dollars because we're moving deeper into the funnel, we know who those consumers are and we have the ability to react and reengage them at a lower cost to us or a lower acquisition costs.
Which should improve either create leverage in our.
In our demand creation overtime and or other.
Enable us to use their day the dollars that we're using to drive a greater greater revenue plan. So so those are some of the things that we're excited about those are we are we seeing the fruit of it today, we're starting to but what we what we are seeing Kimberly as we can see more clearly, though where the biggest pockets of opportunity are and thats where were folks.
Yes, and Thats, where were investing to create capability. So that we can drive these outcomes as we look several years out. So this is where we're focused as a team and.
And it's what's going to fuel our financial model over the next several years.
Fantastic. Thank you so much.
Operator, we have time for one more question.
Our last question is from Paul Trussell with Deutsche Bank. Your line is open.
Happy holidays, and great quarter Tim.
Thanks, Paul.
Wanted to ask about margins maybe.
Maybe a little bit more detail and color on the factors impacting both GPM and SGN day.
Welcome to the second quarter and also your second half guidance in particular, I would love to hear a little bit more about demand creation, which was obviously down double digits. This quarter. It sounds like its going to inflect up a bit and then also the profile.
Of profitability of your DTC and digital business right, obviously, that's accretive.
But certainly it's not to the extent that you are scaling obviously.
Up meaningfully on the top line and also the earlier you highlighted that share finding ways to reduce per unit fulfillment costs I'm just wondering to what extent is that channels margins actually see an improvement overall.
Thank you.
No Matt that is that is a great last simple question for the Eric.
And I'm going to give you full permission to add to that in a very concise manner [laughter].
[laughter].
Well I guess right start where I'd start Paul is when we look at our margins in the second quarter were very pleased with where gross margin performance landed.
We said gross margin in the short term would be more of a function of how we manage supply and demand and so we were more focused on the art the with the quality and health of our franchises and restoring inventory levels and that's ultimately what drove.
That's ultimately what drove our operating plan for the last six months.
We're probably even more so pleased with the speed of recovery because it puts us in a position now where we can see where we can look forward and say how do we want to manage the business as we move forward and as I said earlier today, we are incredibly focused on on on the things that are required in order for us to achieve that vision of consumer direct acceleration. So as we look.
Go ahead, our gross margins are are going to be roughly flat is what our guidance is for the third quarter and that's another quarter of sequential improvement in margin, that's being driven by a higher full price mix in the third quarter and lower discount activity and thats going to be offset to some degree by.
Factory store liquidation that we talked about last quarter, where we're still planning for more Mark downs in that specific channel because we continue to see traffic lagging behind the prior year in that specific channel. So that we can keep conversion rates up.
In the third quarter I should also say that we're going to we're expecting to see about 55 basis points of FX headwinds that.
So we've had about 30 per quarter in the first two quarters of this year and we're expecting 55 basis points in Q3, and so FX adjusted the margin looks even better sequentially and what I'd say, maybe it's just a little a little site point on this is that we think that third quarter will end up being the trough on FX for us. So we've started to see benefit.
In translation on the top line, but FX is continued to be a headwind in EBIT through the second quarter will be through the third quarter.
And it will lessen as we get into the fourth quarter and then that's where we expect to start to see some inflection from.
Weaker us dollar and strong growth outside the U.S. So.
I think thats, probably where I'll stop and I know our team can follow up with you with with more questions specifically on the modeling, but thanks and happy holidays.
Thank you Paul.
Finally, even from just Andy.
Matt and I and Andrew what extent happy holidays to everyone on the call. Thank you for doing the call on a Friday afternoon, hopefully to freeze up a little of Europe.
The holiday week next week and please everyone have a very safe and happy holiday and thanks again to all the Nike teammates around the world per incredible teamwork resilience and commitment to share happy holidays.
Thank you all.
This concludes today's conference call and you may now disconnect.
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