Q1 2022 Nike Inc Earnings Call
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. T. P forward Slash H T. T. P. Colon forward slash forward slash investors that Nike Dot com now I would like to turn.
The call over to Paul Trussell.
Thank you operator.
Hello, everyone and thank you for joining us today to discuss Nike, Inc. Fiscal 2020 to first quarter results.
As the operator indicated participants on today's call may.
Discuss non-GAAP financial measures.
You will find the appropriate reconciliations in our press release, which was issued about an hour ago or at our website investors Nike Dot com.
Joining us on today's call will be Nike, Inc. President.
And C E O John Donahoe.
And our Chief Financial Officer, Matt friend.
Following their prepared remarks, we will take your questions. 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.
Initial questions to one thank.
Thank you for your cooperation on this.
I'll now turn the call over to Nike, Inc, President and CEO John Donahoe.
Thanks, Paul and Hello to everyone on today's call.
Nike creates value through our relentless drive to serve the future.
<unk> sport.
And as we saw again in Q1, our strategy is working with business results that reflect our deep connection to consumers around the world.
Thanks to our brand momentum culture of innovation commitment to purpose and proven operational playbook, we stay at the front of the pack.
Q1.
Strong quarter for Nike with revenue growth of 16%.
And even if we saw a physical retail traffic return across much of the portfolio digital continued its momentum with 25% currency neutral growth led by North America at over 40.
Our digital success.
It was another evidence of the product innovation brand strength and scale that drives our meaningful relationships with consumers as we continue to show momentum against our biggest growth priorities.
As has been the case since the start of pandemic I'm proud of the way our entire Nike Inc. Team has.
S ever through macro volatility.
Over the past 18 months, we've demonstrated our ability to manage through turbulence to emerge even stronger and better positioned.
And that's what we'll continue to do as we navigate through these current supply chain issues.
We will focus on what we.
The literal while leveraging the many levers at our disposal, you'll hear Matt walked through our mitigation efforts in a few minutes.
Today, we're in a stronger position relative to our competition than we were prior to the pandemic why.
Because of the changes happening in the market work.
In our favor.
Consumers shift to digital that might have taken five years will now only take two.
That plays to Nike's advantage.
In our consumer direct acceleration strategy is capitalizing on this marketplace transformation.
We know that when we get to the other side of this will be uneven.
He can stronger shape.
We'll be more agile more direct and more digital.
So we remain focused and confident in our long term business outlook, our competitive advantages, including our innovative product.
Brand strength fueled by compelling storytelling are.
Even the world's best athletes.
And increasingly our industry, leading digital experiences at retail we will continue to create separation.
As we drive strong sustained consumer demand our confidence remains undiminished.
We just wrapped up.
Ross ratable summer of sport highlighted of course by the Olympics and Paralympics.
In moments like these are exciting for our company because sport energizes, our roughly 75000 employees around the world you can just feel it.
And it's through that passion for sport that we continue.
And in Q2, innovate and connect to the consumer.
And this summer in Tokyo, our leadership as the world's most innovative sports brand was demonstrated once again.
If Nike were a country, we would have eclipsed the competition, capturing 226 metals, including 85 goals.
<unk> here are a few examples of what excited US most of this summer.
We saw the emergence of Gen Z as a powerful next generation of athletes led by a pair of 13 year old Skateboarders, who showed us the joy and the expansion of the definition of sport.
We shined in key team sports, including football.
10 year Nike teams took home gold in both mens and womens and basketball, where Nike and Jordan teams combined to take five of the six metals, including both goals.
And we continued our great legacy and track and field with Nike athletes, winning more individual metals and track and field events.
Paul and all other brands combined.
And at the same time, the European Championships brought incredible energy to football in Q1, with England, making it to the final.
Our brand anthem, the land of new football brought a fresh approach to the sport representing.
His vision that in this game everyone is welcome to.
The film saw more than 800 million impressions across all channels as more than half of EMEA as Gen Z population viewed it at least once.
And the summer of sport also saw you honest in the Milwaukee Bucks when.
Nike VA title after an electrifying finals against Chris Paul Devin Booker and the Phoenix SUNS.
Days later, we released Jonases latest signature shoe the zoom freak free which is built to support the dominant physicality that defines his style of play.
We continue to see strong response.
The entrance to the zoom freak and we're excited by what we're seeing with our growing you're honest business.
And speaking of Devin Booker Q.
Q1 was a great reminder of how we're investing in the next generation of Superstars as we continued to build our roster of athletes joy.
Jordan brand signed the.
Response, DAK Prescott in the quarter.
Joining emerging global icons, and Nike Inc's family, including U S. Open winter M Alvarado condo and Manchester United's Jason <unk>.
At the end of the quarter the summer of sport gave way to back to school season.
So far.
NFL fall, we've seen sell through in our kids business up almost 30% led by digital with growth of almost 70.
As we focus on the kids opportunity, our new consumer construct.
Through that we are connecting with families Maureen authentically than ever before.
Farthest, we're creating kids specific designs and leveraging new channels for us to connect with these consumers.
Take for example play list, which is adjust for kids series on Nike Dot Com and Youtube.
It's filled with games challenges and exclusive.
The content of.
All aligned to our mission of encouraging movement in play.
Its latest season began a few months back with the new video starring Lebaron, James and some of his costars from their movie space Jam a new legacy.
Platelets, there has been a hit with kids and parents.
AST week with viewership numbers well above our expectations.
And our kids business remains an important connection point for us on organic incubator of the brand across multiple generations as we look long term.
We're the largest kids athletic footwear brand in the world.
So like we know that there is still so much potential ahead.
And as I've said before at Nike everything starts with innovation.
Our culture of innovation is our most profound competitive advantage.
And this week I toured our new law, Brian James Innovation Center.
But in our World headquarters with Lauren.
At over 750000 square feet. This new home for our innovation teams is five times the size of our previous lab.
And is continued proof of nikes leadership and sports science.
We expect this facility.
<unk> to act as an accelerant as it helps extend our advantage in innovation even further.
I'm looking at our innovation agenda, the two areas that I'd like to touch on today, where our relentless pipeline of innovative product continues to create separation between us and our competition.
Apparel.
Here are and sustainability.
First let's take a look at apparel.
We're seeing strong over indexing growth of 16% in this key growth driver.
And the investments, we're making in our new consumer construct are fueling higher apparel growth for women's led by our yogurt business.
Are you.
<unk> collection today features multiple industry, leading innovations, including dry fit and unfit alone.
These innovations are resonating with consumers and have helped us nearly quadruple our yogurt business over the past two years.
Another key apparel story.
Yoga come Q1 was our broth business.
This quarter, we maintained our number one market share and sports Bras in North America and introduced the Nike dry fit ADB swoosh bra.
Dry fit ADB combines the ultimate and cooling fabrics with highly engineered methods to make.
For us an innovation that's connected with consumers as we scale this technology across our line.
And now.
To take a look at sustainability.
Look at what we've done with space hippie.
Basically as you may recall is quite literally made from trash.
It's and it was originally introduced at our 2020 future Forum and.
And debuted four separate sustainable material innovations for us <unk>.
Including creator from.
And space waste yarn.
Now since then we have strategically grown this franchise to global scale.
And what's more we have also scaled these individual material innovations across our entire portfolio.
So today one year after that initial launch there are more than 43 styles using space hippie innovations across four sports three brands and our full consumer construct.
For instance, you can see it come to life and iconic franchises such as the Air Force one greater.
New performance innovation platforms like cosmic unity.
And even in our hands free accessibility line with styles like glide plays.
By driving new dimensions across platforms.
Our work to scale space hippies innovations catalyze growth.
Consumers are clearly responding to sustainability is we're seeing very strong full price sell through for this family of product with vast opportunity to drive continued consumer and business value still ahead.
And this is just one example of how we lead with platforms and not just products.
Our deliberate franchise and innovation management create scalable and sustainable impacts on our business and I'm excited by the upcoming new innovation platforms, we'll be introducing soon.
Next let's discuss Nike is increasing digital advantage.
We continue to lead the industry by creating a premium consistent and seamless experience that deepens relationships between consumers and our brand.
Our advantage comes to life at retail in both digital.
As well as at the intersection of digital and physical <unk>.
I'll discuss both here.
Even as physical retail revenue approach pre pandemic levels, our digital business this quarter grew double digits.
This is the result of an unwavering focus on our strategy and the investments we've made.
Against our end to end digital transformation.
And so we continue to expect digital to be our leading channel for growth in fiscal 'twenty two.
Now one of the best gauges for success.
And our digital business is how strongly we're connecting with members.
Our digital growth is led by outsized member.
<unk>, which has seen a penetration increase of 14 point since last year.
Our membership strategy is working as we increasingly use data and analytics to personalize member product offering and experiences.
And we're seeing this come to life as repeat buying members grew more.
Than 70% in the quarter.
Now part of our success stems from our constant focus on expanding what it means to be a Nike member.
We brought this to life in Q1 by introducing a new launch experience exclusive to the sneakers App that revolutionized is how we serve consumer.
<unk>.
The new experienced debuted in one of the year's most highly anticipated launches the offline Doug.
For the launch last month, we rolled out our new elevated sneakers exclusive access.
This approach personalized purchase offers.
Offers to members based on their engagement with sneakers past purchase attempts and other criteria using data science to drive digital member targeting.
For example, 90% of the <unk> for the off White Dunk went to members who had lost out on a prior off white.
White collaboration over the past two years.
The result, the off White dunk ended up in the hands of hundreds of thousands of our most deserving members, creating what we call exclusivity at scale.
And this improved consumer experience has a positive.
<unk> impact on the entire business, we've seen that those who benefit from exclusive access on sneakers.
<unk> more across Nike fuel.
By the energy of their win.
So we're increasingly personalized approach to launch along with benefits like remember days.
And exclusive Nike by you access highlights how we continue to increase the value proposition of Nike membership.
Yeah.
We're also leveraging our digital advantage by investing in our brick and mortar fleet to create a compelling retail footprint that supercharge is how we.
Consumers across <unk>.
Physical and digital.
A couple of weeks ago I was in Los Angeles and toured some of our great retail there.
I got to see a wide variety of stores, including our Nike live door in long Beach, our community door in East L a and more.
And across each.
We serve every store what jumped out to me was our team there.
Their love for their community and their passion for our product and bringing it to life for consumers was inspiring and just awesome to see.
I also enjoyed visiting a few strategic partner doors, including Dick's and foot locker.
And what's clear across the marketplace. Both owned and partnered is how online to offline is becoming second nature.
We know that higher levels of connectivity across physical and digital are driving better consumer experience and loyalty.
<unk> service.
<unk>, such as buy online pickup in store and ship from store as well as the in store shopping features of the Nike App drive our premium and seamless consumer experience.
And we're starting to extend these innovative experiences globally and.
In Q1, we brought our Nike rise.
And immersive concept to Seoul.
Nike sold introduces new features to live arise rather <unk>.
Including inside track and interactive RFID enabled digital footwear table, where shoppers can compare details for any two shoes simply by placing them on the tape.
Table.
Our digitally connected retail experiences are clearly resonating with consumers. This quarter are inline fleet grew over 70% in revenue approaching pre pandemic levels.
We're seeing over index growth from members not just a digital but also.
With physical retail with member buying penetration up double digits since last year.
And so we will continue expanding these compelling experiences across our fleet in fiscal 'twenty, two driving that interplay between physical and digital retail.
In the end Nike.
Also what we always do staying on the offense.
The strength of our consumer demand around the world continues to give us confidence in our playbook and execution.
I said, it earlier and I'll say it again I am proud of our resilient and creative team across Nike Jordan and converse.
He is doing the work we continue to deliver for consumers.
Our confidence as we look long term has not changed one bit we've already gotten stronger through this pandemic and we're going to emerge from it even stronger yet.
And with that I'll now turn the call over to Matt.
Thank you.
John and Hello to everyone on the call today.
<unk> acceleration to a more direct member centric business model continues to fuel deep connections between consumers and our portfolio of brands.
Drawing upon our culture of innovation.
Unmatched global scale, and our industry, leading digital platform.
And.
We continue to serve the modern consumer as only Nike can.
Our first quarter results proved again that our strategy is working.
And nike's consumer direct acceleration is fueling the transformation of our long term financial model.
At four and a relentless focus on serving the consumer translated into revenue growth of 16% and EBIT growth of 22% versus the prior year.
The Nike brand remains distinctive and deeply connected in our key cities around the world.
From New York to Paris, Shanghai to Tokyo.
Nike continues to be consumers number one cool and favorite brand with a position that has gained strength as we've navigated through the pandemic.
Consumer demand for Nike, Jordan and converse remains incredibly high.
And our first quarter financial results would have been even stronger if not for supply chain.
Gesturing, resulting in lack of available supply.
Despite these headwinds.
Retail sales still grew double digits versus the prior year, including a record setting back to school season in North America.
Sneakers has increasingly become an indicator and barometer of brand heat now.
<unk> operational scale in 50 countries around the world.
Nike Digital is now 21% of total Nike brand revenue.
Which is an increase of two points versus last year.
With strong double digit growth versus the prior year, even with broad reopening of physical retail.
Digital is increasingly becoming a part of everyone's shopping journey.
And we are well positioned to reach our vision of a 40% owned digital business by fiscal 'twenty five.
And coming back to the marketplace held for a moment, we delivered strong growth in average selling price this quarter.
Now being with continued improvement in full price realization.
This performance reflects our intentional efforts to manage the health of our product franchises as demand searches.
To move available inventory to serve demand in the right channels.
And to drive a more premium experience for consumers.
This.
This quarter, we exceeded our 65% full price sales realization goal.
Which reflects the expectations that we put forward at our last Investor day.
As we accelerate our consumer led digital transformation.
We are developing and refining new capabilities that our transform.
Operating model quickly, becoming a competitive advantage for Nike.
Central to these capabilities is scaling our digital first supply chain to a navy enable Nike digital growth while optimizing.
<unk> service cost convenience and sustainability.
We are evolving our distribution network and forward deploying inventory closer to the consumer leveraging data and advanced analytics.
These actions will improve service levels reduce carbon impact and ultimately reduce cost to fulfill an order.
Our regional service center outside of Los Angeles.
<unk> are one year ago and were excited with the opening of two more centers in Q1, one on the east coast and one in Spain.
Our investments in our <unk> services are putting our products in the path of more consumers and more efficiently optimizing our inventory.
We have at least two O to O services.
This openness in each of our Nike owned stores in the U S.
And we are aggressively scaling these services across the globe.
Our express Lane offense is also creating more and more agility across our portfolio.
From creating locally relevant product on shorter lead times to leveraging a shared inventory pool across.
Service marketplace, we are better conserving consumers with more operational flexibility yielding higher profitability.
This quarter Express lane grew roughly 20% versus the prior year and its creased its share of overall business.
And last the Nike App continues.
Ross the enable a convergence between physical and digital shopping journeys <unk>.
Eliminating friction for consumers.
From member driven personalization and localization to building an endless aisle through digital integration with our most important wholesale partners.
Consumer direct acceleration is transforming.
<unk> two <unk> operating model to move at the speed of the consumer.
Now, let me turn to the details of our first quarter financial results and operating segment performance.
Nike, Inc. Revenue grew 16% and 12% on a currency neutral basis with growth across all marketplace.
<unk> nights.
Nike digital grew 25% and Nike owned stores grew 24%.
Wholesale grew 5% in the quarter negatively impacted by lower available inventory supply due to worsening transit times.
Gross margin increased 170 basis points versus the prior.
<unk> Chandra drip.
Driven primarily by higher Nike direct margins and partially offset by increased ocean freight surcharges.
SG&A grew 20% versus the prior year.
This was due to higher wage related expenses higher levels of brand activity connected to return to sport and strategic technology.
Prior humans.
Our effective tax rate for the quarter was 11% compared to 11, 5% for the same period last year.
This was due to increased benefits from stock based compensation and discrete items offset by a shift in our earnings mix.
First quarter diluted earnings per share was $17.0
And we're up 22% versus the prior year.
Now, let's move to our operating segments.
In North America, Q1 revenue grew 15% and EBIT grew 10%.
Demand for Nike remained incredibly strong for the fifth consecutive season.
Energize this quarter buyback.
Our school and the return to sport.
Retail sales for our performance business grew strong double digits. During the fall season led by running fitness in basketball powered by excitement from the Olympics, the new WNBA season, and the NBA finals.
Nike direct grew more.
Back 45%.
With Nike digital now representing 26% share of the business.
Digital continued its momentum and grew more than 40% increasing market share by outperforming industry trends with strong growth in traffic and repeat buying member activity.
More than the return to physical retail accelerated Nike owned store growth of over 50%.
As we serve members with elevated experiences.
Nike owned inventory increased 12% versus the prior year.
This was driven by highly elevated in transit inventory levels.
As transit times in North America.
And deteriorated during the last quarter now almost twice as long as pre pandemic levels.
This impacted product availability across the marketplace and our ability to serve strong levels of consumer demand.
Particularly in the wholesale channels.
Closeout inventory was down double digits versus the.
Erika ear.
In EMEA Q1 revenue grew 8% on a currency neutral basis, and EBIT grew 26% on a reported basis.
This region was energized by the Europe. This summer, where Nike players scored more goals than all other brands combined and more than half of those goals.
Prior to our material boots.
We saw a strong consumer response to both the material boot and replica jerseys during the tournament.
Nike direct grew 10% on a currency neutral basis led by our Nike owned stores.
Following a full reopening we saw traffic increased by double digits versus the prior.
That's where we are with better than expected conversion rates.
In EMEA, while Nike digital grew 2% in the quarter demand for full priced products grew nearly 30% as we compare it to higher liquidation levels in the prior year.
Nike owned inventory declined 14% on a reported basis.
Prior you with closeout inventory down double digits.
Transit times to EMEA I have also deteriorated over the past 90 days.
Higher levels of in transit inventory and negatively impacting product availability to serve strong consumer demand.
In greater China.
<unk> Q1 revenue grew 1% on a currency neutral basis, EBIT grew 2% on a reported basis.
The team delivered in line with our own recovery expectations.
Retail sales were impacted in late July and August due to regional closures and lower levels of foot traffic due to COVID-19 containment.
Prior to late July physical traffic had been approaching prior year levels.
In July we engage with consumers through the launch of our Joy of sports local marketing campaign.
This campaign generated over 1 billion local views demonstrating strong brand connection with Chinese.
Tumors.
Nike direct declined 3% on a currency neutral basis, partially impacted by retail closures.
Nike digital declined 6% as we compare to higher liquidation in the prior year.
Partially offset by double digit improvement in full price sales mix.
You can see we experienced a strong 618 consumer moment, where we grew nearly 10% versus the prior year and remained the number one sports brand on Tmall.
Demand in our sneakers app grew more than 130% for the quarter.
Our experienced local team continues to navigate through marketplace dynamics.
We finished the quarter with healthy marketplace weeks of supply and inventory normalization is on plan.
Now moving to a P L a.
First quarter revenue grew 31% on a currency neutral basis, and EBIT grew 72% on a reported basis.
Revenue growth was led by Soco.
So, Japan, Mexico and Korea.
With more muted growth in Pacific and Southeast Asia, and India due to Covid restrictions and government mandated store closures.
Nike digital grew more than 60% on a currency neutral basis highlighted by the expansion of our Nike App.
In June the <unk>.
Soca in Mexico, and six additional countries across southeast Asia, generating 3 million local downloads during the quarter.
Earlier on the call John spoke about the new Nike rise retail experience in Seoul.
To Mark the opening of the store, our express lane sneakers and Nike rise teams.
Went live created the Nike sold dunk.
This collaboration drove more than half of day one sales.
And highlights how digital and physical experiences are converging in our own stores, leveraging local insights and a more agile supply model.
Now I will.
<unk> to our financial outlook.
Consumer demand for Nike remains at an all time high.
And we are confident that our deep consumer connections and brand momentum will continue.
However, we are not immune to the global supply chain headwinds that are challenging the menu.
[noise] turned her and movement of product around the world.
Previously I had shared that we were planning for transit times to remain elevated for the balance of fiscal 'twenty two.
Unfortunately, the situation deteriorated even further in the first quarter.
With North America, and EMEA are seeing.
Fact, she says in transit times, due primarily to port and rail congestion and labor shortages.
Additionally, several of our factory partners in Vietnam and Indonesia.
We're required to abruptly cease operations in the first quarter.
As of today.
Increase in Asia is now fully operational.
But in Vietnam, nearly all footwear factories remain closed by government mandate.
Our experience with Covid related factory closures suggest that reopening and ramping back to full production scale will take time.
Therefore were revising our short term financial outlook to incorporate the following factors.
10 weeks of production already lost in Vietnam since mid July.
Factory reopening to occur in phases, beginning in October with a ramp to full production.
Several months.
And elevated transit times, consistent with where we are now operating today.
We now expect fiscal 'twenty, two revenue to grow mid single digits versus the prior year versus our prior guidance of low double digit growth.
Due solely to.
The supply chain impacts that I just described.
Specifically for Q2, we expect revenue growth to be flat to down low single digits versus the prior year.
As factory closures have impacted production and delivery times for the holiday and spring seasons.
Over last weeks of production combined with longer transit times will lead to short term inventory shortages in the marketplace for the next few quarters.
We expect all geographies to be impacted by these factors how's.
However, those geographies in Asia with less in.
Inventory at the end of the first quarter.
We will experience a disproportionate impact beginning in Q2.
For the balance of fiscal 'twenty, two we expect strong marketplace demand to exceed available supply.
We are optimistic inventory supply availability.
Transit will improve heading into fiscal 'twenty three.
Against the backdrop of a very strong brand and healthy pull market across all geographies.
Turning to the rest of the P&L.
We still expect gross margin to expand 125 basis points versus the prior year at.
At the low.
The prior guidance.
Reflecting stronger than expected full price realization the ongoing shift to our more profitable Nike direct business.
And price increases in the second half.
This more than offsets roughly a 100 basis points of additional transportation logistics in.
And of our freight costs to move inventory in this dynamic environment.
We also expect a lower foreign exchange benefit now estimated to be a tailwind of roughly 60 basis points.
And for the second quarter, we expect gross margin to expand at a rate lower than the full year due to higher planned.
In airfreight investment.
For the holiday season.
We expect SG&A to grow mid to high teens.
We intend to maintain our position as the number one cool and favorite brand.
And to celebrate the return to sport as we inspire and engage consumers around the world.
Plan to air will also maintain pace on our multi year investment plans in order to transform our business for the future.
As I've outlined in prior quarters.
Nike's financial strength is a competitive advantage.
And it is in moments like these where our competitive strengths and strong balance sheet.
We were just the ability to remain focused on what's required to win.
And serve consumers for the long term.
In closing.
Our vision for Nike as long term future remains unchanged.
Nike is a growth company with unlimited potential.
Our full despite new short term operational dynamics.
Our consumer direct acceleration offense is driving our business forward and transforming our financial model towards the long term fiscal 'twenty five financial outlook I shared last quarter.
This quarter's impressive results are additional proof.
Our strategy is right.
Not only for the moment, we find ourselves in but also for the opportunity to serve the future of athletes and sports like only Nike can.
I wouldn't trade our position with anyone.
And there is no better team to navigate through volatility and lead long term.
Proof that information will change.
With that let's open up the call for questions.
Your first question comes from the line of Erinn Murphy with Piper Sandler.
Great. Thanks, Good afternoon, and really appreciate the update on what you're seeing real time in the supply chain I guess my question Relatedly is.
<unk> train or any if you looked at that fall in back half of Europe and holiday season are there any keep footwear franchises that are being more impacted than others and then when you zoom back and think about the longer term what type of investments do you plan to continue to make within the supply chain to continue to improve your agility. Thanks, so much.
Okay.
Erin Thanks for the question you know there are several aspects to the current supply chain challenges that are probably not intuitive just based on my prepared remarks, and so let me take a couple of minutes to try to break it down further.
As I said earlier consumer demand has never been higher and we expect strong demand to continue for quarters to come.
Over the last 90 days to things that happened in the industry that we didnt anticipate.
First already long transit times worsened and second local government mandated shutdowns in Vietnam and Indonesia.
Keep in mind that there are global complexities and differences in transit times and sourcing mix across our geographies.
So I'm going to use North America as an example to just go a little deeper on what I'm talking about.
Prior to the pandemic it would have taken approximately 40 days to move product from Asia to North America.
Transit times have been increasing due to container shortages port congestion rail congestion and labor shortages impacting the entire.
History.
And during Q1 these lead times worsened further to now sit at 80 days roughly two times normal.
So here's where the Geo specific piece comes in so as we finished Q1 with higher levels of in transit inventory that means that we had full priced inventory that was unavailable to use to serve.
Tire in consumer demand in this quarter.
We would've had an even stronger topline result, if we had more product available to serve that consumer demand.
And so these elevated transit times that we're seeing we've been talking about now for several quarters and they worsened this quarter continue to have an impact on our business.
And then in addition to that.
Theres, Vietnam and it's important to think about these two impacts together as of today, 80% of our footwear factories located in the south Arne and nearly half of our apparel factories in Vietnam are currently closed.
So through this week that means we've already lost 10 weeks of.
That action.
And that GAAP will continue until factories are able to reopen and produce product at normal capacity.
So this has created a GAAP to the flow of inventory originally ordered for delivery beginning in mid October.
And our experience shows us based on navigating through this pandemic over the last 18.
Production, it's going to take several months to ramp back to full production.
Now on a positive note a few factories that just had their reopening plans approved like this week and so we're optimistic about a phased reopening and ramp of production beginning in October.
And as I said in the call earlier in the call Indonesia is already operational.
10 months, and they're ramping back up to capacity.
So North America is coming into Q2 with elevated in transit inventory.
Which means North America will have higher quantities of fall season product that it can sell in the second quarter.
But holiday and spring production has been delayed and.
And if you combine.
<unk> have longer lead times the impact of the loss production is going to have a greater impact in North America in Q3.
Conversely, greater China, which has lower levels of in transit inventory and shorter transit times, because it's closer to the factories is going to experience the impact of the loss production.
That with your in Q2.
Our teams are leveraging their experience in our operational playbook and taking actions to try to mitigate these impacts and they're doing things like maximizing our footwear production capacity in other countries shifting apparel production out of Vietnam to other countries, like Indonesia, and China and others.
We're viable.
Strategically leveraging air freight and then we're continuing to employ a season with approach to product to serve incredibly strong consumer demand given our success that we've had selling at full price even if the product reaches the market later than we expected.
Okay.
So while the.
The environment is dynamic these supply.
Chain issues, we believe are temporary and from what we can see today.
We're optimistic that available inventory supply will be improved as we head into fiscal year 'twenty three.
And Aaron to the second part of your question on in that context investment.
Where we're doing with strong companies.
These do during periods of time like this we're going to continue to invest in innovation and product creation and brand and storytelling in support of sport being back and our strong sports marketing portfolio and our digital transformation. So that's that's continuing and then we'll we'll continue with strong.
<unk> presence around driving demand and brand even in the face of a of a supply constrained market and as Matt mentioned accelerating air transportation and other things in our supply chain that allow us to take and manage every lever we can and this and this supply chain constrained environment. So we're gonna we again.
Again, our mantra going into this next phase is the same mantra, we had going into the first phase of the pandemic.
Let's make sure we emerge stronger coming out of it than we have even today going in.
Your next question comes from the line of Matthew Boss with JP Morgan.
So John maybe could you speak to the overall health of the athletic industry, how best to think about overall Tam for Nike as we exit the pandemic can you leverage size scale and innovation to accelerate market share and then Matt you know real quick just on the revised gross margin outlook for this year.
Aside from the supply chain impact I guess my question is could you speak to maybe some of the underlying drivers it sounds like full price selling digital margins on track.
Aside from the supply chain dynamics does anything really change, meaning do you see this is fully transitory and any change to the multi year gross margin outlook.
Well Matthew on the on the first part of your question the health of your athletic market [laughter] in my remarks.
Sport is back and that is just such an energizing and important thing for Nike and we saw that the summer I won't go back through it whether it's the Olympics basketball global football Incredible U S.
Open tennis to go it goes college football U S football back I mean, it's it's so I would say traditional sport was what I'll call. It is strong and back and that's also happening now in high schools in grade schools as kids come back to school.
Second thing, we're seeing is the expansion of the definition of sport.
Whether that's in the Olympics with with sports like escape being included for the first time some of the most exciting moments in the Olympics was around skate right and that young generation Gen Z generation really dominating remarkably in a very compelling way, but also coming out of the pandemic the definition.
Condition of sport I think is getting to every athlete astra's can different ways just the concept of movement.
And health <unk>.
And the fact that sport can happen in your living room, as well as going to the gym or the yoga studio or the or the the basketball court and so part of the tailwind.
We're seeing is sports is becoming part of.
Everyone's everyday life and that's a that's a powerful tailwind for us and then athleisure that that blurring the line between the sports part of your life and the rest of your life is also what we view as a tailwind so we're doubling down on traditional sport on capitalize.
On these you know the new emerging definition of sport you saw that escaped Me Olympics, you see that in some of our brand campaigns being really close to where that Gen Z consumers and we think that bodes well for our future.
And I'll just hit the gross margin quickly Matt you know, we believe that this quarter was an excellent proof point of the success.
That we're seeing in driving our consumer led digital transformation, we're seeing meaningful movement forward in both Nike direct mix of business and also Nike digital mix of business as I mentioned and it's what fueled our gross margin expansion in the first quarter high levels of full price realization greater mix of Nike direct and Nike digital business.
And lower markdowns as we leverage the capabilities that we have to serve consumer demand, how and where they want it as we look longer term we're absolutely.
Continuing to look towards that that high Forty's gross margin outlook that we provided last quarter and in the short term, we're going to navigate through these transitory impacts.
But when you're when you've got a strong brand and you've got a healthy pull market.
What we're seeing is strong full price margins offsetting some of these transient costs that we're going to experience as we move product around the world.
Our next question comes.
From the line of Michael Binetti with credit Suisse.
Hey, guys. Thanks for taking my questions here.
Maybe John.
Could you click into the China trends, a little bit more on the quarter I guess jump ball down and that you know last quarter, you spoke to some of the trends within the quarter.
After the impact in April to help with given understanding.
The path back to what was headed back to normal at the time of any kind of dimensions. This quarter. You mentioned there was some COVID-19 lockdowns in few markets that weighed on the total China Trump, maybe where we're at in Q2 to date and what you see is the right pace to think about getting back to normal in that market.
And then on North America to the extent that you do need to make decisions.
Decisions on the allocation to the <unk>.
Inventory.
Going forward I know you had a good amount in transit that can that can feed into two two but you know how should we think about how you're thinking about allocation between the DTC channel and in wholesale.
As we roll forward from here is it similar dynamics, what we saw in the first quarter or any change in that in that trajectory.
No.
Why don't I take the first part of it.
Quick question you take the second perfect American on on China, Michael You know I'll, just reiterate what I said last quarter.
Is we take a long term view in China, we'll invest for long term and we're confident in the long term opportunity.
And coincidentally this.
As the 40th this month as the 40th anniversary of Nike participation in China.
And we saw a Q.
Q1 results that were roughly in line with our expectations and as Matt said supply constraints.
Impact our second quarter performance.
But we are continuing to do what what frankly felt was done from the beginning and China, which he's done over the last 40 years and we've done and we will continue to do over the next 40, which is deliver innovative product that can connect with local consumers.
Strong consumer connections to our brand partly reinforced by the 7000 mono.
[noise] brand stores.
Across the country, we're blessed to have a really strong local team and I am so proud of that team how they're navigating through is as we've said many times before they havent led us in the sort of pandemic playbook in.
And they continue to be very responsive on the ground. There and then and then we always have been and will.
We'll continue to be very respectful responsible corporate citizens.
Promoting sport and the wellbeing through activity in and promoting sustainability and other important societal themes and so we will continue to stay on that playbook and invest with consistency and.
And and longevity.
During this period of time.
And just transitioning to North America, you know we've continued to deliver strong growth in that marketplace. I mentioned five consecutive quarters of our seasons I should say of incredibly strong demand as.
As we think about the marketplace. Our approach is really no different.
And we've been talking about for a couple of years and now we start through the eyes of the consumer whereas the consumer shopping how is the consumer engaging with our brand across the marketplace and we're going to continue to focus on prioritizing our product availability for those locations, where the consumer shopping and that'll continue to be within Nike zone channels and.
Our most strategic wholesale partners and that's what we're going to continue to do to serve that demand. The marketplaces. I said is gonna be lean, we're gonna have lean inventory across the marketplace, but Nike and our partners will continue to try to create the best consumer experience that we can throughout the remainder of that of this.
Per year.
Your next question comes from the line of Bob Treble with Guggenheim Securities.
Hi, Yes. Good afternoon, just two questions. The first one is on the spending levels.
The updated outlook on the revenue.
Fifth the disruption of the supply chain can you just help us understand how you're thinking about spending against the lower levels of revenue, whether it's demand creation or the investment technologies.
Uh huh.
Sure. Thanks, Bob.
Year over year comparisons as we've talked about for a while here.
With really intuitive.
And.
A couple of quarters ago, I talked about as we were starting to see the strength in consumer connections and the acceleration of our business that we were going to begin accelerating investment to drive our digital transformation and in particular, where we were investing was against technology.
Or <unk>, our digital for creating a digital first supply chain and the marketplace and we created a multi year investment plan against our outlook to drive that growth and when we finished the first quarter. We finished our first quarter spending at about 29% of revenue and as we think about the transitory.
Tori nature of these impacts we believe this is a moment, where nike's financial strength is a real competitive advantage and so we believe this is the short term dynamics will pass, but we're more convinced and committed to what we believe the capabilities, we need to operate our consumer direct business.
At scale on a as we execute the strategy and so that's where our focus and attention is going to be we're going to keep our teams focused on creating those capabilities, and which which we're seeing translate into strong growth and profitability.
And that that also includes the investments that we're.
We're making from a brand perspective strong brands get stronger in this in this environment and having that deep consumer connections, especially when it's rooted to sport and the return of sport is absolutely what we need to be doing in order to to continue to stay in a position of strength.
Great and if I could just sneak one more in I think the Drake knocked the line dropped today or I just wondered if you might give us some learnings on what you think about how that product is going and the opportunity that you have for something like that.
Bob I am so glad you asked I had a sneakers when this.
Morning.
Off the line the best.
I'm excited it was a great it's a great collection.
Anytime you went on sneakers, it's a jolt out was in the middle of my work out and one of our gyms here on campus I stopped to work out at seven a M to to to to sue by by one another one so.
So.
Bumped up about that as our as we said earlier it all in all seriousness millions and millions of sneakers users what a what a great experience and obviously that line is just another example of how Nike is unparalleled and our ability to create.
Real innovative stylish he.
In connection with the consumer.
Great. Thank you.
Your next question comes from the line of Simeon Siegel with BMO capital markets.
Thanks, Hey, good afternoon, everyone.
Just when thinking about your price elasticity of demand so recognizing the unit pressures youre talking about with inventory.
Just talk about maybe the opportunity or order of magnitude for potential pricing you see and then Matt anyway, just to parse out the change in wholesale performance this quarter between the undifferentiated partners and then the.
The strategic partners that you are continuing to support thanks.
Yes, so on the pricing question.
We.
I mentioned in my prepared remarks that we've taken some pricing and pricing actions in the second half and.
What I would say Simeon is that we evaluate price value of our products on a season by season basis, and we consider a number of different factors.
That we incorporate to make a decision about what to do.
But what I will tell you is that we take a long stand we have a long standing relationship with our consumer and so we take a long term view to these types of decisions.
And so the price increases that we've implemented in the second half are in the low single digit range.
And we feel it's appropriate given the this the marketplace.
We're operating in and Theres other factors that I referenced considering we've got rising input costs and other factors that are that are impacting our business but.
But I think it's really important not to drive past. The fact that we continue to see strong growth in asps across the whole marketplace driven by higher full price realization.
And as we've been talking about for several quarters, and lower markdowns and leveraging the capabilities of identifying our inventory, knowing where we want to put it putting it in the path of the consumer optimizing it between ourselves.
In our physical locations are digital locations in.
Realizations.
Providing that enlist access to some of our wholesale are to some of our most strategic wholesale partners.
All of these things are contributing to a higher level of full price realization across the marketplace and so we do believe that this is the base from where we want to operate.
Right as opposed to a moment in time, and that's driving profitability for Nike at a moment that that where theres lots of disruption.
I think in terms of your second question in terms of undifferentiated or differentiated what I would tell you is that we continue to see strong growth in our in our differentiated partners and are.
Our differentiated partners because of the fact that they are creating a better consumer experience and driving more demand their mix of inventory on hand is about half where they would like for it to be right now because of the strong demand that they're driving.
And to take it a step further over the last three years we.
We've actually exited about 50% of our undifferentiated accounts, while we've been able to deliver strong double digit growth.
And so we believe that we will continue down this strategy and as John alluded to in his prepared remarks, we believe that the supply related reductions will likely trigger an even.
Greater acceleration in the transformation of the marketplace towards Nike and our most important wholesale partners.
Yeah.
Your last question comes from the line of Kimberly Greenberger with Morgan Stanley.
Oh, great. Thank you.
So much and I'm really really great color on the call today. Thank you.
Now I wanted to just.
I'll talk through the resumption in production and when you see inventory levels normalizing assuming that production resumed through that October November timeframe that you laid out.
As you sort of think about your lead times are the low inventory levels.
When do you think in in calendar year, 2022, you're going to feel really comfortable about having gotten caught up on on the inventory that that is holding back revenue.
Growth here over the next few quarters. Thanks, so much.
Sure well Kimberly.
Our optimism stems from the fact that our factories are starting to have reopening plans approved.
And that that has happened this week and so we're optimistic that we're going to start to see a production begin in.
October.
Our experience from the Covid related closures in China earlier in the pandemic and then in Indonesia earlier. This quarter tells us that it will take time for those factories to ramp back up to full capacity.
We've lost 10 weeks of production.
Since mid June.
Leigh.
And so what we're really focused on is our our factory partners getting back to full capacity. So that we can serve demand that we see in the marketplace. When we combine the loss production and the re ramping plus the extended lead times.
We feel optimistic.
Mystic that we're gonna see inventory supply improving as we exit this fiscal year and move into fiscal year 'twenty three.
And our experience would tell us that while this situation is going to be dynamic.
And it's not going to be linear.
That's what we're planning towards at this point in time.
And you know I might just build on that Kimberly to say.
Both Matt and I wish we had a crystal ball, but.
But we don't and one of the things that I think we are demonstrating through this very dynamic phase IB.
Is regardless of what.
The future holds we're capitalizing on it right we're doing great.
Sports teams too, which is making a job confronting the reality, making adjustments showing agility and executing in a way where we emerge stronger and so we had demand shocks last year with the closing of retail in phase one of the pandemic and now we've got some supply shocks with phase two of the pandemic.
This year, we will now.
Through those just as we did last year I think we're stronger today than we were 18 months ago and will be stronger 18 months from now.
Then we are today and in the process, we're building that capability, where we're leveraging our strengths and we're leveraging the leadership position and I just wanted to maybe conclude this call Paul right. Once again just.
Pressing my sincere thanks, and appreciation for the 75000 Nike teammates around the World, who day in and day out are adjusting to the circumstances on the field are demonstrating teamwork and resilience and creativity to serve consumers and continuing to innovate and that's what we'll continue to do regardless of what the future.
<unk> tells us.
Thank you Kimberly for the question and thanks to all for joining US today, we look forward to speaking with you next quarter take care and stay safe.
Ladies and gentlemen, we thank you for your participation in today's conference call. This concludes today's conference.
You may now disconnect.
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Yeah.
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