Q4 2022 Nike Inc Earnings Call
Inc, President and CEO John Donahoe.
Thank you, Paul and Hello to everyone on today's call.
This quarter Nike celebrated our <unk> anniversary.
On May $1 972, Nike became its own company.
New Standalone brand with its own mission and vision.
It's Tom I'd put it recently back that all we had was a dream a ton of ambition of Trump followup shoes, and a big swoosh on all of them.
And over the 50 year sense Nike has been a growth company.
For five decades, now we innovated for athletes redefining sport for generation after generation.
And today, we are the biggest champion in the world for athletes and for sport.
And we've inspired a global community and remain driven by the power of sport to create a better world.
This spring we've been celebrating our <unk> anniversary across the globe.
And these moments have been particularly special as many of US have now returned to our workplaces, it's been great to see the collaboration and creativity as we strengthen our culture of innovation team and community.
I have personally load feeling the energy of our teammates being back together again.
In fact, I got to feel that energy not just here on our campus in Oregon, but also across Europe , when a group of US visited our team there a few weeks back.
After a couple of years of virtual meetings. It was great to finally spend time with our European teammates in person.
Another highlight from that trip was touring our European Logistics center, and locked all Belgium, and getting to see firsthand, how efficiency and sustainability help us serve our consumers while minimizing our environmental impact.
And I love getting a chance to spend some time with some of the players on England's women's national football team. The Lion Esses, who were inspiring as they prepare for the women's Euro Champs in England. This summer.
Seeing our European teammates in person again reminds me of how deeply grateful I am to all of our 79000 global teammates.
As we conclude this fiscal year.
Our Nike Inc. Team has navigated so much together.
Working with commitment and resilience to serve our consumers and our communities.
And our teams have proven their ability to be unrelenting and executing against the macro complexities, while also building our future.
In particular I want to acknowledge our greater China team, who have managed the business through a challenging period for them and their families.
I've said, it before and I'll say it again. This team is the greatest collection of talent in the world and I sincerely thank them.
This fiscal year and certainly this past quarter macroeconomic challenges have created a dynamic environment.
And yet looking at our full fiscal year 'twenty two results. It's clear that our strategy is working and that Nike has unique competitive advantages continue to drive the business.
Today, we're better positioned to drive sustainable long term growth than we were before the pandemic.
Over the past two years, we've transformed our business building a muscle, but won't just help us navigate future adversity, but one that gives us the ability and agility to continue to drive our growth.
We now have a proven operational playbook with many levers at our disposal.
Fiscal 'twenty two posed operational headwinds throughout the year.
But we continue to invest.
As other companies have pulled back our investments have made us stronger.
And we're excited by what we see as we look at our growth opportunities and a strong consumer demand we continue to enjoy.
And as we look ahead to fiscal 'twenty three we remain very confident in our long term strategy and our growth outlook.
Our structural tailwind which include the expanded definition of sport.
<unk> movement toward health and wellness and comfort.
And the fundamental shift in consumer behavior toward digital continue to create energy for us Steve.
These advantages along with our size and scale the strength of our portfolio of brands and having the right strategy gives us the confidence to move even faster against the opportunities we see ahead.
And Nike's growth has been and will continue to be the.
<unk> of three areas I'll walk through today.
First.
Our brand deeply connects with consumers fueled by authenticity and sport and compelling storytelling.
Second our culture of innovation drives continuous pipeline of new product.
And third we continue to have a competitive advantage in digital is one of the few brands that can connect with and directly serve consumers at scale.
So let's start with the strength of the Nike brand.
<unk> heard me say that these are times when strong brands can get stronger and that has never been more clear than it is today.
Our passion for sport continues to drive our deep connections with consumers.
While visiting our team in Europe , I was able to attend the Nike versus Nike FAA Cup final, which Liverpool won in a thrilling penalty shoot out over to Chelsea at Wembley Stadium.
And April Scott Schaeffer won the Masters and earlier this month Raphael and the Dol One is 14 French open.
And it's been a great month for basketball as the WNBA season kicked off.
And an incredible NBA season concluded.
The power of our full portfolio of brands was felt with Nike basketball highly visible as the official supplier and partner for both leagues.
And Comverse and Jordan.
Showing up proud in the NBA finals, with Draymond Green and Jason Tatum, respectively.
It was also a quarter defined by a series of only Nike moments, none bigger than the April unveiling of the Serena Williams building here on our campus.
This 1 million square foot building is the new home for our design and product creation teams.
More than 200000 square feet is dedicated to lab space, which allows our innovation and product creation teams to test new ideas and developing presenting in merchandising product.
And along with our La Brian James Innovation Center that opened last fall. These facilities represent the single greatest investment in Sports Science Research innovation and design in the world.
Also in the quarter, we were thrilled to launch the Nike athlete think tank, which brought a group of female athletes together on our campus to share their experience and insight.
The 13 athletes, including Serena Sabrina and Shay Leen also selected community organizations that Nike will help fund through grants.
Soon we plan to grow the think tank, creating even more long term impact at the grassroots level fueled by our goal of empowering the next generation of women in sport.
This quarter, we also connected with our consumer through a powerful brand campaign tied to our <unk> anniversary.
The film directed by and starring Spitefully celebrates Nike has passed and the promise of our future.
Film was complemented by programming across our App ecosystem, Nike Dot com social media.
And more to incredibly strong consumer response.
In fact, our 15th anniversary campaign led to the highest Nike Commerce App traffic in our history, even higher than some of the major commercial moments in the past, which once again shows how brand heat can translate to member engagement.
We saw particular energy with Gen Z <unk>.
As our campaign song went viral and Tic Toc, reaching number one on the list of top trending Tictoc songs.
Another only Nike moment in Q4 was the launch of no off season, our podcast focused on mental health and starring athletes, including Carl Anthony towns and Laura Hernandez.
We created this pad cast to help redefine sport for our new generation <unk>.
As another new and creative way that we drive relationships with consumers with an energy and scale is only nicely Nike can.
And finally, we began the next chapter of our relationship with Kobe Bryant and his family this quarter as we launched our new Kobe shoe the pace honored to Gigi, Brian with all profits donated to the Mamba and Mamba Cedar Sports Foundation.
This was a launch with deep global residents from L. A to Shanghai.
With much more to come as we continue to build our Kobe business within our portfolio of signature franchises.
My second point today is our relentless pipeline of innovative product, which continues to drive separation between us and our competition.
No other brand has our ability to resource solve and scale in response to a consumer opportunity.
In Q4, we again introduced new performance innovations to the market.
Including new footwear technology from both Nike Womens and the Jordan brand.
In womens we launched the Nike Sparks flying it.
New lifestyle shoe that introduces Nike running latest innovation the spark cushioning system.
<unk> offers a new sense of comfort and energy return through its dual density foam midsole.
The Sparks flying it is one of the first projects from our Nike Sports Research lab focused uninjured <unk> performance technology into lifestyle products.
In this case responding to the consumer insight requesting a women's shoe for those who are on their feet all day long.
Moving forward, we will be scaling our use of performance innovation into lifestyle footwear with a special focus on the opportunity we see in the women's business.
And Jordan this quarter Luca <unk> debuted his hotly anticipated Luca one signature shoe during the NBA playoffs.
So Luca one introduces a brand new performance phone called Formula 'twenty, three which provides a lightweight and responsive ray the fitting of one of the game's best players.
Formulary 'twenty three is one of the most sustainable performance phones ever made by Nike.
And Jordan now plans to scale it across its product line, including into its next air Jordon shoe.
And speaking of sustainability, we continue to scale our industry leading solutions in this space.
In April we launched new sustainable iterations of two footwear icons.
The Pegasus Turbo next nature running shoe and the material vapor next nature football boot.
Both of which are made with at least 50% recycled content by weight.
Next nature continues the work we started with space hippie with plans to scale, even further across our franchises.
And we're also innovating how we reduced waste.
Beyond the individual products and franchises.
This led to the Nike Recreation program in which vintage and obsolete products are collected and used to create new locally designed and manufactured products.
The program, which combines design retail and distribution launched in L. A with plans to expand to London and Paris in fiscal 'twenty three building a local ecosystem in all three cities.
We know that singularity is the future of sustainability.
And these local ecosystems, creating the exciting beginnings of a fully circular infrastructure at Nike.
And looking ahead, we're excited to soon introduce a new platform that we believe has the potential to change the apparel industry.
It's a new material that brings together scale innovation sustainability and design like only Nike can.
This material is in a net or woven and it significantly reduces environmental impact through fewer carbon emissions and by not using water or dies.
We believe this platform could do for apparel with flying it did for footwear.
It's first products will be unveiled this September and we can't wait for all of you to see it.
Now for my third and final point today, Nike's, increasing digital advantage.
With an own digital business that grew 18% in fiscal 'twenty. Two we continue to set the pace in our industry by creating a premium consistent and seamless experience.
<unk> one to one consumer experiences at scale.
This quarter, our App ecosystem grew into an even greater share of our total digital demand helping.
Helping our digital share of the business reached 24% in Q4.
This is a shift being led by the consumer as.
As they pursue the most personalized shopping experience Nike provides.
And we do not take lightly the choice made by consumers to put us in the most prized real estate that exists today.
The home screen of their phone.
No other brand occupies that space globally like Nike.
And it remains one of our biggest competitive advantages.
Moving to physical retail, we continue to bring to life, our vision of giving consumers personalized digital experiences regardless of channel.
We know that consumers expect us to know who they are online or offline.
And across the full array of mono brand stores.
Nike digital and our wholesale partners.
Within our Nike owned stores higher levels of connectivity across physical and digital are simply driving a better consumer experience.
Online to offline services, such as buy online pickup in store and ship from store are driving growth with a 100% of our North America stores now offering at least one element of O to O.
And in addition to our own physical retail we continue to innovate and co design, great partner experiences and business models to better know and serve consumers.
We started this journey through connected inventory to provide better allocation extend product choice for consumers and reduce friction such as products being out of stock.
And then increasingly we're moving beyond inventory to a broader approach of knowing and serving our consumers as Nike members, particularly when shopping through our retail partners.
As you know this is a journey, we announced in Q2 through our partnerships with Dick's Sporting goods to connect member accounts and then we continued in Q3 with NSP partners in greater China.
And with clear success, thus far and knowing our shared members better our strategy expanded in Q4, two serving our shared members one to one through connected data.
Consumers are responding to the meaningful benefits, we're now testing and we will continue to extend the best of Nike to our members across the marketplace with additional partners and expanded services in fiscal 'twenty three.
At the same time, our growing participation in new digital platforms continues to expand access points to Nike across the digital ecosystem.
After last quarter's first official Nike NFC collaboration with artifact.
We took another step on our journey to serve our community with innovative virtual products in Q4.
Our first co branded virtual sneaker, the artifact by Nike don't Genesis Crypto checks.
Continues our connection with an audience that will help shape, the future of sport and culture.
In the end.
As we look to start a new fiscal year Nike will do what we've done for 50 years now and that stay on the offense.
We have a proven playbook and our unique strengths and competitive advantages give us even more confidence about our future.
Our focus is on the long term and we're not slowing down.
And with that I'll now turn the call over to Matt.
Thanks, John and Hello to everyone on the call.
Nike is 50 of the year has been a year of transformation.
Through dynamic conditions. Our team has remained focused on what we can control continuing to lead with speed agility and responsiveness.
Most importantly, we stayed focused on accelerating our strengths and building Nike for the future.
In this environment, what guides us is a relentless focus on creating value for our consumer.
And what fuels our confidence is the way our consumers responding.
Fiscal 'twenty two was our largest revenue year ever even with supply constraints challenging our ability to serve consumer demand.
We are optimistic as we enter fiscal 'twenty three with.
With our store space fully operational.
Production, surpassing pre pandemic levels.
At inventory flowing again into our largest geographies.
As we set the foundation for another year of strong growth.
I'd like to provide some broader context around our strategic transformation.
Two years ago, we introduced a bold new phase of our strategy, our consumer direct acceleration.
In the early months of the pandemic, we set our sights beyond simply navigating through short term volatility.
Instead, we outlined a clear vision to pursue even further competitive separation.
By expanding our digital advantage.
Reshaping the marketplace of the future and creating deeper more direct consumer relationships.
Okay.
Today, Nike continued momentum shows that our strategy is working.
As we look forward, let me briefly highlight three of Nike, it's foundational elements for long term value creation.
Our global portfolio.
Our consumer led digital transformation, and our expanding direct to consumer operational capabilities.
First one of Nike's greatest strengths is our unrivaled global portfolio.
Together, Nike Jordan and converse represents three of the world's most connected consumer brands.
Dimensionalize, the cross support and lifestyle footwear, and apparel up and down price points throughout geographies at the center of cultural relevance.
Today Nike is the number one cool and number one favorite brand in all 12 of our key cities around the world.
Leading the champion for athletes and sport.
With a sharpened consumer construct across men's women's and kids were deepening our sport focus.
Expanding our product pipeline.
And accelerating our long term growth potential.
The next chapter of our partnership with Kobe Bryant the Bryan family. It is just one example of how we continue to bring new energy and dimension to our portfolio.
Jordan brand momentum has also been unstoppable with some of the most exciting young athletes and sport and some of the most iconic products in the world.
Since fiscal 'twenty, Jordan women's has tripled.
International geographies have grown over 60%.
And apparel has grown over 50%.
Now with approximately $5 billion in revenue.
22, with Jordan's biggest year ever with epic growth potential ahead.
Converse also delivered incredible milestones in fiscal 'twenty to Prada.
Product and storytelling through the lens of youth and creativity are resonating deeply with growing strength among women consumers.
As converse scaled into digital offense and invest in new product creation the impact is clear.
With global revenue approaching $2 3 billion total digital penetration, reaching 27% globally.
And EBIT more than doubling since fiscal 'twenty.
Across all three of our brands, we are driving a more direct digital and differentiated future.
And I wouldn't trade our position with anyone.
Next our consumer led digital transformation is driving long term growth and value.
A more digitally connected Nike.
It's a more valuable Nike.
Today, our own digital business, representing over $10 billion in revenue.
It's more than double in size versus pre pandemic levels.
After increasing market share and gaining three percentage points from the prior year Nike digital now represents 24% of total brand revenue.
More importantly, we are accelerating the pace and scale of nikes direct to consumer connections.
With growing digital traffic and Nike App downloads are apps now represent almost 50% of total digital demand.
In turn increased digital engagement is translating into more repeat buyers are higher buying frequency and increased average order value.
Ultimately driving higher lifetime value through membership.
And as retail consolidation continues and consumers converge around fewer digital platforms.
A distinct Nike consumer experience is driving more direct connections positioning us well for long term growth.
Lastly, we are transforming our operating model with new capabilities.
In order to move at the speed of the consumer.
This year, we will begin to see value from our biggest investment in nike's digital transformation, our new ERP.
As we shift to an increasingly direct to consumer future, our new ERP will be foundational for increasing speed and agility across our supply chain.
This will give us real time visibility to inventory across our network plus dynamic transactional capabilities to optimize consumer demand and inventory productivity.
We will go live with our new ERP in greater China in July .
And continue building and testing in North America for deployment in fiscal 'twenty four.
We will also see a new consumer marketing offense in action in fiscal 'twenty three.
Through new capabilities activated in partnership with Adobe, we will unlock additional productivity and demand creation and member retention across our Nike ecosystem.
We have started testing audience segmentation in North America, with real time data and personalized journeys on the Nike App with plans for further expansion in the coming months.
In greater China. We are also accelerating our digital capabilities building on our 40 year history in the market with an ecosystem from China for China.
In fiscal 'twenty, three we will deliver a new suite of commerce in sport activity apps.
Deepening our connections with Chinese consumers through an enhanced user experience, including locally relevant features across our digital apps services and our owned and partnered retail stores.
Finally, we continue to scale our express lane.
Combined hyper local consumer insights with improved responsiveness and speed to market.
In fiscal 'twenty to express lane drove approximately 25% of total Nike brand revenue with higher profitability.
We expect to build express lane into a larger portion of our business in fiscal 'twenty three and beyond.
Now, let me turn to Nike, Inc, fourth quarter financial results and operating segment performance.
In Q4, Nike, Inc. Revenue declined 1% and grew 3% on a currency neutral basis.
This was led by 11% growth in Nike direct offset by a 3% decline in wholesale Nike.
Nike digital grew 18% fueled by strong demand across our app ecosystem.
Fourth quarter reported gross margins declined 80 basis points versus the prior year.
This was primarily due to specific actions taken to manage supply and demand in greater China following COVID-19 related disruption.
As well as elevated freight and logistics costs.
Winds were partially offset by benefits from strategic pricing actions.
Favorable foreign currency exchange rates improved Nike direct margins and a higher full price mix.
SG&A grew 8% in Q4, primarily due to strategic technology investments increased Nike direct variable costs wage related expenses and increased demand creation expenses.
Our effective tax rate for the quarter was negative four 7%.
This was due to a shift in our earnings mix.
And a noncash onetime benefit related to the onshoring of our non U S intangible property.
Fourth quarter diluted earnings per share was <unk> 90.
This includes a 10 cent nonrecurring noncash charge related to both the deconsolidation of our Russian operations as well as the transition of our Argentina, Chile, and Uruguay businesses to a strategic strategic distributor model.
Finally inventories were $8 4 billion up 23% compared to the prior year period.
This was driven by elevated in transit inventories due to extended lead times from ongoing supply chain disruptions, partially offset by strong consumer demand.
Now, let's move to our operating segments.
In North America, Q4 revenue declined 5% and EBIT declined 18% in line with our expectations as we lapsed supply shifts in the previous year.
Elevated ocean freight and logistics costs continue to dampen near term profitability in this geography.
Nike owned inventory grew 30% versus the prior year with extended lead times, causing in transit inventory to be 65% of our total inventory at the end of the quarter.
Wholesale revenue declined 12% due to inventory supply constraints.
Strong marketplace demand drove closeout units down double digits versus the prior year.
Nike direct grew 5% versus the prior year delivering its highest quarterly revenue ever.
Marketplace channel growth was led by 11% growth in Nike digital with another quarter of historically low markdown rates and lower available inventory supply.
Nike digital total penetration reached 27% for the quarter led by strong Nike App growth.
Even with lean available inventory, our power franchises continue to resonate deeply.
This led to wafer performance footwear, Jordan launch delivered a record breaking quarter and classics, such as Doug and Blazer drove strong full price growth.
Meanwhile, we continue to test and learn across our newest retail concepts such as our Nike live tours, which are increasing member buying amongst women.
In EMEA Q4 revenue grew 20% on a currency neutral basis.
EBIT grew 63% on a reported basis with broad based growth across channels consumer dimensions and product engines Nike.
Nike direct grew 25% on a currency neutral basis powered by healthy retail traffic as we anniversary COVID-19 related closures from the prior year.
Nike digital grew 21% driven by positive launch sell through improved full price selling mix and lower markdown rates.
Sport continues to power, our EMEA marketplace highlighted by growth in running and fitness performance franchises, such as <unk> material and apparel launches such as the a late Brian womens.
Looking ahead EMEA will kick off the most unprecedented 12 months of global football and Nike's history, starting with the women's Euro Champs. This summer men's World Cup in the fall and Women's World Cup next summer.
Nike is meeting the moment with a complete offense, including new kit launches, new training and lifestyle Assortments.
And a new material CFO and fandom footwear innovations across men's women's and kids.
Next I'll provide some deeper color around our results in greater China.
In Q4 revenue declined 20% on a currency neutral basis, and EBIT declined 55% on a reported basis.
This follows the region's most widespread COVID-19 disruptions since 2020 impacting over 100 cities and over 60% of our business as.
As conditions shifted our experienced local team acted quickly and decisively we leveraged a diverse logistics network and strong local partnerships returning to a 100% capacity at our central Logistics center within three weeks.
Our marketplace team also adjusted inventory to meet digital demand.
As a result, Nike digital ended Q4 with low single digit growth.
Despite a dynamic operating environment Nike extended its leadership position as Chinese consumers number one cool and number one favorite brand.
We saw this translate into positive business impact on Nike Tmall Super brand day, which drove 90% number demand penetration and nearly 1 billion impressions.
Nike also created a clear separation on $6 18.
As the undisputed number one store and <unk>.
Number one brand on Tmall sport channels outperforming the market.
In addition, as Lockdowns are lifted in specific trade zones and late April may and early June we saw improved store traffic and overall consumer demand.
Key footwear franchises continue to win in the marketplace led by GT cut as the number one style and performance basketball and Pegasus 39, which drove strong results in mens and womens running.
Express Lane also drove incredible sell through with locally inspired launches such as the Air Force one logo and the head to toe Street games Pac in footwear and apparel.
As I mentioned earlier, we took specific actions in Q4 to recalibrate forward looking supply and demand price.
Prioritizing the return to a healthy pull market by the end of the second quarter.
While there may be near term risk of further COVID-19 disruption longer term, we continue to be encouraged by another quarter of brand momentum in the marketplace.
As we turn to APL, a Q4 revenue grew 24% on a currency neutral basis, and EBIT grew 31% on a reported basis, reflecting our largest quarter ever in the geography.
We saw double digit currency neutral growth across Korea, Mexico, Southeast Asia, and India and Japan.
Nike direct grew 43% on a currency neutral basis led by 59% growth from Nike digital.
Membership fueled double digit growth across all territories as our sneakers app drove its best ever quarter in Japan, Korea and Mexico.
We also saw our biggest quarter yet for womens led by performance running classics and lifestyle apparel.
Kids led the way within Nike digital up nearly 100% from last year.
We're expanding support for a new generation driving strong results with proven franchises such as the court burrow plus newer innovations such as Dynamo go.
Okay.
Now I'll turn to our financial outlook for fiscal 'twenty three.
We entered the year confident in our brand strength.
Consumer connection product pipeline and normalizing inventory supply into a healthy pull market in North America, EMEA and APAC.
We continue to see momentum against our largest growth drivers and our most iconic product franchises.
At the same time, we are closely monitoring consumer behavior and the implications of high inflation on near term economic growth and consumer demand.
We are also taking a cautious approach to greater China.
Given uncertainty around additional COVID-19 disruptions.
As such we have factored various risk scenarios into our guidance for fiscal 'twenty three.
We expect revenue for the full year to grow low double digits on a currency neutral basis.
Partially offset by foreign exchange headwinds of approximately 400 basis points.
In the first quarter, we expect a real dollar revenue growth to be flat to slightly up versus the prior year.
Due to Covid disruption in greater China.
And more than 500 basis points impact from foreign exchange translation.
We expect gross margins to be in the range of flat to declining by 50 basis points versus the prior year.
With a wider than usual range, reflecting our consideration of a number of scenarios.
We expect to benefit from the mid single digit pricing actions and continued gains from our shift to a more direct business.
Offset by another 100 basis points headwind from elevated ocean freight costs.
Increased product costs.
Discrete supply chain investments and normalization of historically low markdown rates.
We expect foreign exchange to be a 30 basis point headwind on gross margin.
Due to strength in the U S dollar largely offset in fiscal 'twenty three by favorable hedge rates versus current spot rates.
We expect gross margin pressure to exceed a 100 basis points in the first quarter of fiscal 'twenty three.
Both as we recalibrate supply and demand in greater China and.
And as we anticipate higher promotional activity to sell seasonal inventory, which has arrived late due to a combination of factory closures and longer transit times.
We expect SG&A to increase high single digits to low double digits as.
As we continue to invest in our people our brands new stores and our transformational capabilities.
And lastly, we expect the fiscal 'twenty three effective tax rate to be in the mid teens range.
As we move forward, we will stay focused on what we can control and continue managing the business for the long term.
This includes leveraging our scale and financial strength.
Optimizing supply and demand.
And most importantly, creating value for our consumer.
From the product redesign to the stories, we tell to the experiences that we deliver.
Our consumer direct acceleration is working on.
Our long term vision has never been more clear.
And if there is anything thats 50 years of growth of proven.
With the right team and the right strategy the future is ours to create.
On that note I'd like to close with a heartfelt. Thank you to the team that makes it all possible the people behind the art.
<unk> and magic of Nike.
Our team is and always will be nike's greatest competitive advantage.
And as proud as we are of all that Nike has achieved over the past 50 years.
What excites US most is what comes next.
With that let's open up the call for questions.
We will now begin the Q&A session. If you haven't already done. So please press Star then one on your telephone keypad to ask a question.
Our first question comes from Bob <unk> with Guggenheim. Your line is open.
Hi, good afternoon.
I was wondering if you could maybe just comment some more around China.
I think when you look at what's happened over the last few months and even more recently with the reopening.
Exactly how youre balancing the compares that you're facing versus the concerns that you have.
Over the next few quarters.
Yes.
Let me start simply by saying, we're continuing to do what we've always Sunrise you know Nike has been in China for 40 years, we are always taking a long term view.
And to be clear, we believe that China remains a growth market with significant potential to unlock.
And we've got very strong equity with with Chinese consumers. Our team I think Matt mentioned it I mentioned that our team has just done a phenomenal job over the last.
10 weeks, but also over the last several years.
And the fundamentals Havent really changed.
So delivering innovation and inspiration in locally relevant ways is what the Chinese consumer cares about I was talking with agile a couple of weeks ago. She said interest on some additional research and the singing the market Gen Z Love innovation.
And inspiration.
And that's what we're that's what we're delivering it.
Cool Nike's brand is the number one cool brand increased its strength in Beijing over the past year, and I think driven by Chinese new year's and the pacing of Olympics.
Nike digital.
We ended the quarter with growth so our direct connections with consumers and as Matt mentioned, we're going to digital local digital apps in the coming six months and then our product.
The localized product through our express Lane continues to drive Great Energy I think Matt mentioned.
The Pegasus.
<unk> assessed the dunk the GT cut a basketball shoes huge heat for that airport slow.
So we continue to think that has huge potential and we're going to continue to invest in that and then ensure that we are building China for China with our tech stack with our hyper local.
Technology Center and <unk>.
Ability to link and serve that Chinese consumer and so we're taking a medium to long term view and we're as confident today as we ever have been coming and coming out of this lockdown, we're seeing increased energy from the Chinese consumer.
Yeah, and I, just would add Bob that we entered the fourth quarter positioned for a strong quarter on building brand momentum in the marketplace.
And our fourth quarter results were impacted by Covid related disruption and Lockdowns impacting over 100 cities and about 60% of our business as we looked at the dynamics in that particular marketplace and the risk of ongoing disruption.
In the first half of fiscal 'twenty, three we decided to prioritize the health of that marketplace and as we've learned from experience over the years.
Having a healthy pull marketplace in a mono brand marketplace by greater China is critical to brand health and long term growth and so we make decisions to recalibrate supply and demand in the fourth quarter and that included reducing our inventory buys at the factories for forward seasons.
We took some reserves on our existing inventory and we also plan for some investment in promotional activity with our partners because we expect that as the marketplace reopens its going to be more promotional and so those were the charges that and the impacts that we had in the fourth quarter.
In order to prioritize that inventory health and pull market by the end of Q2, as John said and some of the examples I gave we continue to see brand strength growing and consumer connection and we're seeing it in our brand strength results and also in the way the consumers engaging with our brand we invested in the brand this quarter again.
<unk> for the third straight quarter, and we're seeing the impact of that on our business.
And as Lockdowns are lifted in specific trade zones.
In late April May and early June we saw improvement in traffic and strong overall consumer demand. So we're trying to take the decisions the right decisions for the marketplace to position us for growth over the long term and despite the short term disruptions, we're increasingly confident in our local market strategy and <unk>.
Our ability to fuel long term growth in the China marketplace.
Great. Thank you very much.
Thanks. Our next question is from Michael Binetti with Credit Suisse. Your line is open.
Guys. Thanks for taking our questions here just a few on the model quick and then a bigger bigger picture question I guess, just if we could get a sense of SG&A in the first quarter I think we got it for the year.
But a help there and then I guess it looks like youre guiding to or at the high end of the revenue algorithm for the year. Despite the caution that you mentioned to us on China in the first part of the year, maybe just a thought on what parts of the of the portfolio Overgrow. Those long term rates you gave us last year in the year.
So we can think about that alongside you.
And then I guess, just a little bit more on.
Youre thinking on structural margins in China over the long term. Obviously you took some actions in the quarter, we see the output here on the margins, but how should we think about those as you move into things like the new ERP system in and then to a better pulp market.
Sure I'll go ahead and take that question.
Why don't I start by just saying that.
We mentioned last quarter, we thought that the variables that were coming together, we are positioning us for another year of strong growth in fiscal year 'twenty three.
And it really reflects Michael the power of Nike's portfolio.
Inventory supply is normalizing against a healthy pull market across North America, EMEA and <unk>.
And we've seen three consecutive quarters, now where consumer demand has significantly exceeded available inventory supply and so.
And so when we look at our brand strength and momentum.
Our product pipeline against some of the biggest growth opportunities that we have.
We think we're well positioned for growth in fiscal year 'twenty three.
<unk> said that we did take a cautious approach to greater China, and we're doing that because as we look at what disrupted our performance in the fourth quarter and focusing on what we can control.
We felt strongly that prioritizing a healthy pull market place is the right action for us to take given the ongoing risk that we see in that marketplace.
But longer term, we continue to believe that the growth potential that we see in that marketplace is significant.
So.
So underlying drivers of growth.
We feel quite confident we continue to closely monitor consumer behavior, and we're not seeing any signs of pullback at this point in time and so we continue to.
To execute this strategy and the plan, we have which is working.
As it relates to SG&A, what I would say, it's just that we're planning for high single digit to low double digit SG&A growth for the full year and that's really us continuing on this multi year investment plan that we have to create the capabilities that we need to be able to serve consumers directly and personally at scale and that is an operational transfer.
<unk> that is underway and and we're already starting to see proof points of benefit against it we're working really hard to prioritize our resources to fuel the things that are going to enable long term growth and shift resources away from places that.
Our legacy ways of operating.
But we continue to feel confident that the things that we're investing in are going to be driving our driving business benefit and we're starting to see some of that come to life.
At the end of this fiscal year and heading into fiscal 'twenty three.
As far as your last question about structural margins in greater China.
There isn't anything that we see at this point in time that would lead us to not lead us away from.
The profitability that we've seen obviously this quarter, we took some actions in order to manage our inventory and and to be able to.
To carry forward our plans.
In fiscal 'twenty, three and beyond in the first quarter were just anticipating that the marketplace is going to be promotional and so we've made some adjustments to our plans around markdown rates.
And in partnership with our wholesale partners to ensure that we clear some of the inventory that is owned by Nike, but that's in the marketplace.
But beyond that our focus is on getting to a healthy pull market by the end of the second quarter and I think as we look longer term the fundamental drivers that are driving our profitability in the consumer direct acceleration strategy more direct and more digital is going to fuel profitability expansion in greater China, too and our ERP It's Frank.
The backbone, that's going to enable us to take advantage of those opportunities at a more significant way.
Okay.
Okay.
Our next question is from initial Sherman with Bernstein. Your line is open.
Yeah.
Thanks for taking my question, so you've talked about a sizable gross margin benefit from the shifts towards direct business and it's been hard to see that this year with a lot of other moving parts, but if you were to strip out the supply chain on the FX and the other moving parts are you seeing an underlying mix benefits from that move and should we.
Are you still confident that some of these transitory costs roll off that you're still on track to get to that high Fourteens gross margin target in a few years and then another quick question on gross margin you talked about Mark Downs normalizing for given the commentary around presentation of the Assortments higher percent direct and digital.
I would've expected you to have a lot more control over Mark Johnson pricing rockier than say a couple of years ago. So is that a fair assumption that we should expect markdown breadth and depth to settle at a kind of permanently lower rates given the tighter control over the channel that you have now thank you.
Sure well, let me let me start on the gross margin by talking about what we saw in the fourth quarter and I think it will help help bring some light maybe to the broader question.
Our gross margins were down 80 basis points in the fourth quarter and that is really reflective of two elements from an operational perspective.
If you look at the growth that we saw in Nike direct and the expanding margins that we saw both in Nike direct and Nike digital and a higher full price selling mix overall, our gross margins would've expanded over 100 basis points in the fourth quarter.
The.
<unk>.
The decision that we took in greater China. The specific actions that we took in greater China had a 200 basis point impact on Nike Inc's Q4 margins.
So when we look at the underlying health of our business and the margin expansion that we see attributed to the shifting business mix from wholesale to a more direct and more digital.
We are seeing it and the financial benefits that come from it in our gross margins.
Since fiscal year 'twenty, our gross margins are up over 260 basis points and.
And that includes in fiscal year 'twenty, two a 100 basis point headwind from elevated ocean freight costs.
We're paying about five times the rate that we paid we paid pre pandemic to put product in a container on a boat and move it from Asia to the U S.
So up 260 basis points with a 100 basis points of a headwind as we look ahead to fiscal 'twenty, three and our guidance for flat to declining 50 bps.
We're planning for mid single digit price increases.
We're planning for additional expansion from our growing Nike direct business and our digital business, which we believe will continue to lead our channel growth, but that's being offset by another 100 basis points of Ocean freight. So if you take 22 and 'twenty three together its about 200 basis point impact on our on a two year basis from paying those higher rates.
To move product from Asia too.
Two our other geographies and and that had a that has a significant impact on where we are today relative to where we would be we still believe in the high <unk> gross margin goal. We believe those costs are transitory in nature, but we expect it's going to take a few years to revert and so we're planning for that accordingly on the law.
Last part of what you said about markdowns, here's what I'd say.
We've planned for a normalization of full price realization and markdown rates in fiscal 'twenty three.
For the last year, we've seen full price realization in RF in three of our geographies to be over 70%.
Whereas our long term goal is to be at 65% full price realization.
As we think about the markdown rates that associated with that we also stopped both in our channel partners and in our own business historically low market markdown rate because of the lower available supply.
We think that that will start to normalize over this year and given some of the uncertainties in the risk scenario planning that we've done around our guidance for 'twenty three that's what's helping to drive this wider range that we're providing in our gross margin guidance for 'twenty three.
As far as the longer term goes as I mentioned.
We continue to believe in that high <unk> number.
And we're going to continue and it's going to be fueled by this ongoing consumer led shift to direct it to digital.
Our next question is from Gabby Carbone with Deutsche Bank. Your line is open.
Hi, good afternoon. Thanks for taking our question CRP over fiscal 'twenty I'm wondering if you could dig into the overall product Florida.
Seeing around lead time, if youre seeing any improvement there.
Just wondering if you can elaborate on demand and how you feel about the product pipeline. Moving ahead, you mentioned in your prepared remarks that you're expanding it and I'm wondering if you can just talk about that thank you.
John You want me go first make sure that the product okay.
Look we continue to see transit times be elevated relative to.
Relative to pre pandemic levels.
It's about it's about two weeks longer than where we were this is specifically in North America, we're about two weeks longer.
In the low eighties days.
In the fourth quarter relative to where we were in the fourth quarter of last year, and that's obviously, having a big impact on our in transit inventory and the flow of goods into the marketplace.
Right at the end of the quarter, we did start to see a little bit of improvement vis vis <unk>.
<unk>.
The boat backlog at the West Coast ports, but at this point in time, given all the variables that we see there we're not planning for a significant improvement in transit times.
In fiscal 'twenty and fiscal 'twenty three so we're managing our inventory accordingly, we're making decisions about.
Our assortment product life cycles.
We're taking some of our styles to season less so that we can manage it on more of a rolling basis, and and we will continue to leverage the experience that we've had over the last few years.
Navigating through this environment from a from a from a supply chain complexity and congestion perspective.
And Gabby on product innovation pipeline.
Funny you asked that we we had about two weeks ago, our first in person VP meeting in two years.
And because we haven't been together in person.
And no one had seen physical product, we had six different rooms.
<unk> built on the new Serena Williams building that had our full innovation pipeline for the next three years Nike men's women's kids performance lifestyle by every sport Jordan Comverse from and I would tell you everyone walked out excited by the breadth and depth at the innovation pipeline.
It was almost overwhelming to be honest when you see it all in one place and so you saw some recent examples of the Sparks flying at which is what's really interesting about that as more and more of our innovations are done for her but can be leveraged by all.
Zoom X foam, which is one of our most responsive homes, yet that can be pulled.
Entire running line I mentioned Formula 23 next nature and the sustainability of innovations and so going forward. We're very excited I teased a little bit about the apparel innovation coming we think thats going to be up a platform opportunity for us more to come on that in the fall.
The pipeline, Matt mentioned this next coming year of global football with with Euro Champ Womens This summer.
World Cup in the men's and the fall Women's World Cup next year, the remarkable innovation, both performance and lifestyle around global football a sharper focus on running the.
Jordan.
Jordan stock, both footwear and apparel.
<unk> lifestyle, the Comverse room with like a.
<unk> hit because I think most people don't really get to see the full breadth and depth of Congress innovation. So we feel we feel very excited about the innovation pipeline I will also tell you that our teams now they are back together in person feels like the pace.
And level of innovation is just kind of.
And design it is kind of just accelerate so a lot of optimism on the innovation front.
Our final question today is from Lorraine Hutchinson with Bank of America. Your line is open.
Thank you good afternoon.
Just hoping to get your thoughts on channel mix in the coming years as you think about wholesale versus direct is there any.
Big Callouts that you would make obviously youre, making the investments in technology would you expect that to return wholesale to a faster growth rate or do you think the direct business will continue to lead.
The rain.
We're going to be guided by the consumer misses you've heard me say before the key to winning in this future is getting the consumers what they want when they want it how they want it.
And consumers don't think about different channels, they just want a seamless and premium and consistent experience and so everything we're doing.
It has to offer that to them and to make us indifferent frankly about where they transact. So they will start their shopping on one of our mobile apps or online, but due to their product investigation or they're looking they may go ahead, and just buy it one of our mobile apps or they may go into one of our stores because they want to try it on or if one of our partner stores is closer to them.
M a dicks.
They'll go there and try it on or if they're an index and they see what they want and they don't have it in stock we can fulfill it through our connected inventory.
And so the whole goal is to give the consumers what they want when they want it how they want it and we believe we are building what will be a source of competitive advantage. That's grounded in having a direct connection with the consumer membership program is going to be a strong whether it's through Nike direct owned and digital.
Physical or through our partners and we achieved that we then can give the consumer choice and the actual channel mix will land and it's most natural place and will evolve and it's most natural place.
Yeah, and I just would add that.
Our wholesale revenue this year was depressed because we had to cut 130 million units of supply because our factories in Vietnam. We're closed for 12 weeks and so as you look specifically to 'twenty three Nike direct will lead our growth and.
Nike digital will be our fastest growing channel but.
But we do expect to see wholesale growth look different.
Other words turn and grow based on available inventory supply flowing back into our geographies and so we do expect to see wholesale growth in fiscal 'twenty three I think as John said long term. This is a consumer led digital transformation, but I still think that our our longer term vision of Nike direct.
Representing approximately 60% of our business and digital owned digital representing 40 is a trajectory that we are still on we're seeing growth in our digital business thats exceeding what's happening in the marketplace. We're watching we're watching our own digital traffic and an accelerating level of Nike App downloads.
It's driving more consumer engagement against our digital platform and that is driving growth and shifts relative.
Relative to the broader marketplace.
And while we're up about nine points of business mix versus FY 'twenty.
We continue to believe that digital is going to be as John has said again and again and again our fuel for growth for us over the next three to five years.
Yeah.
That concludes our question and answer session I will turn it over to Mr. Trussell for any closing remarks.
Yes, I just wanted to say, thank you to everyone for participating.
In our fourth quarter call we.
We appreciate you joining and we look forward to speaking with you next quarter take care.
Thank you everyone.
Okay.
Ladies and gentlemen. This concludes today's conference call. Thank you very much for participating you may now disconnect.
Okay.
Okay.
Okay.