Q1 2020 Earnings Call
During today's call is my friend CFO , Nike operating segments, and Vice President Investor Relations.
I will return the call over to Mr. friend, Let me remind you that participants on this call will make forward looking statements based on current expectations and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially.
These risks and uncertainties are detailed in the reports filed with the FCC, including the annual report filed on form 10 dashboard.
Some forward looking statements, making certain expectations of future revenue growth or gross margin.
In addition, participants may discuss non-GAAP financial measures, including references to constant dollar revenue.
References to constant dollar revenue are intended to provide context as to the performance of the business eliminating for foreign exchange fluctuations.
The defense May also make references to other nonpublic financial and statistical information and non-GAAP financial measures.
The extension on public financial and specific this school information as discussed presentations of comparable GAAP measures and quantitative reconciliations will be made available at nike's looks like.
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Such forward slash investors Dot Nike cycle.
Now I'd like to turn the call over to my friends CFO operating segments, and Vice President Investor Relations.
Thank you operator, Hello, everyone and thank you for joining us today to discuss Nike Inc.'s fiscal 2021st quarter results.
At the upper 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.
At our website.
Lessors Dot Nike dotcom.
Joining us on today's call will be Nike, Inc., Q, Chairman, President and CEO , Mark Parker, and our Chief Financial Officer, Andy Campion.
[noise] 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 a lot of time.
So we would appreciate you limiting your initial questions to too.
In the event that you have additional questions that are not covered by others. Please feel free to re queue and we will do our best to come back to you.
Thanks for your cooperation on that.
I'll now turn the call over to Nike, Inc., Chairman, President and CEO Mark Parker.
Thanks, Matt and good afternoon, everyone.
Many of you know, Matt I'd like to welcome him to his first call as he takes on the responsibility of Investor Relations.
And then of course on behalf of the whole team I'd like to thank the test for his partnership over the last several years.
Turning to the result.
We feel very good about our performance in the first quarter of fiscal year 20, growing revenue, 10% on a currency neutral basis.
It was a quarter that proved the depth and balance of our complete offense.
Building on the strength of our foundational business drivers and capitalizing on the untapped dimensions of our portfolio.
For the quarter. This is reflected in the broad based growth in all geographies.
Our international business, which grew 16%.
In double digit growth.
Oh, you know women's business off the back of an incredible summer of celebrating female athletes.
In both footwear and apparel with our strong lineup of innovation and style, which continues to feed the growing consumer demand for comfortable athletic product.
And in digital which grew a very strong 42% showing the power more personal relationships with the consumer.
Mobile continues to lead the way and within mobile App experiences are fueling the most growth.
And while this trend has held true in our own channels for some time, we're beginning to leverage our digital digital experiences with our retail partners.
As we set out to do we're creating a differentiated marketplace for Nike by scaling our learnings and best in class experiences with our partners.
The key to expanding our competitive edge continues to be our total commitment to the consumer through the consumer direct off that.
We're focused we're investing in our brand in key markets and we're accelerating in the high growth dimensions of our business.
And that's especially important in the volatile macroeconomic and geopolitical environment that we see today.
In relation to tariff we've been clear that we strongly believe in the power of free and fair trade.
Historically, we've effectively navigated through excessive duties.
And we're confident that we'll continue to do so under the current dynamic.
In China, specifically, we continue to extend nike's lead.
In our key cities of Beijing, and Shanghai, we serve a generation of digital first consumers and we support their love of sport by helping to grow participation through grassroots programs.
As I've said before Nike is a brand on China for China, and the results continue to prove it out.
Driven double digit growth in greater China every quarter more than five years.
This quarter, we continue that momentum with an outstanding 27% revenue growth on a currency neutral basis.
In any environment Nike's Foundation for success, it's always been great product.
We continue to see that today with another huge quarter for Nike innovation.
We're delivering more choice and fresh options on some of our hottest products.
An expansion of both new and existing platforms.
And a deeper commitment to serving a wider range of athletes.
Sportswear continues to lead all categories in both footwear and apparel growing strong double digits.
One of Nike's greatest strengths is how we mix style and innovation and the Airmax react to 70 is a perfect example.
We created a runway ahead.
Blending airmax and react with multiple bold colorways.
In fact, the to 70 Airmax Riyadh react led to the largest gains in footwear revenue for the quarter.
Another strong addition to our lineup this quarter is the Airmax 200.
The layered up or with a new visible Airseal unit continues to build on the energy we're driving in running silhouettes.
We're also re imagining and clearly segmenting, our top sportswear franchises like the Air Force, one and Tech fleece.
Why adapting the air force one into models like the end 354 and stage. We grew the air Force one businesses with women's and kids faster than men's this quarter.
It's an approach we're using with our tech fleece collection to adding new silhouettes and shapes throughout our lives.
Our strategy of designing apparel through themes and collections continues to connect with the consumer as we drove double digit growth in sportswear apparel for the 22nd consecutive quarter.
[noise], our kids business, it's one that doesn't get a lot of attention on our calls but it is in fact, a critical part of our business.
Overall kids footwear and apparel just experience its biggest back to school season ever driving double digit growth for the quarter.
Kids were earning significant gains through core footwear and apparel for both boys and girls and in basketball and the air Max to 70, which drove triple digit growth for kids power franchises.
How we present and distribute kids product also provides new opportunities we see more parents buying on our apps. So we continue to invest in more dynamic imagery on our digital platforms and we're testing new business models through membership to make it easier for parents to buy at the pace that there.
Kids need new product.
In performance product, we saw very strong momentum it basketball.
Internationally this quarter, especially with the Alpha Duncan with the honest we're excited about the long term potential of his signature line.
We did assume freak wanting to become the largest initial signature launch in Nike basketball history is apparel line sold out quickly as well the freak T shirt, becoming the top selling apparel item a Nike dot com.
This quarter, we were all inspired by the incredible athletes and performances at the Women's World Cup.
It was also a tremendous stage for Nike innovation.
During the all Nike final. We also debuted our top football boot innovation the material 29 team.
In addition, apparel revenue from the 2019 Women's World Cup was four times bigger than it was for the 2015 event.
Across the water business, we stayed intensely focused on the apparel classifications that matter than most of the female athlete broad and tight.
The quarter the lights support indie brawl led the way and our Nike Onesite is creating incredible demand, especially in Nike direct and strategic retail partner doors.
The Nike one collection is a great example of our edit to amplify approach that will stretched other categories, putting more focus on our most profitable items across price points and distribution channels.
In running we launched Jory, Rod, which was designed to encourage more everyday athletes to get moving.
We're excited about the incredible comfort the system delivers with responsive beats that conform to the foot.
The customer response to the running silhouettes. This quarter was very strong and we're just now beginning to scale the joy ride platform across multiple categories through womens sportswear and kids.
As we began to communicate through two I ride one of the biggest opportunity for Nike is to continue to serve uneven wider range of athletes.
As a leader in our industry, we will add to the growing movement of health and wellness around the world.
We've been broadening our definition of sport through our brand, but more and more we're doing it through product innovation.
From competition to fitness to light activity to play are more inclusive view on design is opening up new lines of opportunity for growth.
For example, we're studying instead of our products to serve more body types with our successful plus size line.
Our teams are designing for modesty to match more people's preferences.
And our plays system has been updated for easier entry and exit to it to appeal to even more people.
There will be expanding into a new high performance basketball shoe and one of the most coveted seekers of all time the air Jordan one.
Making more athletes comfortable and confident can be an incredible catalyst to bringing more people into sport.
And that's a theme will continue to champion as we lead into the Tokyo Olympics.
On last quarter's call. We told you that the Jordan brand was accelerating and finished with over $3 billion in revenue for fiscal 19.
Jordan, followed up that record breaking year with a quarter of healthy double digit growth in all geographies, including mid teens growth in North America.
We are growing at an accelerated pace in new areas like performance basketball women's international and apparel.
In the year Jordan, one franchise continues to create incredible demand all over the world.
This quarter, we we're incredibly excited to announce that it's I on joined the Jordan family.
Trial design will where are the our Jordan 34 to start this season, and we're already developing new innovation with one of the NBS most anticipated records.
Looking over the next few seasons, our pipeline is set to fuel growth in our biggest businesses, while also carving out new space for future opportunities.
New Lebron and Kyrie signature models will arrive at the end BA season gets started.
Women's apparel will lead with new materials and performance tights training will introduce a new franchise design for a range of fitness activities, including high intensity workouts station based training and swim and spending classes.
Running will introduce more innovation, that's proven to help make athletes faster as we head into Tokyo.
And our adaptive platform will continue to evolve with new features like voice activated voice activation from your phone.
There is much more to come from Nike innovation in fiscal year 20.
While products are usually the first to grab the attention of our consumers, we deepened those relationships through the power of digital.
To do that we're investing in three areas.
We are building industry, leading personal experiences we're quickly ramping up our back end capabilities to capture more of that demand.
And the final critical piece is to create scale through our own channels and with our partners.
Memberships sits at the heart of that strategy, giving consumers are more personal relationship with Nike.
Fundamentally that gives an easier access to more tailored products and services.
With product there are multiple advantages to being logged in logged in member in some cases. It means they have early access to our latest innovation like we did this quarter with the launch of Jory ride and the Airmax to 70 react.
You can also be as simple as giving better access to the product they want in the moment, so you're capturing more full price demand.
Connected inventory is critical to that capability.
With services were bringing real value to our members lives consistently.
Our teams are obsessing different ways to engage with more people completely and have that coming back for more.
Over the last three years, we've more than doubled the number of active users across all of our apps.
With more active engagement, we create more value for both our members and for Nike.
And this quarter for example over 50% of our Nike direct digital growth came from members.
Becoming personal at scale is the ultimate objective.
We start in our own channels, and then amplify those experiences through partnerships.
The sneakers App has truly redefined our connection with the sneaker community.
It's now in 22 countries with more room to grow in EMEA and La and grew roughly 50% this quarter.
We've also begun to test.
To test a new opportunity within sneakers on high heat apparel.
The early read from our members on our pilots has been very positive.
As I've said before the Nike App is the most comprehensive one stop shop for Nike.
It's become the largest and fastest growing platform in our portfolio growing almost triple digits this quarter.
The Nike App is already in 21 countries and we'll go live in China in holiday.
Just as exciting is the impact that the Nike App is having on physical to physical shopping experience.
It's scaling in North America and it features can be now activated in every store owned Nike location.
Most factory stores, including most factory stores and in this quarter alone. We added nearly 1 million new Nike members from interactions in our North America doors.
Nike fit is our new technology that scans the foot.
Eliminating a significant consumer friction point by providing an accurate read a user's shoe size.
The in store experience is currently available in all North America locations, and it's moving quickly into Europe and Japan.
Also be launching an at home in App experience later this fiscal year.
We're moving at an impressive pace in the channels that we control and while we continue invest in stronger more distinctive PARP partnerships.
When coming together with another platform a retailer our objective is to create a better experience in the path of the consumer.
We want them to be able to move seamlessly from online to offline and easily find the product they want when they want it across the marketplace.
Ultimately by recognizing surveying and rewarding members it will engage with Nike more often across multiple channels and touch points.
Our teams continued to be very active in this space.
Nike App at retail is already showing the ability to scale with partners. This quarter for the first time Nike at retail features and Nike membership, we're activated with the wholesaler through a pilot with foot lockers, Washington Heights store.
We plan to integrate Nike up at retail and more foot locker doors in North America, and bring new experiences to Zalando in Europe and top sports in China later this fiscal year.
Our inventory partnership program also continue to scale, including the Londo J.D. and pro direct in Europe .
And we're leveraging the world's top social media platforms, with Instagram, where consumers can use direct messaging for commerce, and our women's and training channels and when we chat with a new feature that allows users to check product availability in nearby stores instantly.
A critical component to accelerating all of our opportunities is our ability to become smarter through our supply chain.
And to do that we're bringing sides to the art of retail like never before.
We sodium we've acquired proprietary technology and teams to better know our members given better experiences and expand their lifetime value to the Nike brand.
In vertex brought us computer vision and capabilities for Nike fit, which we talked about and in addition to more accurate fitting sizes were already using insights we gain to inform better design product.
And just last month, we cry acquired a new predictive analytics analytics platform and team of data scientists through our acquisition of select this team will greatly accelerate our ability to turn rod data into actionable demand insights.
And this allows us to make more accurate inventory decisions closer to market.
We are partnering investing in our own teams and we're gaining new capabilities all the name of serving the consumer more completely.
It was a great start to the year for Nike the global shift towards more active lifestyles continues to accelerate and demand for athletic product is high.
As the company, we have a sharper focus on these areas that will drive the greatest growth.
We are bringing the joy of sports even more people and we continue to build our more valuable relationships with the consumer through the power of digital.
Our fundamentals are strong what excites me. The most is a significant opportunity ahead for our industry and for Nike.
Thanks, and now here's Andy.
Thank you Mark and I'll, let everyone on the call first I want to take a moment to personally. Thank nitesh for his incredibly valuable thought partnership and leadership over Investor Relations as he now transitions into a new and expanded set of responsibilities and I also want to welcome Matt to his first call as he expand his responsibilities to include.
Good leadership over Investor Relations.
In Q1, we came out of the block strong with our results meeting or exceeding the expectations. We set 90 days ago on every dimension.
Most notably we delivered currency neutral revenue growth of 10%.
150 basis points of gross margin expansion.
EPS growth of 28% and high expanding returns on invested capital.
Those are extraordinary numbers, but what we're most excited about is the quality of our performance.
Our financial performance in Q1 reflects exceptional strategic execution by our teams around the world. We continue on our relentless drive to transform how Nike serves consumers.
There are three key themes that really stand out when we reflect on Q1.
One the strategic transformation of Nike continues to be the fuel for accelerating broad based growth across our global portfolio.
To this transformational growth is not happening by accident, our targeted investments are extending our competitive advantage.
And three while the geopolitical and macro environment is increasingly volatile and in some respects unpredictable consumer sentiment for the Nike brand remains incredibly strong and consistent around the world.
Let's go a bit deeper on these three themes first strategic transformation is driving our broad based global growth.
When it comes to creating value for shareholders. It all starts with growth and as Mark has said when it comes to growth at Nike It all starts with product.
He is bringing innovative new product to market at an unrivaled pace and scale.
New innovation platforms equated to over 100% of our incremental growth in Q1.
That includes the successful launch of Joy ride and strong sustained consumer demand for recently launched platforms from react to the range of compelling new airmax platforms launch over the past two years, such as Vapormax to 70, 720 and 200.
At the same time digital is transforming in amplifying everything we do at Nike in Q1, Nike digital grew 42% on a currency neutral basis, driven by enhanced digital services and the expansion of our App ecosystem internationally.
The Nike and sneakers App are now both live in over 20 countries with more expansion coming over the balance of fiscal year 20.
As for the second key theme, we are making deliberate investments both organically and through acquisition to extend nike's competitive advantage.
For example, we've enhanced our ability to test and scale, new digital services faster by investing in the migration of over 95% of our consumer experiences to a more nimble cloud based architecture.
Our acquisition of select in Q1 was another accelerator of our transformation select team and per pack proprietary digital demand sensing tools will help us more effectively predict demand plan supply allocate product to the rate stores and sharpen our pricing and markdown cadence.
Select capabilities, our first of their kind in our industry. Most other industry sell the same products season after season.
The lack has developed unique models that leverage data science and machine learning in our industry, where we bring new and innovative product to market every season.
The acquisition of select accelerates our building of digital demand sensing capabilities by at least three years.
With Nike is unrivaled scale and resources, we will continue to capitalize on opportunities such as these to invest and extend our leadership and competitive advantage.
At the same time, we're also increasingly offsetting our incremental investment through the editing of resources within our legacy operating models.
The third key theme as we reflect on Q1.
Relates to the environment in which we're operating.
Despite increasingly dynamic and somewhat unpredictable macro and geopolitical factors consumer sentiment and affinity for the Nike brand remains strong and consistent nike's growth continues to outpace GDP growth and broader retail growth in our major markets around the world and Nike continues.
Has to be the number one favorite brand in our 12 key global cities.
Since launching our consumer direct offense two years ago, our currency neutral performance has exceeded our long term financial model in terms of growth profitability and returns on invested capital and we see that momentum continuing over the balance of fiscal year 20.
While the macro dynamics are even more volatile than they were 90 days ago. Nike has a long track record of remaining agile and managing all of the levers we control.
We're also increasingly engaging with all of our constituents on the levers that are outside of our direct control.
As a result to date, our net real dollar reported results have remained strong and consistent we continue to deliver strong financial performance. Despite FX, having had a roughly $3 billion negative impact on our reported revenue and over one and a half billion dollars of neb negative impact on our EBIT over the past.
For years.
Despite the recently implemented tariffs and associated FX headwinds, we expect to continue delivering strong financial performance going forward, but before sharing our positive outlook for the balance of fiscal year 20, I'll first touch on our reported Q1 results in a bit more detail.
In Q1 revenue increased 10% on a currency neutral basis, and 7% on a reported basis.
Our stronger than projected overall growth reflects healthy balanced growth across all four of our geographies led by Nike digital globally and greater China.
Gross margin expanded by 150 basis points in Q1 as average gross selling prices expanded at higher margin Nike direct growth.
Outpaced wholesale growth.
Q1, gross margin significantly exceeded our guidance driven primarily by a shift in the timing of supply chain and other investments out of Q1 and into the balance of the year.
Significantly lower than planned markdown rates in our Nike factory stores in fact, even lower than we'd expect than a typical quarter.
And the favorable mix impact from stronger than planned growth in our high margin international geographies and Nike direct.
We nonetheless expect gross margin expansion over the balance of the fiscal year, though of course not at the same level as we saw in Q1 I'll touch on this more specifically in our guidance.
As Shannay grew 9% in Q1, as we continued to invest in our digital transformation and in part driven by brand marketing associated with the women's World Cup and the Joy right innovation launch our effective tax rate for the quarter was 12.4%, which would have been largely in line with guidance, but for favorable nonrecurring.
Items.
First quarter diluted earnings per share increased 28% 86 cents.
And as of August 30, Onest inventories were up 12%, reflecting strong forward looking consumer demand globally and also in support of key consumer moments such as back to school, which has extended into six September this year and looking ahead to single day on 11 11 in greater China.
Now, let's turn to the financial performance for our reported operating segment in North America Q1 revenue grew 4% our growth in Q1 was right on plan led by digital from a channel perspective, and sportswear in Jordan categorically.
We are reshaping the marketplace in North America, with Nike digital growing over 30% on a currency neutral basis.
With high single digit growth across our key strategic and differentiated partners.
In Q1, we also drove an intentional decline in undifferentiated multi brand wholesale we continue to reallocate, our best product and our retail investment dollars to Nike direct and differentiated partner experiences.
That includes for example testing new services, leveraging the Nike App in partner doors, such as in Washington Heights with foot locker.
Now, let's turn to EMEA, where revenue grew 12% on a currency neutral basis in Q1.
Growth was broad based across our categories and amplified by strong double digit growth in Nike digital.
We see continued strong digital momentum in Europe with the Nike App, having just launched in 13 new countries across this geography.
We extended our lead in Europe in Q1 with the Nike brand rated the number one favorite brand in all of our key cities and our business growing at strong double digit rates in London, Berlin and Milan.
While Nike direct is a key driver our strategic partnerships with JD ends Alonzo are also contributing to our strong sustained growth in Europe .
Now, let's turn to greater China, which continues to set the pace for nike's growth globally.
Q1 marks the 20 onest consecutive quarter of double digit revenue growth in greater China.
In Q1, greater China grew 27% on a currency neutral basis fueled by nearly all key categories led by sportswear and Jordan.
Coming off of the FIFA World Cup in China. We're also excited about the energy around the basketball category in this geography and globally as we enter the new MBS season.
The impact of digital in China has been nothing short of extraordinary Nike digital grew over 70% in Q1 in part amplified by our strategic partnerships with T Mall and we chat.
And looking ahead, we're pulling forward the launch of the Nike App in greater China into late Q2.
Based on trade and other dynamics, we continue to be deeply engaged with all of our constituents in China and we're also closely monitoring consumer sentiment.
At the same time affinity for the Nike brand continues to build and our sell through at retail remain remains very strong.
We believe we're extending the Nike brand leadership in China by remaining authentic play focused on serving the Chinese consumer while fueling their passion for sport.
And a broader movement toward a more active lifestyle.
So now, let's turn from China to another fast growing geography Ella.
In Q1, Apiay revenue grew 13% on a currency neutral basis, driven by nearly 50% growth the Nike digital.
In Q1, we launched the Nike App at retail in our hard you through store a great example of bringing the consumer direct offense to life globally through the key city of Tokyo.
The culture of basketball was also a driving force behind the momentum we saw in Npls with the Jordan brand growing strong double digits year over year.
Npls is an extremely entrepreneurial and diverse geography, npls, we continue testing new concepts with local partners.
Such as our digital commerce relationship with Flipkart in India to leveraging the social media platform Cow in Korea on the launch of Joy ride and on ramping new members.
Finally at converse revenue increased 8% on a currency neutral basis with the Congress brand delivering strong double digit growth in China and across digital globally, while returning to growth in Europe .
Growth is being fueled by an increasingly stronger and diversified product portfolio, including across the Chuck Taylor franchise, the Chuck 70, and the Chuck Taylor lift.
We're also excited about converses reentry into performance basketball, which got off to a great start with the successful launch of the Allstar Pro Bebe.
Now turning to our outlook, we see continued momentum going forward accordingly, our projected currency neutral growth and profitability are improving.
One might have expected the recently implemented tariffs and associated FX headwinds to result in lower real dollar expectations.
However, our real dollar outlook remains consistent to slightly improved net of all of the dynamics in our business.
For the full year, we continue to expect reported revenue growth within the high single digit range slightly exceeding fiscal year 19 reported revenue growth.
This improves.
This incorporates our improve currency neutral outlook being largely offset by the more intense FX headwinds of late associated with trade dynamics.
Recall that the impact of foreign exchange hedges is not accounted for within our revenue line item.
We now expect to deliver full year gross margin expansion within the 50 to 75 basis point range.
That assumes that the negative impact of recently implemented tariffs remains in effect for the balance of our fiscal year and again remember that our Q1 gross margin expansion was amplified by timing shifts and other discrete items.
While our recent acquisition of select we'll have some impact on SGN M&A, we still expect SG M&A to grow roughly in line with revenue for the year.
We expect our effective tax rate to be in the mid teens.
And for Hawaii net of interest expense, we continue to expect $50 million to $100 million of income for the year.
Our focus first and foremost is on sustaining strong currency neutral operating momentum over the full year and longer term, but based on the volatile dynamics of late ill provide a bit of context on Q2.
We expect reported revenue growth in Q2 to be inline with our Q1 reported revenue growth.
That assumes our strong currency neutral revenue growth will be dampened by roughly three points of FX headwinds.
For gross margin, we expect Q2 expansion to be roughly 25 basis points were slightly greater expansion than that in the second half of the year.
The impact of tariffs will be most pronounced in Q2.
In Q2, we expect SGN a growth in the high single digit range.
We expect our effective tax rate to be in the mid teens range and for Oh, I see we expect income in Q2 to be roughly $10 million to $30 million.
We are extremely pleased with our brand momentum and the strong currency neutral growth we've delivered since implementing our new offense two years ago.
That said, we are still in the early stages of Nike strategic transformation.
Our execution of the consumer direct offense will continue to fuel growth across our portfolio of key categories key cities in key countries as well as accelerate our growth against the outsized long term opportunities that we see in womens apparel digital and international with that we'll now open.
The call for questions.
At this time it wants to ask a question press star and one on your telephone keypad.
First question comes from Bob Zero with Guggenheim. Your line is open.
Hi, guys good afternoon.
Hey, Bob bonds.
I guess the question I have is.
Two questions really on the first part of it is in North America.
Can you talk a little bit more about the apparel performance in terms of need some success in women's but just generally the level of growth and sort of how we should approach that during the second question is just around the inventory levels.
Yes, any any pockets of concerns there any areas geographically that youre concerned about or anything we should think about from from that perspective.
Sure.
I'll start on North America apparel.
We continue you asked about women's in particular.
We continue to grow the women's apparel business in North America. It's in fact growing at a very strong rate at the same time, we see great opportunity ahead even.
Even greater than we've capitalized on to date.
Overall in terms of apparel growth, we're really pleased with the growth.
A number in Q1.
Does compare unfavorably to some prior year comps as you may recall last year in Q1 apparel in North America grew 8% and that was in part.
Impacted by the.
Jersey business relative to the end VA as you may recall, Brian change teams last year.
That had some impact we also are seeing this year back to school extend a bit out of Q1 and into our Q2.
So in short, we see really strong demand for our apparel in North America, we've had a little bit of pressure on supply, but you're going to see the rates of growth in North America apparel accelerate as over the balance of the year.
And then you asked about inventory.
I guess I'll take that went to inventory as we spoke about was up 12%.
Versus prior year that was primarily driven by strong consumer demand.
Jordi of our inventories and new seasonable seasonal product some of which is in transit to the marketplace.
And we'll sell into the marketplace and sell through over the quarter and into Q3.
There was also a little bit of an impact from foreign exchange and that inventory number. So if you look at it on a unit basis.
Our unit inventory growth is really well aligned with our forward looking.
Unit growth.
And kind of combining those two teams one the fact that it's largely seasonal inventory and too that the overall unit numbers are aligned what you're saying you would expect and hope to see is that our close out mix is low and it is in fact very low so our inventories very healthy in our geography is there a couple of other Danny.
Amex that are probably worth calling out one again is this extended back to school season. So you see some of that inventory now selling through as back to school extended into September which is in our Q2 and then we also have been building inventory in anticipation of singles day on 11 11 in China. So punch line is.
We feel great about the inventory that we have on hand, and it's reflective of the strong demand for the brand.
Great. Thank you operator, just a quick.
Our next question is from JP merryman with corn seed.
Bernstein, Sir your line is open.
Hey payments and thanks very much on the color on the call.
First question is with me Thank you gentlemen.
Hi.
Thank you Susan mislabeling down somewhat.
Not nonspecific strategic partners in the markets can you talk about how those lands playing out for the balance of 2020 in how we should think about that.
Thanks, just give us an update on how you're thinking about.
Those on strategic partners, specifically with e-commerce .
Whether you have an update on partnerships with Amazon.
I, just like that what you've seen sapphire. Thank you.
Hi, Jamie I'll take that first question relative to North America.
As you may recall from our call 90 days ago, we highlighted that we were going to add some year over year comparison dynamics in North America. So I'd start by saying we're right on plan in North America, We're really pleased with the growth that we're seeing in that geography, we still see that geography as sustaining strong healthy mid single day.
Growth.
You will see slightly higher growth rates in North America over the balance of the year.
What we delivered in Q1 and of course remember not all percents are created equal at a point or two of growth in North America is pretty significant impact.
And then again I think I touched on this a little bit with respect to Bob's question.
The growth in Q1 was slightly impacted again by some year over year comparisons not just in the Jersey business, but also the timing of innovation launches in footwear, and then again with that kind of extended back to school season spanning.
Over Q1 and into our Q2, which begins in September .
So again, we see.
Tremendous momentum in North America, you also asked about this distinction between.
Nike direct differentiated consumer experiences and undifferentiated consumer experiences.
That is really a tale of two cities. We are seeing strong in fact and accelerating growth and Nike digital we're seeing high single digit growth and differentiated retail with our strategic partners and we're seeing an expected in in fact somewhat intentional and deliberate decline in undifferentiated retail and the dry.
Divers of that or how we allocate product and where we put our retail investment dollars. So we would expect that that trend to continue in the short term.
Of course long term our goal is that we've reshaped this marketplace to one in which we're connecting much more directly.
With Nike consumers and members through Nike directing our strategic wholesale partner. So again, we're on plan in North America. The brands extremely strong and really really excited about the opportunities ahead, including in those areas. We've consistently touched on digital womens core footwear below $100, which is touched on in apparel.
Yes, let me touch on the.
Second part of your second question you had on digital partnerships.
Obviously digital growth is driving much of nike's overall growth and Thats important obviously for direct but also the digital base business with our partners both wholesalers, who are expanding their growth through the digital channel as well as digital platforms.
We don't have anything new to.
Update you on in terms of Amazon.
So far the.
With Amazon the relationship has gone well.
This is performing well that is.
So nothing new to report there, we continue to sort of analyze that relationship and the and the other opportunities we have.
Foreign partnership standpoint, it's really critical that our platform partners are actually.
Serving our members are serving our consumers at the highest level possible so that means sort of seamless interaction.
Frictionless experiences in terms of commerce.
Looking at an environment, where there no that thereby authentic Nike product and ultimately just to better known serve our consumers. So those are the things that we expect from our digital platform partners, we feel really good.
About our partners.
In Europe , and in China and that also.
Growing.
Through the digital channels here in the United States.
With partners like Instagram through social media.
It's just getting going with jet so there's lots of opportunity ahead there.
So this is the this will be an important part of our.
Growth going forward and I should mention I'd fill the mentioned one of our biggest most successful partners here as in China, and that's with T mall, so tremendous relationship there.
Continues to add energy to the brand as well as help to drive our business in China.
Okay. Operator next question.
Your next question is from Paul Trussell with Deutsche Bank. Your line is open.
Congrats on the great quarter.
Thanks for taking our question wanted to touch base on the.
Gross margin performance.
Perhaps you could just walk through.
A little bit more detail on the spread versus your original estimates how should we think about the supply chain impact.
Q1 and how that will affect the balance of the quarters as well as what were the drivers behind the the lower than expected.
Downs and what is the impact into Q of tariffs color on that would be helpful. Thank you.
Sure.
Thanks, Paul.
I will first walk you through some of the impacts are drivers as you said in terms of the spread versus our guidance so as compared to the expectations. We said 90 days ago, a 150 basis points significantly exceeded those.
I'd say first.
I would touch on higher growth and favorable mix in our international geographies.
Second higher growth in our Nike direct business.
And again both of those are.
Let's say over indexing growth versus the plan, we had 90 days ago, So strong momentum and those dimensions of our business versus plan and our and again, our international geographies, our higher margin geographies in North America, and our Nike direct business is a higher margin business than the wholesale business.
You asked about lower than expected markdowns in our factory store business.
I'd say that was most pronounced in Europe .
In Europe , we've really just had extraordinary separation.
You've seen strong double digit currency neutral growth in Europe for quite some time.
Where we're taking share and our brands just incredibly strong and all of our key cities in Europe and.
So frankly, our markdowns were much lower than we had planned there and in some other areas of our business not only than we planned for the quarter, but then you'd expect in a typical corner you also asked about.
The impact of tariffs.
Tariffs will impact Q through Q2 through Q4, now again, we guided to slightly improved overall gross margin even taking into account those tariffs.
But the impact is more pronounced in Q2 as you know they were announced in August and implemented on September 1st.
That doesn't give us much time to manage any of the levers within our overall portfolio as we look out to the balance of the year.
Where a lot of levers within our portfolio weve manage them overtime, we're a big proponent of free and fair trade and Thats because tariffs have always been part of the financial equation at Nike, So with a little bit of time.
We have a lot of levers we can work with from sourcing to other levers so the impact of tariffs as most significant in Q2.
And then as you.
Likely inferred from our guidance, yes, we expect.
Slightly greater gross margin expansion in Q3, and four as compared to two.
Really appreciate that color my quick follow up it's just regarding the product pipelines.
You spoke about a lot of the exciting platforms that are delivering results for you already.
Just curious if theres a way that you could maybe rank for us.
Your excitement or how you think about.
The platforms in new areas of innovation that will drive.
The strong high single digit revenue gains over the balance of the year as we think about joy ride and.
Airmax now moving to 200.
What you're doing in womens just any color on.
That would be helpful. Thank you.
Yes, absolutely.
The excitement meter is very high over this next year, we sort of look at the Summer Olympics is term papers do and.
And.
So we're this is a time, where we bring our.
Best work front, not only from a brand standpoint, but certainly from a product standpoint and in this case, both performance based innovation that actually leverages.
Two sport style or sportswear, so we feel like the portfolio of innovation or the pipeline of innovation is more.
Complete I always talked about the complete offense and that's why we lineup innovation, it's against our complete offense.
Sure women's.
I would include core.
And that though more accessibly priced innovation.
Coming in the.
Particularly in the spring summer.
Seasons, we've got incredible against sportswear, we've got performance I've been here for a long time at Nike and some of the most incredible breakthroughs and performance.
For the for the Tokyo Olympics building on some of the great platforms that weve learned how to leverage more completely.
That includes the cadence of the.
Innovations, how we manage the lifecycle of innovations and how we again leverage that across multiple categories. Both in performance and sportswear, so incredibly high level of.
Excitement I would add we've talked about adapt it still on the early stages.
Nike fit.
We'll include both powered adaptive systems as well as.
Non powered hands free systems, and that's incredibly exciting as we bring innovation to more.
Make innovation more accessible to more people women's of course will continue to be a high priority, we're shifting resources to amp up our innovation agenda, there feel really good both footwear and apparel.
Our kids.
I mentioned is incredible category to leverage the innovation that we have a more completely across the portfolio. So thats a major.
Source for us for growth as well.
So I think the opportunities ahead or.
As bright as I've ever seen him so very both.
Sounds like okay operator.
Our next questions. Thanks, Omar Saad with Evercore ISI Your line is open.
Hey, Thanks for taking my question Congrats another great quarter I wanted to ask my first question. Another follow up in North America, the 30% DTC growth. Obviously, that's a huge number you smaller piece of the business you talked about that things still kind of being offset by intentional reduction and undifferentiated wholesale Nick we think about when that DTC.
See kind of the time horizon looking out when the DTC starts to become a material mover for the overall north American market or you get to a point, where you're happy with.
With the kind of wholesale footprint and then have a follow up another follow up for Mark as well. Thanks.
Yes.
Omar we at our Investor Day, a couple of years ago talked about our business.
Being 30% or greater digital owned and partner it over the next five years.
That's a global.
Measure of success, but I would say north America's in that same range in terms of the from too.
So we see digital alone not just not necessarily all Nike rack, but digital alone being in that range and as we've discussed we see that continuing to build beyond that and potentially accelerating towards that date based on the incredible momentum that we've had as I noted that was an accelerated level of growth.
In digital and Q1.
So much like we discussed at our Investor day, two years ago. Our view is that over the next five years.
Sustainable profitable growth in North America would equate to a mid single digit range of growth.
But what we're really excited about as we think the next five years in North America is building the platform for the long term future North America is the marketplace.
Where the most reshaping and transformation.
As required and frankly is is underway.
Got it got it and then you know stepping back I don't think and watching the different components of the company performed year after year quarter to quarter now I've never seen such consistent positive performance across categories regions price points channels age groups genders.
Maybe help us understand.
Thank you obviously from performed exceptionally in the past that maybe you can help us understand or give us insight into why that kind of broader platform.
Seems to be performing so much more consistently them has historically thanks.
I think we're actually.
A lot smarter about how we.
Not only where we invest in terms of new product innovation.
But as I said, we'd better leverage that innovation across.
Multiple categories, and then up and down the price points spectrum across genders.
And I always.
Fixate on complete offense, it's a and it's one of those areas, where you go no matter, how well we're doing across every across all those dimensions, we see more opportunity areas, where we have we're underpenetrated, where we have what we call outsized opportunities we've talked about apparel talked about women's.
Digital international as examples, but even in our foundational business I think we've got tremendous upside ahead in terms of core striking that right balance across the complete.
Portfolio or the complete offense as we call it is a never ending.
Challenge for us or opportunity when they put it that way.
So the innovation that we're putting out there I think we're just getting better at how we are leveraging that across.
The entire offense and I feel like this is this has always been a competitive advantage for Nike is sort of bran energy, but also tremendous growth for us and I've never seen.
Our Bennett Nike during a period, where theres such robust.
And strong innovation, that's relevant to two to consumers across the portfolio that said I'd be the first one as people here at Nike would tell you to.
Say that we have a lot more opportunity.
So.
The challenge or the opportunity is to focus on the things that matter. The most we have unlimited opportunities.
The fixation with a focus on the things that are really going to drive the needle from a consumer standpoint, there are really going to be relevant and ultimately drive growth is what creates success.
And Omar I'd, just add maybe from a framework perspective or framing up how you might think about it.
Our key categories and our 12 key cities in our 10 key countries are really the where in terms of growth.
Opportunity is for Nike.
The consumer direct offenses, the how and it applies to all of those categories. All the cities and all those countries and that's about doubling the cadence and impact of innovation being faster to market. So thats two X speed.
And then being more directly connected to consumers and and there isn't any dimension of our offense that complete offense that mark refers to.
That isn't.
In his unrest can be positively impacted by those strategic principles.
And then of course, the over over arching or maybe you'd say underlying fuel is this digital transformation and Nike, it's impacting everything we do from how we create product.
How we assess demand and planned supply all the way through to consumer services through the Nike App that are now not just in our digital offerings, but they're in our retail stores an increase when our partner doors. So it's really a strategy that consumer knocked off insights about impacting every dimension of the portfolio, yes, I want to put an exclamation point on that.
The digital capabilities that we're creating.
And invest in investing in are really going to make us a better innovation company understanding the consumer serving the consumer leveraging the innovation that we invest and it's all making us better I see so much more opportunity.
From being advancing our digital capabilities going forward.
Okay, operator, maybe what time for one more call.
Last question is from Jim Duffy with Stifel Nicholas go.
Oh. Thank you. Thanks for squeezing me in a couple of questions for me on the gross margin any as we think about gross margin in the context of historical performance or you've got pricing power afforded by innovations structural shifts from outgrowth of direct reshaping the north American marketplace.
And then some more nuance factors that can help margin like leveraging select and Nike fit and so forth.
No reason to think that Nike gross margins shouldn't go past past peaks in the near future.
It seems like a lot of good things are coming together.
The short answer is no I think many of the drivers you rent mentioned and some others.
Our long term drivers of expansion in margin Nike direct is a significantly higher margin business than the wholesale business and.
As we just touched on as part of Omars question, we see digital indirect being increasingly larger part of our business long term.
The price value equation is also an opportunity to expand margin and as Mark just touched on we've never been more excited about the innovation pipeline, we're bringing to market and and that means bringing tangible value to the consumer.
You're in your own question you touched on a huge opportunity at our Investor day, we talked about that potentially significant impact from having a.
A greater mix of full price sell through and lower markdowns and close out and select is it just is spot on in terms of the capabilities.
We had planned to build organically, but.
Are now able to start leveraging thanks to this acquisition.
And drive that if I was to tell you the one thing.
That we're not as pleased about or the FX headwinds that have impacted us as I touched on on the call over the last four years, we've got about a $3 billion headwind on revenue and a 1 billion and a half dollar or more headwind on profitability and of course, if we could add those back we would that would be pretty.
And expansion in our operating margin.
Thats more reflective of what we're doing from an operating perspective.
But again the short answer is yes, we see.
Some pretty systemic drivers of gross margin expansion over the short medium and long term.
And then as it relates to FX in gross margin to what extent or more favorable headroom to a positive contributor to gross margin in the first quarter during fiscal 2000.
Yes, the way I would think about FX in fiscal year 20, as we came into the year.
Expecting FX to be sort of neutral to slightly favorable.
It's now a net negative from an EBIT perspective again thats in the context of our slightly improved guidance. So we are thrilled that our operational performance just continues to be so strong that its offsetting that.
Over the balance of the year, one thing to keep in mind is it's somewhat difficult to predict not to predict that to model. The impact of FX you have very volatile actual spot rates certainly the renminbi is at the top of the list in that regard of late.
The timing of our hedges over the course of the year as well as the timing, which is a kind of backward looking timing aspect in terms of when we lock in product cost.
So I think that the easiest way for me to say it is.
FX will be about three points negative headwind on revenue as I spoke about it my guidance it'll be a slightly negative impact on margin over the course of the full fiscal year and it's now shifted to a slightly negative impact from an EBIT perspective.
So we're hopeful that those are more transient impacts and then as we go forward and we get more certainty with respect to trade.
And some resolution.
That that maybe we see things turn from a headwind into a tailwind.
Okay. Thank you Jim.
Thank you everybody detail.
Thank you for joining us on the call today, and we look forward to speaking to you next quarter take care Bye bye.
This concludes todays conference call you may now disconnect.