Nike to partner with Stitch Fix, expand Amazon tie-up

Dive Brief:

NIKE, Inc. on Thursday reported that Q2 2018 revenue rose 5% (or 3% on a currency-neutral basis) to $8.6 billion. Gross margin fell 120 basis points year over year to 43%, as higher average selling prices were more than offset by unfavorable changes in foreign currency exchange rates and, to a lesser extent, higher product costs per unit, according to a company press release.
Diluted earnings in the quarter dropped 8% from the year-ago period to 46 cents per share, due primarily to a decline in gross margin and higher selling and administrative expense, which offset solid revenue growth, a lower tax rate and a lower average share count, the company also said.
This spring in the U.S., the company will run a pilot with online styling and delivery service Stitch Fix with personalized women's merchandise, and will expand its pilot with Amazon, which is "going well," CEO Mark Parker told analysts, according to a transcript from Seeking Alpha.

Dive Insight:

Overseas markets continue to rescue Nike, as its North American sales remained under pressure in the second quarter.

By brand, Nike brand revenues rose 4% (on a constant-currency basis) to $8.1 billion, driven by Europe, the Middle East and Africa, Greater China, and Asia Pacific Latin America, including growth in the sportswear and basketball categories. Converse revenue fell 4% to $408 million, as international growth was more than offset by declines in North America. Inventories as of Nov. 30 were up 6% to $5.3 billion, from the same point last year, driven primarily by changes in foreign currency exchange rates and, to a lesser extent, an increase in Nike Brand units.

"Though 2Q saw better than expected gross margin and international sales performances, the essential NA market saw further sales deceleration and a turn to contracting margins," Wedbush analyst Christopher Svezia said in a note emailed to Retail Dive. "[T]he dynamic of negatives outweighing the positives persists further into FY18 while we await the improved product pipeline.”

Analysts from Wedbush and Jane Hali & Associates held their assessment to "neutral" in light of ongoing struggles in North America. Parker, meanwhile, promised more traction in the second half of the company's fiscal year. "We're entering the second half of the year with a wave of new products and concepts," he said. "Consumers want fresh, innovative product and they want choice, and right now, our innovation cycle is delivering against those demands."

Jane Hali analysts mostly backed that up, saying that a recent visit to the New York SOHO store revealed a more stylized presentation in women's apparel like yogwear. "JHA believes fashion is the future of athleisure," the analysts said in a note emailed to Retail Dive, adding, "We see [Nike]'s innovation through new fabrics, messaging (i.e. inclusivity), digital and store experiences."

Nike's customer engagement is strong online and off, and extends beyond its boost in women's apparel, according to Jane Hali. "Their roster of influencers and celebrities is a strong mix," according to Jane Hali's note. "Their online experience is excellent across the various regions. Their app experience is also outstanding. We also believe their new loyalty program (NikePlus Unlocks) has been well executed and the perks are a bonus for loyal consumers. As we visit the stores across the US and Europe we find them to be a unique and a unified experience."

But the company's investments will take a toll, and executives scaled back revenue expectations.

For the full year, the company continues to expect reported revenue growth in the mid single-digit range, as well as a contraction of 50 to 100 basis points in gross margin. In Q3, it expects reported revenue growth at or slightly below the rate of reported revenue growth in Q2, with the timing of new product launches coming later in the quarter, according to CFO Andy Campion, speaking on the company's conference call.