Dive Brief:
- Nike’s third quarter revenues were flat year over year at about $11.3 billion, according to a Tuesday press release. Wholesale revenue increased 5% to $6.5 billion while direct revenue dropped 4% to $4.5 billion.
- Converse brand revenue declined 35% to $264 million and Nike brand revenue rose 1% to $11 billion. The company’s gross margin decreased 130 basis points to 40.2% and net income fell 35% to $520 million.
- Looking ahead, Nike expects Q4 revenues to drop 2% to 4% year over year, Executive Vice President and Chief Financial Officer Matthew Friend told analysts on a Tuesday call. And in providing more forward guidance than usual at this point in the fiscal year, Friend also said Nike expects full-year earnings to be “flattish” and revenues to drop in the low single digits with gains in North America offset by declines in Greater China.
Dive Insight:
Nike’s leadership team is “not satisfied” about its comeback yet and acknowledged it’s taking longer than expected, CEO Elliott Hill said on Tuesday’s call. Analysts agreed.
Though it’s making the right moves to redirect business, “the turnaround is progressing at a slow pace and there remains significant work to revitalize the entire product portfolio and right size its international businesses,” Telsey Advisory Group analysts led by Cristina Fernández said in a Wednesday note.
The athletics company reported Q3 revenue in North America grew 3% on a reported basis, helping to offset a 7% drop in Greater China (or a 10% decline excluding currency changes). Nike’s EMEA region reported a 2% bump, but 7% drop on a constant currency basis while Asia Pacific and Latin America revenue increased 1% on a reported basis and dropped 2% in constant currency.
Patience is needed, but running thin for some industry experts.
“Strong results in running and [North America] were the reasons for our patience but with the sales inflection now nine months away, we see little room for multiple expansion, leading to our downgrade to Neutral,” Bank of America analysts said in a Wednesday note.
During the quarter, Nike continued efforts to improve long-term profitability, stepping back from some investments made during the COVID-19 pandemic. A $230 million charge Nike incurred during Q3 was due to employee-related severance costs, primarily in supply chain and technology, Friend explained on the call.
Certain pandemic investments in technology and its supply chain were meant to support Nike’s direct business. Now that it has become more holistic about distribution channels, the brand has taken steps to reset its cost base, specifically related to reducing costs in its supply chain. The company also worked to rightsize operating costs within Converse in Q3.
Nike’s Q3 inventory was down 1% at $7.5 billion, mostly reflective of a decrease in units and product mix shift. Further removing unhealthy inventory in Nike’s classic footwear franchises from the marketplace was “one of the most important” actions taken during the quarter, Hill said. It weighed on the period with a five-point headwind to reported results, but was both intentional and necessary, per the executive.
By the end of the calendar year, Nike expects to have finished its Win Now strategic actions, Hill added.
“While some of the key aspects of the ‘Win Now’ strategy make sense (refocus on sport, wholesale, marketing, etc.), the external environment is highly challenging, and the prior CEO may have dug the company into a bigger hole than it seemed,” Needham analysts led by Tom Nikic said in a note Wednesday.
