Nike (NKE) Q1 2024 results

Nike reported sales on Thursday that fell short of Wall Street’s sales expectations for the first time in two years, but beat profit and gross margin estimates, sending its shares soaring in after-hours trading.

Here’s how the sneaker giant performed in its fiscal first quarter compared to Wall Street’s expectations, based on an analyst survey from LSEG, formerly known as Refinitiv:

• Earnings per share: 94 cents versus 75 cents expected
• Revenue: $12.94 billion vs. expected $12.98 billion

The company’s reported net income for the three-month period ended Aug. 31 was $1.45 billion, or 94 cents per share, compared with $1.47 billion, or 93 cents per share, a year earlier.

Revenue rose to $12.94 billion, up about 2% from $12.69 billion a year ago. According to LSEG, quarterly revenue was just below the $12.98 billion expected by analysts.

Nike shares rose about 8% in extended trading on Thursday.

The retailer maintained its full-year forecast of mid-single-digit sales growth and gross margin expansion of 1.4 to 1.6 percentage points.

“We are closely monitoring the operating environment, including foreign exchange rates, consumer demand over the holiday season and our wholesale order backlog for the second half of the year,” Chief Financial Officer Matthew Friend said in a call with analysts.

“Given the promotional environment, we are cautiously planning for modest discount improvements for the remainder of the year,” he added.

For the second quarter, Nike expects slightly higher sales growth than last year and an increase in gross margins of about 1 percentage point compared to last year.

Investors were intensely focused on Nike’s recovery in China, its relationship with its wholesale partners and how the resumption of student loan payments will affect sales.

They’re also keen to see Nike’s margins recover after bloated inventory, high promotions and supply chain problems contributed to lower profits in recent quarters.

According to StreetAccount, Nike’s gross margin fell about 0.1 percentage points to 44.2% during the quarter, but was above the 43.7% expected by analysts. The company attributed the decline in gross margin to higher product costs and foreign exchange rates, but these trends were offset by price increases that contributed to the increase in earnings.

According to StreetAccount, sales in China rose 5% from the same period last year to $1.7 billion, falling short of analysts’ expectations of $1.8 billion.

In the previous quarter ended May 31, Nike reported a 16% increase in China sales compared to the same period last year. However, the numbers could not be compared with simple comparisons as the region was still under Covid-related lockdown measures last year.

While Nike remains bullish on China, the region’s economic recovery has been mixed so far. After a sluggish July, retail sales rebounded 4.6% in August from a year earlier, beating Reuters forecasts of 3% growth.

“We are happy with the market there and our position,” said CEO John Donahoe, adding that he had traveled to China twice in the last four months. “Honestly, a few things stand out. Firstly, sport is back in China, you can just feel it, and that gives us great confidence in the future and the Chinese consumer in our segment, regardless of the macroeconomic outlook there.”

Nike reported sales increases in all regions except North America, its largest market. According to StreetAccount, North American sales fell 2% from the same period last year to $5.42 billion, just above the $5.39 billion expected by analysts.

In Europe, the Middle East and Africa, sales rose 8% to $3.61 billion. In comparison, analysts had expected $3.51 billion. According to StreetAccount, sales at its Latin America and Asia Pacific unit rose 2% to $1.57 billion, falling just short of the $1.59 billion analysts had expected.

The Converse brand, on the other hand, fell well short of expectations for the second quarter in a row. Revenue was $588 million, down 9% from the same period last year. According to StreetAccount, analysts had expected sales of around $660 million.

Nike’s direct channel, which includes its own stores and digital channel, was the driving force behind the retailer’s growth during the quarter, posting a 6% year-over-year increase. In June, the company noted that shoppers were flocking to its stores through its digital channels, suggesting consumers are moving closer to pre-pandemic shopping habits.

“We continue to see that consumers want to engage directly and personally with our brands, and in fact, member engagement in our direct business is up double-digit year-over-year, with average order values ​​increasing,” Friend said.

“Our stores delivered a particularly strong quarter, with a double-digit year-over-year increase in foot traffic and an increasing share of our members in our business as consumers moved from our digital to physical channels… Our team was adept at transitioning inventory “To achieve greater complete price sales across our entire store fleet,” he said.

When it comes to wholesale sales, Nike’s relationships with these partners have been difficult. As the company has shifted to a direct-to-consumer model, it has focused on increasing sales online and in its stores at the expense of its wholesale customers.

However, as Nike struggled with excess inventory throughout 2023, the company relied on these partners to fulfill these goods. It has now restored its relationship with both of them Macy’s And DSW – Accounts it had previously shortened in favor of its DTC strategy.

Some analysts expected Nike’s wholesale sales to be sluggish during the quarter as excess inventory posed a problem across the retail industry – and some wholesalers were more precise with their orders to avoid a further backlog.

Wholesale sales in the quarter were flat at $7 billion compared to the same period last year.

Both Donahoe and Friend made it clear to analysts that Nike is ready to reach customers across all channels, including through wholesalers and directly. The retailer shouted Dick’s Sporting Goods as one of its key partners and noted that the company is still in the process of turning its business around chestwhich reported declining sales and profits for two quarters in a row.

Despite the change in how it works with wholesalers, Nike insisted that direct sales would pave the way for its future growth.

“Ultimately, we have a segmented portfolio of strong partners across all price ranges and channels. No single partner represents more than a mid-single-digit portion of Nike’s overall business,” Friend said.

“While the ultimate destination of digital and direct is not as clear, we believe we will be a more direct and digital company as well as a more profitable company,” he said. “This also creates opportunities for the channel mix and channel profitability.”

Meanwhile, inventories fell 10% to $8.7 billion. The decline was due to a decline in units but was offset by product mix and higher manufacturing and production costs.

“Overall, we are very pleased with the level of inventory in the market relative to retail sales that we are seeing as we begin to increase wholesale sales volumes in our second half,” Friend said.

With inflation rates high for decades, consumers have backed off on clothing and footwear purchases. With student loan payments about to resume, some analysts expect these sectors to be hit even harder.

Jefferies conducted a survey of U.S. consumer spending and found that 54% of respondents plan to spend less on clothing and accessories. Meanwhile, 46% plan to spend less on shoes, which isn’t a good sign for Nike.

It’s too early to estimate the impact of student loan payments on Nike. The first quarter ended at the end of August and payments will not resume until October.

During the quarter, footwear sales rose 4% to $8.4 billion, accounting for about 68% of Nike’s total sales. The apparel sector fell 1% to $3.4 billion.

Correction: Nike’s gross margin fell 0.1 percentage points. An earlier version of this story misstated that number.