NIKE : Q2FY24 EARNINGS CALL OFFICIAL TRANSCRIPT

FY24 Q2 Earnings Release Conference Call Transcript

December 21, 2023

This transcript is provided by NIKE, Inc. only for reference purposes. Information presented was current only as of the date of the conference call and may have subsequently changed materially. NIKE, Inc. does not update or delete outdated information contained in this transcript and disclaims any obligation to do so.

[OPERATOR]

Good afternoon, everyone. Welcome to NIKE, Inc. Fiscal 2024 Second Quarter Conference Call. For those who want to reference today's press release, you'll find it at investors.nike.com. Leading today's call is Paul Trussell, Vice President of Corporate Finance and Treasurer. Now I would like to turn the call over to Paul Trussell.

[PAUL TRUSSELL]

Thank you, operator. Hello, everyone, and thank you for joining us today to discuss NIKE, Inc.'s fiscal 2024 second quarter results. Joining us on today's call will be NIKE, Inc. President and CEO, John Donahoe and our CFO, Matt Friend.

Before we begin, 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 NIKE's reports filed with the SEC. In addition, participants may discuss non- GAAP financial measures and nonpublic financial and statistical information. Please refer to NIKE's earnings press release or NIKE's website, investors.nike.com, for comparable GAAP measures and quantitative reconciliations.

All growth comparisons on the call today are presented on a year-over-year basis and are currency-neutral unless otherwise noted. We will start with prepared remarks and then open up for questions. We would like to allow as many of you to ask questions as possible in our allotted time so we would appreciate you limiting your initial question to one. Thanks for your cooperation on this.

I'll now turn the call over to NIKE Inc. President and CEO, John Donahoe.

[JOHN DONAHOE]

Thank you, Paul, and hello to everyone on today's call. NIKE is the market leader in sport. It's a role we take seriously. We create innovation that pushes human potential. We expand the world of sport, inviting new generations all around the globe into the community of athletes. And we feel the energy and excitement of sport itself, both on a global stage and on the ground in community and cities everywhere.

One thing that distinguishes NIKE more than any other brand in the world is that we get our inspiration from athletes and sport. And it was a great quarter for NIKE and the athletes who inspire us. Here's just a few examples. Kelvin Kiptum broke the Marathon World Record wearing the Alphafly 3, which built on our proprietary system of speed that continues to set the standard. A'ja Wilson earned WNBA Finals MVP after leading the Las Vegas Aces to their second straight title. LeBron James and Anthony Davis led the Lakers to the first-ever NBA in-season tournament championship. Aitana Bonmati won the women's Ballon d'Or. And Sha'Carri Richardson was named USA Track and Field Female Athlete of the Year.

Being inspired by world-class athletes like these keeps us focused on what's redefining what's possible. That's what sets us apart. No one changes the game like NIKE, from our breakthrough innovation for toddlers with the Swoosh 1 shoe to being able to elevate beloved product like Kobe's into an entire franchise to NBA players increasingly choosing to play in the Sabrina 1, a shoe deeply resonating across gender. Again and again, it's NIKE that pushes what's possible to break the status quo.

Now in addition to creating best-in-class innovation, great companies must also focus on strong execution. And that's what we did in Q2, delivering our second $13 billion quarter. This went on top of last year's extraordinary 27% growth. And we drove more than 20% growth in earnings per share this quarter. Simply put, this is the result of relentless execution by our team in an uneven macro backdrop.

Looking at holiday, we outpaced the industry, driving growth of close to 10%. NIKE Digital had its strongest Black Friday week ever, and a record number of consumers shopped in our stores over the long Thanksgiving weekend. And in Greater China, brick-and-mortar grew double digits during National Day holiday, and NIKE once again outperformed the industry during 11.11 as the #1 sport brand on Tmall.

These holiday results, when combined with Q2's earnings growth and our continued healthy inventory showcase how we're executing against our priorities even in the face of a highly promotional environment and increasing macro volatility.

Last quarter, I talked about how we're getting back on our front foot, accelerating the flow of our innovation and executing with excellence across our winning formula of innovative product times distinctive storytelling times differentiated marketplace experiences. Let me give you a few examples of where we've demonstrated progress.

Within our Running business, we're driving deeper connections with the running community. We recently launched our most innovative trail shoe yet, the Ultrafly at the world's Pinnacle Trail Race. We hosted over 1,000 runners for a uniquely NIKE experience, which drove energy and positive feedback from both elite runners and the broader trail running community. And we partnered with top RSG doors for a series of community activations centered on the Ultrafly and other key products like Peg Trail and Wildhorse. All this led to growth of over 20% in our trail running portfolio for the quarter.

In Global Football, we're fueling growth through strategic Only NIKE Athlete storytelling. As you know, we have a 3-silo construct in men's football, having paired Erling Haaland with the Phantom Boot, Jamal Musiala with the Tempo and Kylian Mbappé and Marcus Rashford leading the Mercurial. With the game's greatest showcasing our product superiority and our seamless execution to pull this innovation through the marketplace, all 3 franchises are up strong double digits, even lapping last year's strong performance with the Men's World Cup.

And in Lifestyle, we're driving a women's-ledgeo-by-geo marketing acceleration behind V2K, a standout shoe in our fast-growing retro running line. It's being fueled by a tongue-in-cheek campaign that's resonated with this consumer and a creator partnership strategy that's delivered head-to-toe style inspiration into her preferred media channels. All this catalyzed the V2K to very strong sell-through in the quarter with exciting potential for this style still to come.

All 3 of these examples offer an early indication of the growth we aspire to. We have real opportunity to drive progress across many dimensions of our business, and that's our priority moving forward.

At NIKE, we like to say we're on the offense always. When we see something that needs solving, we don't wait around. We solve it. And so as we look to the future, we know where we must focus.

Three areas will always drive our distinction and competitive separation: product innovation, storytelling that connects and marketplace execution. When NIKE is at its best, we create impact on a scale that can't be matched, grounded in sport, centered in youth culture, inviting consumers around the world into our brands.

The second half of fiscal '24 represents the start of a multiyear product innovation cycle that will introduce new franchises, concepts and platforms, elevating our full portfolio. And while there'll be some key moments in the second half, this new innovation cycle will take some time to fully ramp up, given our size and scale.

Now we know we have an outsized opportunity to drive long-term profitable growth and with areas of significant growth potential like Women's, Jordan Brand and Running, each of which requires focused investment to reach full potential.

We also must get deeper traction on our key speed initiatives. Today, we know we must be faster, increasing the pace of innovation, increasing the pace of market to consumer and increasing our agility and responsiveness. To drive this, we'll embrace a significant savings plan to create investment capacity to fuel profitable growth at speed and scale. Areas of potential savings include simplifying our product portfolio, increasing automation and the use of technology, streamlining our organization and leveraging our scale to drive greater efficiency.

Let me just acknowledge that this work will be led with respect and thoughtfulness as we move to improve the ways in which we work and build a leaner and stronger company for the future.

Matt will provide more detail on this later in the call.

Now we've made some progress as we look to accelerate growth in our business. And I want to walk through 2 key areas today where we're investing for future and further growth, our Women's business and Jordan Brand. Both Women's and Jordan are opportunities that are grounded in performance and the ability to drive culture and lifestyle, with the latter providing even greater scale and growth opportunities.

First, let's discuss Women's, which is already a roughly $9 billion business, and that's just a NIKE brand, excluding Jordan and Converse. Our Women's business has grown high single digits on average over the past 3 years. And while we're encouraged by this progress, we now have line of sight into what we believe is the best plan we've ever had to accelerate growth in Women's. Our plan makes us even more confident in serving her through sport and style.

Today, about 40% of our members are women consumers. They make up a bigger proportion of new members, and their demand per member is growing faster. We see great opportunity to better serve this consumer by responding to her needs across the spectrum of performance and lifestyle.

Let me first touch on performance, where we're focused on innovating for her to create new opportunities we did not previously serve. We've now built a collection of bras and leggings across different price points. This includes our statement leggings, Zenvy, Go, and Universa, all of which are above $100, a price point we were not previously in. These leggings serve her with a whole new approach to fit and comfort, thanks to new material innovation. And we're holistically elevating our retail, presentation and storytelling to help her find the right product for her exact needs. More and more women are joining our brand by purchasing these leggings. In fact, all told, statement leggings fueled our fitness apparel growth in Women's for the quarter.

And in footwear, we're seeing very strong sell-through for the Motiva, a shoe with a comfortable and distinctive design that shows how we've dimensionalized performance into walking. And Free Metcon is also performing very well, serving her need for versatility by expanding a fitness shoe into comfortable everyday wear. And at the same time, when we look at women's lifestyle, we've established our leadership position in women's sportswear through a focus on style and comfort with iconic franchises like Air Force 1, Dunk, Court and Fleece, all of which drive continued momentum with new energy and design.

And we're also fueling the rapidly growing retro running trend with our portfolio styles like the Vomero 5, V2K and P-6000. In fact, even with us sequentially increasing the supply, demand for this entire line is so strong, there remains tremendous opportunity to grow further. We're excited to scale these styles over the next few seasons. And so today, we're taking the right steps to serve our women consumer with energy and sharpness. And we're fully aligned in accelerating our offense to raise our game with an eye to the immense opportunity we see going forward.

Now let's discuss Jordan Brand, which is on a clear path to become the #2 footwear brand in North America, the biggest brand not named NIKE. We're fueling the strong momentum in Jordan by growing a Monday to Friday business with a more diverse product portfolio on top of our very successful launch business. Over the past few years, we've driven strong growth in the Jordan business by bringing more dimensions into the brand. We're proving that Jordan can be more than retro, more than footwear, more than men's and more than North

America. An approach to growth will continue to bring life and growth over the coming years.

And this is just the beginning for Jordan Brand as we see even greater growth potential through our plan for deeper investment, which for Jordan will come in areas like merchandising, marketing and marketplace. For instance, today, Jordan Brand performance product is outpacing overall growth with Jordan reigniting its Encore presence in basketball with the strongest signature portfolio ever as Tatum, Luka and Zion push the brand to new heights, both on and off the court.

Jordan is also expanding beyond basketball into, for example, Golf, Global Football and American Football. And Jordan Women's and Kids continues to lead the brand's overall growth. Women's and Kids business share within Jordan have increased 7 points over the past 3 years. And Jordan Apparel is now a roughly $1 billion business, averaging almost 20% growth over the past 3 years. We're also building new dimensions in the iconic AJ1 franchise across high, mid and low as well as through women's-led dimensions such as the ELEVATE and the Brooklyn Boot.

And I'd also like to spotlight Jordan's strategic approach and success with our Remix footwear line, which, again, has already surpassed the $1 billion annual revenue mark with high double- digit growth. Led by styles like the Max Aura and the Stadium 90, Remix has increased Jordan's accessibility through more affordable price points and an expanded distribution with key partners.

And last but not least, Jordan's share from international markets continues to expand as we bring the brand to global cities in an authentic way. This has shown up as we pilot the Jordan Destination Tab in the NIKE commerce app in EMEA with strong early results. And the Jordan World of Flight doors in Milan, Tokyo and Seoul have emerged as the Company's most productive retail concepts. The sky is the limit for Jordan as we continue to invest and explore what's possible for one of the world's leading brands.

In the end, we are moving with confidence against the opportunities we see. And looking ahead to the next calendar year, we remain single-minded in our focus to compete and win. I wouldn't trade our position with anyone. And with that, I'll turn the call over to Matt.

[MATT FRIEND]

Thanks, John, and hello to everyone on the call. NIKE's second quarter financial performance reflected our proactive marketplace management and disciplined execution with tremendous delivery by our teams in a dynamic environment. Revenue was up slightly versus the prior year, growing 1% on a reported basis as we compare to 17% reported and 27% currency-neutral revenue growth 1 year ago. Gross margins expanded despite a highly promotional marketplace, and combined with disciplined SG&A management, earnings per share and free cash flow accelerated.

As I said last quarter, we believe we are turning the corner in driving more profitable and sustainable growth. At the same time, there were a number of puts and takes in the quarter. So before I walk through our financial results, let me share some perspective on our performance in light of current macro and consumer trends as well as additional insight into our business direction.

Now as you recall, we moved proactively in the prior year to liquidate excess inventory and reduce wholesale sell-in for the first half of fiscal '24. And while this dampened our reported revenue growth through Q2, total retail sales in the quarter grew across the marketplace on top of double-digit growth in the prior year. ASPs were up across both footwear and apparel and AURs grew across channels.

Average order values among NIKE members increased versus the prior year. Our higher- priced products, in particular, have been resilient with our $100-plus footwear models driving strong growth in units sold across the marketplace. And overall, we have maintained lower markdown rates than many of our competitors.

In the most impactful consumer shopping moments, NIKE's brand strength created even greater separation. We delivered market-leading results in Greater China in 11.11. And over the Black Friday and Cyber Week period, NIKE Direct grew approximately 10% across North America, EMEA and APLA. In Q2, NIKE Direct once again led our growth and wholesale shipments exceeded our expectations. Having said that, we are seeing indications of more cautious consumer behavior around the world in an uneven macro environment.

Total retail sales across the marketplace fell short of our expectations with softer demand outside of the key consumer moments. While NIKE's store traffic continued to grow, we saw softness in digital traffic and higher levels of promotional activity across the marketplace. As a result, we are adjusting our channel growth plans for the remainder of the year.

Looking to our product portfolio, our top franchises continue to drive strong full price sales, but we intentionally manage the life cycle of these models across the marketplace for long-term value. Given the promotional environment and the cautious consumer behavior that we are seeing, we are stepping up our plans to reduce marketplace supply of our key franchises.

Our goal is to focus NIKE's brand heat and energy on what is new as we accelerate our product innovation cycle. We have seen encouraging signs from recent consumer activations around some of NIKE's latest innovations and newness, and we intend to accelerate our pace through the Paris Olympics and beyond. While this will initially take some time, we are confident in our pipeline and the product journeys, stories and consumer energy to come.

Now as you heard from John, our priority is to drive sustainable and profitable long-term growth while building a faster, more efficient NIKE. Since fiscal '19, our investments in accelerating NIKE's Consumer Direct vision have created new operating capabilities, added tens of millions of new members to our member base and delivered a return of more than $12 billion of incremental revenue. However, we have also added complexity and inefficiency. In this competitive environment, we need to accelerate our pace of innovation, elevate our marketplace

experiences, maximize the impact of our storytelling and increase our speed and responsiveness, all in service of the consumer.

To do this, we are creating investment capacity to fuel NIKE's next phase of innovation, growth and profitability. We are identifying opportunities across the company to deliver up to $2 billion in cumulative cost savings over the next 3 years, both up and down our P&L and across our value chain. Some examples include simplifying our product assortment, improving supply chain efficiency, leveraging our scale to lower the marginal cost of operations, increasing automation and speed from data and technology, streamlining our organizational structure, reducing management layers and enhancing our procurement capabilities.

And as we look to drive greater efficiency and productivity, we will reallocate and invest the majority of these savings to deliver the greatest consumer impact on our largest growth opportunities. Ultimately, we believe that building a faster and more efficient NIKE will accelerate future growth and innovation and deliver long-term profitability, creating value for years to come. We will continue sharing updates over the coming quarters.

Now let me turn to our NIKE, Inc. second quarter results. In Q2, NIKE, Inc. revenue was up 1% on a reported basis and down 1% on a currency-neutral basis, following our strong top line growth 1 year ago. NIKE Direct grew 4% with NIKE stores up 9% and NIKE Digital up 1% while wholesale declined 3%. Gross margins expanded 170 basis points to 44.6% on a reported basis, driven by strategic pricing actions, lower ocean freight rates, improved supply chain efficiency and modest markdown improvements, partially offset by higher product input costs. This included impact from approximately 60 basis points of unfavorable changes in net foreign currency exchange rates.

SG&A grew 1% on a reported basis, favorable to our expectations through disciplined expense management and some shifts in timing of spending. Our effective tax rate for the quarter was 17.9% compared to 19.3% for the same period last year. Diluted earnings per share was $1.03, up 21% year- over-year. NIKE inventory dollars are down 14% versus the prior year and down high single digits versus the prior quarter. In total, NIKE inventory dollars