NIKE Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
June 26, 2022

There are 8 speakers on the call.

Operator

Good afternoon, everyone. Welcome to NIKE, Inc. Fiscal 2022 Fourth Quarter Conference Call. For those who want to reference today's press release, you'll find it at investors. Nike.com.

Operator

Leading today's call is Paul Trussell, VP of Investor Relations and Strategic Finance. Investor Relations. Before I turn the call over to Mr. Trussell, 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 uncertainties are detailed in the reports filed with the SEC, including the annual report filed on Form 10 ks.

Operator

Investor Relations. Some forward looking statements may concern expectations of future revenue growth or gross margin. In addition, investments 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 foreign exchange fluctuations. Participants may also make references to other non public financial and statistical information and non GAAP financial measures.

Operator

To the extent non public financial and statistical information is discussed. Presentations of comparable GAAP measures and quantitative reconciliations will be made available at NIKE's website, investors. Nike.com. Now I'd like to turn the call over to Paul Trussell.

Speaker 1

Investor Relations. Thank you, operator. Hello, everyone, and thank you for joining us today to discuss NIKE, Inc. Fiscal 2022 Investor Relations and

Speaker 2

Financial Results.

Speaker 1

As the 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 or at our website investors. Nike.com. Joining us on today's call will be Nike Inc. President and CEO, John Donahoe and our Chief Financial Officer, Matt Friend.

Speaker 1

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

Speaker 2

Thank you, Paul, and hello to everyone on today's call. This quarter, Nike celebrated our 50th anniversary. On May 1, 1972, Nike became its own company, a new standalone brand with its own mission and vision. As Phil Knight put it recently, back then all we had was a dream, a ton of ambition, a trunk full of shoes and a big swoosh on all of them. Investor Relations.

Speaker 2

And over the 50 years since Nike has been a growth company. For 5 decades now, we've innovated for athletes, redefining sport for generation after generation. And today, we're the biggest champion in the world for athletes and for sport. Investor Day. And we've inspired a global community and remain driven by the power of sport to create a better world.

Speaker 2

Investor Relations. This spring, we've been celebrating our 50th anniversary across the globe. And these moments have been particularly special Investor Day. As many of us have now returned to our workplaces, it's been great to see the collaboration and creativity Investor Day. As we strengthen our culture of innovation, team and community, I have personally loved feeling the energy of our teammates being back at In fact, I got to feel that energy, not just here in our campus in Oregon, but also across Europe at when a group of us visited our team there a few weeks back.

Speaker 2

After a couple of years of virtual meetings, it was great Investor Relations. Another highlight from that trip was touring our European Logistics Center at L'Ostal Belgium and getting to see firsthand how efficiency and sustainability help us serve our consumers Investor Day. Players on England's women's national football team, the Lionesses, who were inspiring as they prepare for the women's Euro Champs in England this summer. Seeing our European teammates in person again reminds me of how deeply grateful I am Investor Relations. As we conclude this fiscal year, our NIKE, Inc.

Speaker 2

Team has navigated so much Investor Day. We're working with commitment and resilience to serve our consumers and our communities. Investor Relations. And our teams have proven their ability to be unrelenting in executing against the macro complexities, Investec, while also building our future. In particular, I want to acknowledge our Greater China team Investor Relations, who have managed the business through a challenging period for them and their families.

Speaker 2

I've said it before and I'll say it again, Investor Relations. This team is the greatest collection of talent in the world and I sincerely thank them. Investor Relations. This fiscal year and certainly this past quarter, macroeconomic challenges have created a dynamic environment. Investor Day.

Speaker 2

And yet looking at our full fiscal year 'twenty two results, it's clear that our strategy is working and that NIKE's unique Investor Relations. Today, we're better positioned to drive sustainable long term growth than we were before the pandemic. Investor Relations. Over the past few years, we've transformed our business building a muscle that won't just help us navigate future adversity, Investor Day, but one that gives us the ability and agility to continue to drive our growth. We now have a proven operational playbook Investor Day with many levers at our disposal.

Speaker 2

Fiscal 2022 posed operational headwinds throughout the year, Investor Day, but we continue to invest. As other companies have pulled back, our investments have made us stronger. Investor Day. And we're excited about what we see as we look at our growth opportunities and the strong consumer demand we continue to enjoy. Investor Day.

Speaker 2

And as we look ahead to fiscal 2023, we remain very confident in our long term strategy and our growth outlook. Investor Relations. Our structural tailwinds, which include the expanded definition of sport, the societal movement toward health and wellness Investor Day and Comfort and the fundamental shift in consumer behavior toward digital continue to create energy for us. These advantages, along with our size and scale, the strength of our portfolio of brands and having the right strategy, Nike's growth has been and will continue to be the result of 3 areas I'll walk through today. 1st, our brand deeply connects with consumers, fueled by authenticity in sport and compelling storytelling.

Speaker 2

Investor Relations. 2nd, our culture of innovation drives a continuous pipeline of new product. And 3rd, We continue to have a competitive advantage in digital as one of the few brands that can connect with and directly serve consumers at scale. Investor Relations. So let's start with the strength of the Nike brand.

Speaker 2

You've heard me say that these are times when strong brands can get stronger Investor Day. And that has never been more clear than it is today. Our passion for sport continues to drive our deep connections with consumers. While visiting our team in Europe, I was able to attend the Nike versus Nike FA Cup Final, which Liverpool won in the thrilling penalty shootout over Chelsea at Wembley Stadium. In April, Scottie Scheffler won the Masters.

Speaker 2

And earlier this month, Rafael Nadal won his 14th French Open. And it's been a great month for basketball As the WNBA season kicked off and an incredible NBA season concluded, the power of our full portfolio of brands was And Converse and Jordan showing up proud in the NBA finals with Draymond Green and Jayson Tatum respectively. Investor Relations. It was also a quarter defined by a series of only Nike Moments, none bigger than the April unveiling of the Serena Williams building here on our campus. This 1,000,000 square foot building Investor Relations.

Speaker 2

More than 200,000 square feet is dedicated to lab space, Investor Day, which allows our innovation and product creation teams to test new ideas and developing, presenting and merchandising product. Investor Day. And along with the LeBron James Innovation Center that opened last fall, these facilities represent the single greatest investment in sports science, Research, Innovation and Design in the World. Also in the quarter, we were thrilled to launch the Nike Athlete Think Tank, which brought a group of female athletes together on our campus to share their experience and insight. The 13 athletes, including Serena, Sabrina and Shailene, also selected community organizations that Nike will help fund through grants.

Speaker 2

Investor Relations. Soon, we plan to grow the think tank, creating even more long term impact at the grassroots level, Investor Day, fueled by our goal of empowering the next generation of women in sport. This quarter, we also connected with our consumer through a powerful brand campaign tied to our 50th anniversary. The film directed by and starring Spike Lee celebrates NIKE's past and the promise of our future. The film was complemented by programming across our app ecosystem, nike.com, social media and more to incredibly strong consumer response.

Speaker 2

In fact, our 50th anniversary campaign led to the highest Nike Commerce app traffic in our history, even higher than some of the major commercial moments in the past, Another only Nike moment in Q4 was the launch of No Off Season, our podcast focused on mental health and starring athletes including Karl Anthony Towns and Laurie Hernandez. We created this podcast at to help redefine sport for our new generation as another new and creative way that we drive relationships with consumers Investor Relations. And finally, we began the next chapter Investor Relations. We launched a new Kobi shoe that pays honor to Gigi Bryant Investor Relations with all profits donated to the Mamba and Mamba Sita Sports Foundation. This was a launch with deep global resonance from LA to Shanghai Investor Relations with much more to come as we continue to build our Covi business within our portfolio of Signature franchises.

Speaker 2

Investor Relations. My second point today is our relentless pipeline of innovative product, Investor Day, which continues to drive separation between us and our competition. No other brand has our ability to resource, solve and scale Investor Day in response to a consumer opportunity. In Q4, we again introduced new performance innovations to the market, including new footwear technology from both Nike Women's and the Jordan brand. In women's, We launched the Nike Spark Flyknit, a new lifestyle shoe that introduces Nike Running's latest innovation, the back of the presentation.

Speaker 2

Spark offers a new sense of comfort and energy return through its dual density foam midsole. Investor Relations. The Spark Find It is one of the first projects from our Nike Sports Research Lab focused on injecting performance technology at into lifestyle products. In this case, responding to the consumer insight requesting a women's shoe for those who are on their feet all day long. Investor Day.

Speaker 2

Moving forward, we will be scaling our use of performance innovation into lifestyle footwear with a special focus on the opportunity we see in the women's business. And in Jordan, this quarter, Luka Doncic debuted his hotly anticipated Luca 1 Signature Shoe during the NBA playoffs. The Luca 1 introduces a brand new performance foam called Formula 23, which provides a lightweight and responsive ride the fitting of one of the game's best players. Formula 23 is one of the most sustainable performance phones ever made by Nike, And Jordan now plans to scale it across its product line, including into its next Air Jordan shoe. Investor Relations.

Speaker 2

And speaking of sustainability, we continue to scale our industry leading solutions in this space. In April, we had launched new sustainable iterations of 2 footwear icons. The Pegasus Turbo Next Nature Running Shoe and the Mercurial Vapor Next Nature Football Boot, both of which are made with at least 50% recycled content by weight. Next Nature continues the work Investor Relations. We started with Space Hippie with plans to scale even further across our franchises.

Speaker 2

And we're also innovating how we reduce waste beyond individual products and franchises. This led to the Nike recreation program in which vintage and obsolete products are collected and used to create new locally designed and manufactured products. The program, Investor Day, which combines design, retail and distribution launched in LA with plans to expand to London and Paris in fiscal 2023, Building a local ecosystem in all three cities. We know that singularity is the future of sustainability And these local ecosystems creating the exciting beginnings of a fully circular infrastructure at Nike. Investor Day.

Speaker 2

And looking ahead, we're excited to soon introduce a new platform that we believe has the potential to change the apparel industry. It's a new material that brings together scale, innovation, sustainability and design like only Nike can. This material isn't a knit or woven and it significantly reduces environmental impact through fewer carbon emissions at by not using water or dyes. We believe this platform could do for apparel, which Flyknit did for footwear. Its first products will be unveiled this September, and we can't wait for all of you to see it.

Speaker 2

Now for my 3rd and final point today, NIKE's increasing digital advantage. Investor Relations. With an owned digital business that grew 18% in fiscal 2022, we continue to set the pace in our industry Investor Relations by creating a premium consistent and seamless experience that drives 1 to 1 consumer experiences at scale. This quarter, our app ecosystem grew into an even greater share of our total digital demand, helping our digital share of the business reach 24% in Q4. This is a shift being led by the consumer as they pursue the most personalized shopping experience Nike provides.

Speaker 2

And we do not take lightly the choice made by consumers to put us in the most prized real estate that exists today, the home screen of their phone. No other brand occupies that space globally like Nike, and it remains one of our biggest competitive advantages. Moving to physical retail, we continue to bring to life our vision of giving consumers personalized digital experiences regardless of channel. We know that consumers expect us to know who they are Investor Relations. Online or offline and across the full array of monobrand stores, NIKE Digital and our wholesale partners.

Speaker 2

Within our NIKE owned stores, higher levels of connectivity across physical and digital are simply driving a better consumer experience. Investec. Online to offline services such as buy online, pickup in store and ship from store are driving growth Investor Relations. And in addition to our owned physical retail, we continue to innovate and co design Investor Relations. We started this journey through connected inventory at Investor Day.

Speaker 2

We're going to provide better allocation, extend product choice for consumers and reduce friction such as products being out of stock. Investors as Nike members, particularly when shopping through our retail partners. As you know, this is a journey we announced in Q2 Investor Relations. Through our partnerships with Dick's Sporting Goods to connect member accounts and then we continued in Q3 with NSP Partners in Greater China. Investor Relations.

Speaker 2

And with clear success thus far and knowing our shared members better, Investor Relations. Our strategy expanded in Q4 to serving our shared members 1 to 1 through connected data. Investor Day. Consumers are responding to the meaningful benefits we're now testing and we'll continue to extend the best of NIKE to our members across the marketplace Investor Relations with additional partners and expanded services in fiscal 'twenty three. At the same time, Investor Relations.

Speaker 2

Our growing participation in new digital platforms continues to expand access points to NIKE across the digital ecosystem. Investor Day. After last quarter's first official Nike NFT collaboration with Artifact, we took another step on our journey Investor Day. Our first co branded virtual sneaker, Investor Day. The artifact by Nike Dunk Genesis CryptoKicks continues our connection with an audience that will help shape the future of sport Investor Relations and Culture.

Speaker 2

In the end, as we look to start a new fiscal year, Investor Day. Nike will do what we've done for 50 years now and that's stay on the offense. We have a proven playbook Investor Relations. And our unique strengths and competitive advantages give us even more confidence about our future. Our focus is on the long term Investor Day and we're not slowing down.

Speaker 2

And with that, I'll now turn the call over to Matt. Thanks, John, and hello to everyone on the call. NIKE's 50th year has been a year of transformation. Through dynamic conditions, our team has remained focused on what we can control, continuing to lead with speed, agility and responsiveness. Investor Relations.

Speaker 2

Most importantly, we've stayed focused on accelerating our strength and building NIKE for the future. In this environment, what guides us is a relentless focus on creating value for our consumer. And what fuels our confidence is the way our consumer is responding. Fiscal 2022 is our largest revenue year ever, even with supply constraints challenging our ability to serve consumer demand. We are optimistic as we enter fiscal 2023 with our source base fully operational, production surpassing pre pandemic levels at inventory flowing again into our largest geographies.

Speaker 2

As we set the foundation for another year of strong growth, Investor Relations. I'd like to provide some broader context around our strategic transformation. 2 years ago, we introduced a bold new phase of our strategy, our consumer direct acceleration. In the early months of the pandemic, we set our sights beyond simply navigating through short term volatility. Investor Day.

Speaker 2

Instead, we outlined a clear vision to pursue even further competitive separation by expanding our digital advantage, reshaping the marketplace of the future and creating deeper, more direct consumer relationships. Investor Day. Today NIKE's continued momentum shows that our strategy is working. As we look forward, let me briefly highlight Investor Relations. We have 3 of NIKE's foundational elements for long term value creation: our global portfolio, our consumer led digital transformation and our expanding direct to consumer operational capabilities.

Speaker 2

First, one of NIKE's greatest strengths is our unrivaled global portfolio. Together, Nike, Jordan and Converse represent 3 of the world's most connected consumer brands, dimensionalized across sport and lifestyle, footwear and apparel up and down price points throughout geographies at the center of cultural relevance. Today, Nike is the number one cool and number one favorite brand in all 12 of our key cities around the world, Leading is the champion for athletes in sport. With a sharpened consumer construct across men's, women's and kids, We're deepening our sport focus, expanding our product pipeline and accelerating our long term growth potential. Investor Relations.

Speaker 2

The next chapter of our partnership with Kobe Bryant and the Bryant family is just one example of how we continue to bring new energy and dimension to our portfolio. Jordan Brands momentum has also been unstoppable with some of the most exciting young athletes in sport at some of the most iconic products in the world. Since fiscal 2020, Jordan Women's has tripled. International geographies have grown over 60% And apparel has grown over 50%. Now with approximately $5,000,000,000 in revenue, fiscal 2022 was Jordan's biggest year ever with epic growth potential ahead.

Speaker 2

Converse also delivered incredible milestones in fiscal 2022. Product and storytelling through the lens of youth and creativity are resonating deeply with growing strength among women consumers. Investor Day. As Converse scales its digital offense and invests in new product creation, the impact is clear. Investor Day.

Speaker 2

With global revenue approaching $2,300,000,000 total digital penetration reaching 27% globally an EBIT more than doubling since fiscal 2020. Across all three of our brands, we're driving a more direct, digital and differentiated future. And I wouldn't trade our position with anyone. Next, our consumer led digital transformation is driving long term growth and value. A more digitally connected Nike is a more valuable Nike.

Speaker 2

Today, our own digital business Representing over $10,000,000,000 in revenue is more than double in size versus pre pandemic levels. Investor Day. After increasing market share and gaining 3 percentage points from the prior year, NIKE Digital now represents 24% of total brand revenue. Investor Relations. More importantly, we are accelerating the pace and scale of NIKE's direct consumer connections.

Speaker 2

With growing digital traffic and NIKE app downloads, our apps now represent almost 50% of total digital demand. In turn, increased digital engagement is translating into more repeat buyers, a higher buying frequency and increased average order value, ultimately driving higher lifetime value through membership. Investor Relations. And as retail consolidation continues and consumers converge around fewer digital platforms, Our distinct NIKE consumer experience is driving more direct connections, positioning us well for long term growth. Investor Relations.

Speaker 2

Lastly, we are transforming our operating model with new capabilities in order to move at the speed of the consumer. This year, we will begin to see value from our biggest investment in NIKE's digital transformation, our new ERP. Investor Relations. As we shift to an increasingly direct to consumer future, a new ERP will be foundational for increasing speed and agility across our supply chain. This will give us real time visibility to inventory across our network, plus dynamic transactional capabilities Investor Day to optimize consumer demand and inventory productivity.

Speaker 2

We will go live with our new ERP in Greater China in July Investor Day and continue building and testing in North America for deployment in fiscal 2024. We will also see a new consumer marketing offense in action in fiscal 2023. Through new capabilities activated in partnership with Adobe, We will unlock additional productivity and demand creation and member retention across our Nike ecosystem. We have started testing audience segmentation in North America Investor Relations with real time data and personalized journeys on the NIKE app, with plans for further expansion in the coming months. Investor Relations.

Speaker 2

In Greater China, we are also accelerating our digital capabilities, building on our 40 year history in the market with an ecosystem from China for China. In fiscal 'twenty three, we will deliver a new suite of commerce and sport activity apps, deepening our connections with Chinese consumers an enhanced user experience, including locally relevant features across our digital apps, services and our owned and partnered retail stores. Investor Relations. Finally, we continue to scale our Express Lane, which combines hyper local consumer insights with improved responsiveness and speed to market. In fiscal 2022, Express Lane drove approximately 25% of total NIKE brand revenue with higher profitability.

Speaker 2

Investor Relations. We expect to build Express Lane into a larger portion of our business in fiscal 2023 and beyond. Investor Relations. Now let me turn to NIKE, Inc. 4th quarter financial results and operating segment performance.

Speaker 2

In Q4, NIKE, Inc. Revenue declined 1% and grew 3% on a currency neutral basis. This was led by 11% growth in NIKE Direct, offset by a 3% decline in wholesale. Nike Digital grew 18%, fueled by strong demand across our app ecosystem. 4th quarter reported gross margins declined 80 basis Investor Relations versus the prior year.

Speaker 2

This was primarily due to specific actions taken to manage supply and demand in Greater China following COVID related disruption, Investor Day as well as elevated freight and logistics costs. Headwinds were partially offset by benefits from strategic pricing actions, favorable foreign currency exchange rates, improved NIKE Direct margins and a higher full price mix. Investor Relations. SG and A grew 8% in Q4, primarily due to strategic technology investments, increased NIKE Direct variable costs, wage related expenses and increased demand creation expenses. Our effective tax rate for the quarter was negative 4.7%.

Speaker 2

This was due to a shift in our earnings mix and a non cash one time benefit related to the on shoring of our non U. S. Intangible property. 4th quarter diluted earnings per share was $0.90 Investor Relations. This includes a $0.10 non recurring, non cash charge related to both the deconsolidation of our Russian operations Finally, inventories were $8,400,000,000 up 23% compared to the prior year period.

Speaker 2

This was driven by elevated in transit inventories due to extended lead times from ongoing supply chain disruptions, partially offset by strong consumer demand. Now let's move to our operating segments. In North America, Q4 revenue declined 5% and EBIT declined 18%, in line with our expectations as we lap supply shifts in the previous year. Elevated ocean freight and logistics costs continue to dampen near term profitability

Operator

in this

Speaker 2

geography. NIKE owned inventory grew 30% versus the prior year With extended lead times causing in transit inventory to be 65% of our total inventory at the end of the quarter. Wholesale revenue declined 12% due to inventory supply constraints. Strong marketplace demand drove closeout units down double digits at the prior year. NIKE Direct grew 5% versus the prior year, delivering its highest quarterly revenue ever.

Speaker 2

Investor Relations. Marketplace channel growth was led by 11% growth in NIKE Digital with another quarter of historically low markdown rates at and lower available inventory supply. NIKE Digital total penetration reached 27% for the quarter, led by strong NIKE app growth. Even with lean available inventory, our power franchises continue to resonate deeply. Pegasus led the way for performance footwear, Jordan launched delivered a record breaking quarter and classics such as Dunk and Blazer drove strong full price growth.

Speaker 2

Meanwhile, we continue to test and learn across our newest retail concepts, such as our Nike Live Doors, which are increasing member buying amongst women. In EMEA, Q4 revenue grew 20% on a currency neutral basis. EBIT grew 63% on a reported basis. With broad based growth across channels, consumer dimensions and product engines, NIKE Direct grew 25% on a currency neutral basis, Investor Day, powered by healthy retail traffic as we anniversary COVID related closures from the prior year. NIKE Digital grew 21%, driven by positive launch sell through, improved full price selling mix and lower markdown rates.

Speaker 2

Sport continues to power our EMEA marketplace, highlighted by growth in running and fitness, performance franchises such as Metcon and Mercurial and apparel launches such as the Elate bra and women's. Investor Day. Looking ahead, EMEA will kick off the most unprecedented 12 months of global football in NIKE's history. Investor Day. Starting with the Women's Euro Champs this summer, Men's World Cup in the fall and Women's World Cup next summer.

Speaker 2

Nike is meeting the moment with a complete offense, including new kit launches, new training and lifestyle assortments at Enumercurial, Tiempo and Phantom Footwear Innovations across men's, women's and kids. Investor Relations. Next, I'll provide some deeper color around our results in Greater China. In Q4, revenue declined 20% on a currency neutral basis And EBIT declined 55% on a reported basis. This follows the region's most widespread COVID disruption since 2020, impacting over 100 cities and over 60% of our business.

Speaker 2

As conditions shifted, our experienced local team acted quickly and decisively. We leveraged a diverse logistics network and strong local partnerships, returning to 100% capacity at our Central Logistics Center within 3 weeks. Our marketplace team also adjusted inventory to meet digital demand. As a result, NIKE Digital landed Q4 with low single digit growth. Despite a dynamic operating environment, Nike extended its leadership position as Chinese consumers' number one cool and number one favorite brand.

Speaker 2

We saw this translate into positive business impact on Nike Tmall Superbrand Day, which drove 90% member demand penetration at nearly 1,000,000,000 impressions. Nike also created a clear separation on sixeighteen In addition, as lockdowns lifted in specific trade zones in late April, May early June, We saw improved store traffic and overall consumer demand. Key footwear franchises continue to win in the marketplace, Investor Day, led by GT Cut as the number one style in performance basketball and Pegasus 39, which drove strong results in men's and women's running. Express Lane also drove incredible sell through with locally inspired launches such as the Air Force 1 Lobo and the Head to Toast Street Dance Pack and Footwear and Apparel. As I mentioned earlier, we took specific actions in Q4 Investor Day.

Speaker 2

To recalibrate forward looking supply and demand, prioritizing the return to a healthy pull market by the end of the second quarter. While there may be near term risk of further COVID disruption, longer term, we continue to be encouraged by another quarter of brand momentum in the marketplace. As we turn to APLA, Q4 revenue grew 24% on a currency neutral basis and EBIT grew 31% on a reported basis, reflecting our largest quarter ever in the geography. We saw double digit currency neutral growth across Korea, Mexico, Southeast Asia and India and Japan. NikeDirect grew 43% on a currency neutral basis, led by 59% growth from Nike Digital.

Speaker 2

Membership fueled double digit growth across all territories as our sneakers app drove its best ever quarter in Japan, Korea and Mexico. We also saw our biggest quarter yet for women's, led by performance running, classics and lifestyle apparel. Kids led the way within NIKE Digital, up nearly 100% from last year. We're expanding sport for a new generation, driving strong results with proven franchises such as the Corp. Bureau plus newer innovations such as Dynamo Go.

Speaker 2

Investor Relations. Now I'll turn to our financial outlook for fiscal 2023. We enter the year confident in our brand strength, consumer connection, product pipeline and normalizing inventory supply into a healthy pull market in North America, EMEA and APLA. We continue to see momentum against our largest growth drivers and our most iconic product franchises. At the same time, we are closely monitoring consumer behavior and the implications of high inflation Investor Relations on near term economic growth and consumer demand.

Speaker 2

We are also taking a cautious approach to Greater China, Investor Day. Given uncertainty around additional COVID disruptions. As such, we have factored various risk scenarios into our guidance for fiscal 2023. We expect revenue for the full year to grow low double digits on a currency neutral basis, partially offset by foreign exchange headwinds of approximately 400 basis points. Investor Relations.

Speaker 2

In the Q1, we expect real dollar revenue growth to be flat to slightly up versus the prior year. We expect gross margins to be in the range of flat to declining by 50 basis points versus the prior year, Investor Day with a wider than usual range, reflecting our consideration of a number of scenarios. We expect to benefit from mid single digit pricing Investor Relations and continued gains from our shift to a more direct business, offset by another 100 basis points headwind Investor Relations. From elevated ocean freight costs, increased product costs, discrete supply chain investments at normalization of historically low markdown rates. We expect foreign exchange to be a 30 basis point headwind on gross margin Investor Day due to strength in the U.

Speaker 2

S. Dollar, largely offset in fiscal 2023 by favorable hedge rates versus current spot rates. We expect gross margin pressure to exceed 100 basis points in the Q1 of fiscal 2023, to sell seasonal inventory, which has arrived late due to a combination of factory closures and longer transit times. We expect SG and A to increase high single digits to low double digits. As we continue to invest in our people, our brands, new stores and our transformational capabilities.

Speaker 2

And lastly, we expect the fiscal 2023 effective tax rate to be in the mid teens range. As we move forward, we will stay focused on what we can control Investor Day and continue managing the business for the long term. This includes leveraging our scale and financial strength, optimizing supply and demand and most importantly, creating value for our consumer Investor Relations. From the products we design, to the stories we tell, to the experiences that we deliver. Our consumer direct acceleration is working.

Speaker 2

Investor Relations. Our long term vision has never been more clear. And if there is anything that 50 years of growth have proven, Investor Day. It's said with the right team and the right strategy, the future is ours to create. On that note, I'd like to close with a heartfelt thank you to the team Our team is and always will be NIKE's greatest competitive advantage.

Speaker 2

And as proud as we are Investor Day. Of all that NIKE has achieved over the past 50 years, what excites us most is what comes next. Investor Relations. With that, let's open up the call for questions.

Operator

We'll now begin the Q and A session. Our first question comes from Bob Drbul with Guggenheim. Your line is open.

Speaker 3

Hi, good afternoon. I was wondering if you could maybe just comment some more around China. Investor Relations. I think when you look at what's happened over the last few months and even more recently with the reopening, just Exactly how you're balancing the compares that you're facing versus the concerns that you have over the next few quarters?

Speaker 2

Yes, Bob. Let me start simply by saying, We're continuing to do what we've always done, Rich. Nike has been in China for 40 years. We've always taken a long term view. And to be clear, we believe that China remains a growth market with significant potential to unlock.

Speaker 2

And we've got very strong equity Investor Relations with Chinese consumers, our team, I think Matt mentioned it, I mentioned it, our team has just done a phenomenal job over the last 10 weeks, but also over the last several years. And the fundamentals haven't really changed. So Delivering innovation and inspiration in locally relevant ways is what the Chinese consumer cares about. I was talking with Angela a couple of weeks ago. She said they've just done some additional research and they're seeing in the market.

Speaker 2

Gen Z love innovation at Inspiration. And that's what we're delivering. Nike's brand is the number one cool brand. It's increased its Investor Relations. Over the past year, I think driven by Chinese New Year and the Beijing Olympics, Nike Digital We ended the quarter with growth, so our direct connections with consumers.

Speaker 2

And as Matt mentioned, we're going to digital local digital apps in the coming 6 months. And then our product, the localized product Through our express lane continues to drive great energy. I think Matt mentioned the Pegasus, the Dunk, the GT cut, the basketball shoot, Investor Day. So we continue to think that has huge potential and we're going to continue to invest in that And then ensure that we are building China for China with our tech stack, with our hyper local technology center and Investor Day. Our ability to link and serve that Chinese consumer.

Speaker 2

And so we're taking a medium to long term view and we're as confident today as we ever have been. At and coming out of this lockdown, we're seeing increased energy from the Chinese consumer. Yes. And I just would add, Bob, that we entered the 4th quarter positioned particular marketplace and the risk of ongoing disruption in the first half of fiscal twenty twenty three, We decided to prioritize the health of that marketplace. And as we've learned from experience over the years, Having a healthy pull marketplace in a mono brand marketplace like Greater China is critical to brand health Investor Day and long term growth.

Speaker 2

And so we made decisions to recalibrate supply and demand in the Q4. And that included reducing our inventory buys at the factories for forward seasons. We took some reserves on our existing inventory and we also plan for some investment in promotional activity with our partners because we expect that as the marketplace reopens, it's going to be more promotional. And so those were the charges that and the impacts that we had in the 4th quarter. In order to prioritize that inventory health and pull market by the end of Q2.

Speaker 2

As John said, and some of the examples I gave, we continue to Investor Relations. We're seeing it in our brand strength results and also in the way the consumer is engaging with our brand. We invested in the brand this quarter again for the 3rd straight quarter and we're seeing the impact of that on our business. And as lockdowns lifted in specific trade zones, in late April, May early June, Investor Relations. We're increasingly confident in our local market strategy And our ability to fuel long term growth in the China marketplace.

Speaker 2

Great. Thank you very much. Investor Relations.

Operator

Our next question is from Michael Binetti with Credit Suisse. Your line is open.

Speaker 4

Hey, guys. Thanks for taking our questions here. Just a

Speaker 2

few on the model quick and then a bigger picture question. I guess just if we could get a sense of

Speaker 4

SG and A out quick and then a bigger picture question. I guess just if we could get a sense of SG and A in the Q1, I think we got it for the year, a little bit of help there. And then Investor Day. I guess it looks like you're guiding to or at the high end of the revenue algorithm for the year despite the caution that you mentioned to us on China in the first part of the year. Maybe just some thought on what parts of the portfolio overgrow those long term rates you gave us last year in in the year just so we can think about that alongside you.

Speaker 4

And then I guess just a little bit more on your thinking on structural margins in China over the long Vethram. Obviously, you took some actions in the quarter. We see the output here in the margins. But how should we think about those as you move into things like the new ERP system and into a better pull market? Thanks.

Speaker 2

Sure. I'll go ahead and take that question. Why don't I start by just saying that as we mentioned last Investor Day. We thought that the variables that were coming together were positioning us for another year of strong growth in fiscal year 2023. And it really reflects Michael the power of NIKE's portfolio.

Speaker 2

Inventory supply is normalizing against at healthy pool market across North America, EMEA and APLA. And we've seen 3 consecutive quarters now where consumer demand has significantly Investor Day. And so when we look at our brand strength and momentum, our product pipeline against some of the biggest growth opportunities that we have. We think we're well positioned for growth in fiscal year 2023. Having said that, we did take a cautious approach to Greater China.

Speaker 2

And we're doing that because as we look at what disrupted our performance in the 4th quarter And focusing on what we can control, we felt strongly that prioritizing a healthy pool marketplace at Investor Day. The right action for us to take given the ongoing risk that we see in that marketplace. But longer term, we continue to believe that the growth potential that we see in that marketplace is significant. So underlying drivers of growth, We feel quite confident. We continue to closely monitor consumer behavior, and we're not seeing any signs of pullback at this point in time.

Speaker 2

Investor Day. And so we continue to execute the strategy and the plan we have, which is working. As it relates to SG and A, what I would say is just at We're planning for high single digit to low double digit SG and A growth for the full year. And that's really us continuing on this multi year investment plan that we have Investor Day. To create the capabilities that we need to be able to serve consumers directly and personally at scale.

Speaker 2

And that is an operational Investor Relations that is underway and we're already starting to see proof points of benefit against it. We're working really hard to prioritize our resources to fuel the things that are going to enable long term growth And shift resources away from places that, are legacy ways of operating. But we continue to feel confident that the things that we're investing in out in are going to be driving are driving business benefit and we're starting to see some of that come to life at the end of this fiscal year and heading into fiscal 2023. As far as your last question about structural margins in Greater China, there isn't anything that we see at this point in time that would lead us Investor Day. We'll not lead us away from the profitability that we've seen.

Speaker 2

Obviously, this quarter, we took some actions in order to manage our inventory Investor Day and to be able to carry forward our plans in fiscal 2023 and beyond. In the Q1, we're just anticipating that the marketplace is going to be promotional. And so we've made some adjustments to our plans around markdown rates at and partnership with our wholesale partners to ensure that we clear some of the inventory that isn't owned by Nike, but that's in the marketplace. Investor Day. But beyond that, our focus is on getting to a healthy pull market by the end of the second quarter.

Speaker 2

And I think as we look longer term, Investor Day. The fundamental drivers that are driving our profitability in the consumer direct acceleration strategy, more direct and more digital

Operator

Investor Relations. Your line is open.

Speaker 5

Hi, thanks for taking my question. So In the past, you've talked about a sizable gross margin benefit from the shift towards the direct business. And it's been hard to see that this year with a lot of other moving parts. But if you were to strip out the supply chain and the FX and the other moving parts, are you seeing an underlying mix benefit from that move? And should we Are you still confident that as some of these transitory costs roll off that you're still on track to get to that high 40s gross margin target in a few years?

Speaker 5

Investor Day. And then another quick question on gross margin is you talked about markdowns normalizing. So given the commentary around premiumization of the assortment, higher percent direct and digital. I would have expected you to have a lot more control over markdowns and pricing this year than say a couple of years ago. So is that a fair assumption that We should expect markdown breadth and depth to settle at a kind of permanently lower rate given the tighter control over the channel that you have now?

Speaker 2

Investor Relations. Sure. Well, let me start on the gross margin by talking about what we saw in the Q4. And I think it will Help bring some light maybe to the broader question. Our gross margins were down 80 basis points in the 4th quarter And that is really reflective of 2 elements.

Speaker 2

From an operational perspective, if you look at The growth that we saw in Nike Direct and the expanding margins that we saw both in Nike Direct and Nike Digital and a higher full price selling mix overall, Our gross margins would have expanded over 100 basis points in the 4th quarter. The decision that we took in Greater China, the specific actions that we took in Greater China had a Investor Relations. The specific actions that we took in Greater China had a 200 basis point impact on NIKE Inc. Q4 margins. So when we look at the underlying health of our business and the margin expansion that we see attributed to the shifting business mix from wholesale to more direct and more digital.

Speaker 2

We are seeing at and the financial benefits that come from it in our gross margins. Since fiscal year 2020, our gross margins are up over 260 basis points. And that includes in fiscal year 2022, a 100 basis point headwind from elevated ocean freight costs. We're paying about 5 times the rate that we paid pre pandemic to put product in a container on a boat and move it from Asia Investor Day to the U. S.

Speaker 2

So up 2 60 basis points with 100 basis points of a headwind. As we look ahead to fiscal 2020 Investor Day. Our guidance for flat to declining 50 bps. We're planning for mid single digit price increases. We're planning for additional expansion from our growing NIKE Direct business and our digital business, which we believe will continue to lead our channel growth.

Speaker 2

But that's being offset by another 100 basis points at Ocean Freight. So if you take 2022 and 2023 together, it's about 200 basis point impact on a 2 year basis from paying those higher rates to move product from Asia to our other geographies. And that has a significant impact on where we are Investor Day relative to where we would be. We still believe in the high 40s gross margin goal. We believe those costs are transitory in nature, But we expect it's going to take a few years to revert.

Speaker 2

And so we're planning for that accordingly. On the last part of what you said about markdowns, here's what I'd say. We've planned for a normalization of full price realization and markdown rates in fiscal 2023. For the last year, we've seen full price realization in 3 of our geographies to be over 70%, Whereas our long term goal is to be at 65% full price realization. As we think about the markdown rates that associated with that, we also stop both in our channel partners and in our own business historically low markdown rate because of the lower available supply.

Speaker 2

We think that that will start to normalize over this year And given some of the uncertainties and the risk scenario planning that we've done around our guidance for 2023, that's what's helping to drive this wider range that we're providing in our gross margin guidance for 2023. As far as the longer term goes, as I mentioned, we continue to believe in that high 40s number And we're going to continue and it's going to be fueled by this ongoing consumer led shift to direct into digital. Investor Relations.

Operator

Your next question is from Gabby Carbone with Deutsche Bank. Your line is open.

Speaker 2

Investor Relations.

Speaker 6

Hi, good afternoon. Thanks for taking our question. So as we move into fiscal 2023, just wanted to dig into the overall product flows, what you're seeing around lead time, if you're seeing any recent improvement there. Then I was just wondering if you can elaborate on demand and how you feel about the product pipeline moving ahead. You mentioned in your prepared remarks that you're expanding it.

Speaker 6

So wondering if you can just talk about that. Thank you.

Speaker 2

John, you want me to go first and then you get into the product piece? Okay. Look, we continue to see transit times be elevated relative to pre pandemic levels. At It's about 2 weeks longer than where we were. This is specifically in the North America.

Speaker 2

We're about 2 weeks longer in the low 80s days in the Q4 relative to where we were in the Q4 of last year. And that's obviously having a big impact on our in transit inventory and the flow of goods into the marketplace. Right at the end of the quarter, we did start to see a little bit of improvement vis a vis the boat backlog at the West Coast ports. But at this point in time, given all the variables that we see there, we're not planning for a significant improvement in transit times in fiscal 2020 in fiscal 2023. So we're managing our inventory accordingly.

Speaker 2

We're making decisions about our assortment, product life cycles. We're taking some of our styles to season list so that we can manage it on more of a rolling basis. And we'll continue to leverage the experience that we've had over the last about 2 years navigating through this environment from a supply chain complexity and congestion perspective. And Gabby, on product innovation pipeline, it's funny you asked that. We had about Investor Relations.

Speaker 2

2 weeks ago, our first in person VP meeting in 2 years. And because we hadn't been together in person And no one has seen physical product. We had 6 different rooms and built out of the new Serena Williams building that had our full innovation pipeline for the next 3 years. Nike men's, women's, kids, performance, lifestyle, by every sport, a Jordan room, a Commerce room. And I will tell you, everyone walked out

Speaker 3

Investor Day. We're excited by the breadth and depth of the innovation pipeline.

Speaker 2

It was almost overwhelming to be honest, when you see it all in one place. And so you saw some recent examples of the Spark Flyknit, which is what's really interesting about that is more and more of our innovations are done For Her, but can be leveraged by all. The ZoomX foam, which is one of our most responsive phones yet, that's going to be pulled throughout our entire running line, I mentioned Formula 23, Next Nature and the Sustainability Innovations. And so going forward, we're very excited. I at the back half of the year.

Speaker 2

I teased a little bit about the apparel innovation coming. We think that's going to be a platform opportunity for us more to come in that in the fall. The pipeline. Matt mentioned this next coming year of global football with Euro Champ Women's this summer, World Cup in the men's in the fall, Women's World Cup next year, the remarkable innovation, both performance and lifestyle around global football, a sharper focus on running the Jordan stuff, both footwear and apparel Performance and Lifestyle, the Commerce room was like a hit because I think most people don't really get to see the full breadth and depth of Commerce Innovation. So Investor Day.

Speaker 2

We feel very excited about the innovation pipeline. I will also tell you that our teams now they're back together in person, Investor Day. I feel like the pace and level of innovation is just going to and design is going to just accelerate. So Investor Day. A lot of optimism on the innovation front.

Operator

Our final question today is from Lorraine Hutchinson with Bank of America. Your line is open.

Speaker 7

Thank you. Good afternoon. Just hoping to get your thoughts on channel mix in the coming years, as you think about wholesale versus direct. If there are any Big callouts that you would make, obviously, you're making the investment in technology. Would you expect that to return wholesale Investor Growth Rate or do you think the direct business will continue to lead?

Speaker 2

Lorraine, We're going to be guided by the consumer. This is you heard me say before, the key to winning in this future is giving the consumers what they want, when they want it, how they want it. And consumers don't think about different channels. They just want a seamless and premium and consistent experience. And so everything we're doing It is to offer that to them and to make us indifferent, frankly, about where they transacted.

Speaker 2

So they'll start their shopping on one of our mobile apps or online. They'll do their product investigation or they're looking. They may go ahead and just buy it in one of our mobile apps or they may go into one of our stores if they want to try it on. Or if one of our partner stores is closer to them, Dick's, they'll go there and try it on. Or if they're in a Dick's and they see what they want and they don't have it in stock, we can fulfill it through our connected inventory.

Speaker 2

And so the whole goal is to give the consumers what they want, when they want it, how they want it. And we believe we're building what will be a source of competitive advantage It's grounded and having a direct connection with the consumer. Our membership program is going to be a strong whether it's through Nike Direct, owned and digital at and physical or through our partners. And if we achieve that, we then can give the consumer true choice And the actual channel mix will land in its most natural place and will evolve in its most natural place. Yes.

Speaker 2

And I just would add that our wholesale revenue this year was depressed because we had to cut 130,000,000 units of Apply because our factories in Vietnam were closed for 12 weeks. And so as you look specifically to 2023, Nike Direct will lead our growth at NIKE Digital will be our fastest growing channel. But we do expect to see wholesale growth look different. In other words, turn and grow based on available inventory supply slowing back into our geographies. And so we do expect to see wholesale growth in fiscal 2023.

Speaker 2

I think as John said, long term, this is a consumer led digital transformation. But I still think that Investor Day. Our longer term vision of NIKE Direct representing approximately 60% of our business and digital own digital representing 40 It's a trajectory that we are still on. We're seeing growth in our digital business that's exceeding what's happening in the marketplace. We're watching our own digital traffic and an accelerating level of NIKE app downloads that's driving more consumer engagement against our digital platform and that is driving growth and shift relative to the broader marketplace.

Speaker 2

And while we're up about 9 points of business mix versus FY 2020, we continue to believe that digital is going to be, Investor Day. As John has said again and again and again, a fuel for growth for us over the next 3 to 5 years. Investor

Operator

Relations. That concludes our question and answer session. I'll turn it over to Mr. Trussell for any closing remarks.

Speaker 1

Yes. Just want to say, thank you to everyone for participating, in our Q4 call. We appreciate you joining and we look forward Investor Relations.

Speaker 2

Thank you, everyone. Thanks.

Operator

Investor Relations. Ladies and gentlemen, this concludes today's conference call. Thank you very much for participating. You may now disconnect.

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Earnings Conference Call
NIKE Q4 2022
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