Matthew Friend
Chief Financial Officer at NIKE
Thanks, John, and hello to everyone on the call. Our first quarter of fiscal '23 demonstrated again the deep consumer connection and strong demand for NIKE, Jordan and Converse. In a dynamic operating environment, we delivered top line results ahead of plan, more than offsetting foreign exchange headwinds. With industry-leading Digital growth, positive retail traffic in our stores and online, and more product available for consumers across the marketplace, the power of NIKE's portfolio continues to fuel business momentum.
At our core, NIKE is a growth company, built on a passion for serving athletes. 50 years later, this passion inspires consumers worldwide through our commitment to product innovation and our belief that sport can change the world. Today, NIKE's potential for growth has no limits as we create our future through a steadfast focus on serving the consumer.
At the same time, we are closely monitoring an operating environment that continues to be disruptive. So before discussing our first quarter financial results, let me provide a deeper view into the latest shifts we are seeing and the actions we are taking to manage our business for the long term.
Over the past three years, we have leveraged our operational playbook to manage through supply chain disruption and COVID-related store closures. I could not be more proud of how our team continues to adapt to changing circumstances with a relentless focus on getting the right product to the right place at the right time. This quarter, it became clear to us that conditions in North America are shifting once again.
Earlier ordering by retailers, driven by strong consumer demand and less predictable delivery time lines, had led to elevated inventory levels broadly across consumer goods. Then transit times began to rapidly improve with signals that further improvement may be coming. At the same time, consumers are facing greater economic uncertainty, and promotional activity across the marketplace is accelerating, especially in apparel. As a result, we faced a new degree of complexity. Demand for NIKE, Jordan and Converse continues to be uniquely strong with positive consumer response and high full price realization on fresh seasonal assortments and key product franchises.
In September, month-to-date retail sales are up double digits versus the prior year, following a strong back-to-school season. However, our North America inventory grew 65% versus the prior year, with in-transit inventory growing approximately 85%. This reflects the combination of late delivery for the past two seasons plus early holiday orders that are now set to arrive earlier than planned and a prior year that was impacted by factory closures in Vietnam and Indonesia. As a result, we are taking decisive action to clear excess inventory, focusing on specific pockets of seasonally late products, predominantly in apparel.
While we expect this to have a transitory impact on gross margins this fiscal year, we believe this cost will be far outweighed by the benefit of clearing marketplace capacity to align seasonally relevant product, storytelling and retail experiences for the consumer. Time and again, this is how NIKE responds to adversity. We adapt, we compete and we accelerate forward.
With strong brand momentum, improving deliveries and a robust innovation pipeline, we're acting now to set the stage for future seasons of sustainable profitable growth. Looking ahead, we are especially excited about the breadth and depth of our product pipeline.
This includes innovation platforms that break new ground in performance and sustainability. Women's apparel completely redesigned for fit, sensation and support. A renewed focus on serving everyday runners with the world's best running innovation across price points. A total refresh of our signature basketball line across brands. New sportswear collaborations with the leaders of youth culture and the next chapters of our most iconic product franchises. NIKE's authenticity as the champion for athletes and sport has always been one of our greatest strengths.
Over the next 18 months, we'll drive consumer energy through new product and storytelling, in essence, doing what NIKE does best. NIKE's competitive advantages are also growing as the Consumer Direct Acceleration transforms our operating model, driving deeper and more direct connections through digital. NIKE membership serves as a catalyst for digital growth, driving greater engagement and higher lifetime value in our highest margin channel.
This quarter, repeat buying members grew by over 30% with increased buying frequency and demand across total NIKE members. In fact, many of our most important membership benchmarks, reflecting how well we convert, engage and retain buying members, are at near all-time highs. These trends give us confidence that we have a strong and loyal member foundation to drive digital growth ahead.
Since fiscal '19, our Digital business has nearly tripled to exceed $10 billion in revenue, representing 24% of total NIKE Brand revenue in fiscal '22. Over this period, NIKE Direct gross margins expanded through the combination of rapid digital growth and improvements in channel margin profitability, ultimately fueling NIKE's overall gross margin expansion despite being partially offset by transitory headwinds experienced through the pandemic.
While we continue to manage through short-term dynamics, these structural tailwinds give us confidence that we are making progress towards our long-term financial goals. Now let me turn to our NIKE, Inc. first quarter financial results. In Q1, NIKE Inc. revenue grew 4% and 10% on a currency-neutral basis.
This was led by 14% growth in NIKE Direct and 8% growth in wholesale. NIKE Digital grew 23% with double-digit growth across EMEA, North America and APLA, fueled by increasing traffic, higher conversion and growth in average order value. First quarter reported gross margin declined 220 basis points to 44.3%. This was primarily due to elevated freight and logistics costs plus higher markdowns across the marketplace in North America and unfavorable changes in net foreign currency exchange rates. SG&A grew 10% in Q1, primarily due to wage-related expenses, strategic technology investments, increased NIKE Direct costs and increased demand creation expenses.
Our effective tax rate for the quarter was 19.7% compared to 11% for the same period last year, primarily due to decreased benefits from stock-based compensation. First quarter diluted earnings per share was $0.93.
Finally, inventories were $9.7 billion, up 44% compared to the prior year. Driven by volatility in transit times in North America, strategic decisions to buy inventory for future seasons earlier and lower inventory levels due to last year's factory closures in Vietnam and Indonesia. Now let's review the operating segments.
In North America, Q1 revenue grew 13% and EBIT declined 4%. NIKE Direct grew 13% versus the prior year, outpacing the broader market with double-digit in-store and digital traffic growth. NIKE Digital grew 19%, fueled by member demand and the NIKE app. Wholesale revenue grew low double digits with strong growth from strategic partners such as DICK'S and JD Finish Line as well as our authenticated partners. NIKE continues to lead as the number one cool and number one favorite brand in North America.
We're driving momentum across key consumer and sport dimensions, including positive consumer response to the Pegasus 39, Invincible 2 and Infinity 3 in performance running; high sell-through and full price realization across key footwear franchises, such as Air Force 1, Dunk and the Air Max 270 and broad-based growth across men's, women's, kids and Jordan on improved inventory supply.
As I previously discussed, we started to increase promotional activity in the first quarter and expect the broader marketplace to be promotional at least through the end of the calendar year. We expect that total inventory in North America peaked in Q1, and we anticipate seeing sequential improvement over the year as we rebalance supply and continue serving strong consumer demand.
As we prioritize a healthy pull market, we are confident that our brand strength and decisive actions positions us well to compete and to capture market share. In EMEA, we saw record results. Q1 revenue grew 17% on a currency-neutral basis.
EBIT grew 11% on a reported basis, with broad-based growth and strong gross margin expansion driving the most profitable quarter in EMEA history despite significant foreign exchange headwinds. NIKE Direct grew 20% on a currency-neutral basis and NIKE Digital grew 46%. Running delivered solid growth with strong consumer response to the Pegasus 39, Invincible 2 and the Peg Trail 4.
We also celebrated our most successful Mercurial launch ever and an unforgettable moment for women's sport at the European Championships, with our Never Settle, Never Done campaign driving over 450 million impressions. Since fiscal '19, EMEA gross margins have expanded by more than 500 basis points, with NIKE Digital increasing its penetration from 7% to 20%, nearly tripling its share of EMEA NIKE Brand revenue. This is another great proof point for how our consumer-led digital transformation is accelerating NIKE's growth and profitability.
Next, I'll provide some color around our results in Greater China. In Q1, revenue declined 13% on a currency-neutral basis, and EBIT declined 23% on a reported basis. NIKE Direct declined 2% on a currency-neutral basis with a 5% decline in NIKE Digital. While COVID-related disruption had meaningful impact on store operations and retail traffic, business performance and inventory management are ahead of plan as we continue to proactively recalibrate supply and demand.
Brand strength is our competitive advantage, with NIKE setting the pace as Chinese consumers' number one and number one favorite brand, further extending our lead among teams. Product innovation remains a key differentiator with strong sell-through from the Alphafly Next% 2, the Pegasus 39, the G.T. Cut 2 and other performance products.
Jordan Brand's momentum was another highlight with year-over-year growth, driven by a standout Luka 1 launch, key franchise strength and the energy of Jordan's 25th anniversary campaign. We continue to deepen connections with Chinese consumers in locally relevant ways, from elevating the street dance community with hyperlocal product and storytelling to igniting youth basketball culture through the lens of the Chinese high school basketball league.
With Gen Z member demand growing more than 25% versus last year on NIKE's digital platforms and the newly launched localized NIKE app already leading as the number one brand shopping app, we're more encouraged than ever about NIKE's opportunity to serve Chinese consumers with distinct, premium and localized experiences.
As mentioned last quarter, we are taking a cautious near-term approach in Greater China, given the ongoing risks of COVID-related disruption. However, our brand and business momentum gives us increasing confidence that NIKE's unique value proposition will fuel long-term growth in Greater China.
As we turn to APLA, Q1 revenue grew 16% on a currency-neutral basis, and EBIT grew 4% on a reported basis. We delivered our third consecutive quarter of double-digit currency-neutral growth led by Southeast Asia and India and Korea. NIKE Direct grew 30% on a currency-neutral basis, led by 29% growth in NIKE Digital and 31% growth from NIKE-owned stores.
Our Member Days offense continues to accelerate member engagement, tripling repeat buying versus the prior year. Women's continues to deliver outsized growth, with momentum in performance running, footwear, bras and sports style innovation footwear like Air Max. Performance fueled strong growth in men's with the launch of Pegasus, Infinity and Invincible in running and the Mercurial in global football. In addition, we have now transitioned our businesses in Argentina, Chile and Uruguay to a distributor model.
Now I'll turn to our updated financial outlook for fiscal '23. To date, we continue to see strong consumer demand for our portfolio of brands across our geographies. We are closely monitoring consumer confidence and behavior, and ultimately, the implications of high inflation on consumer demand. We've managed through cycles like this before, and we know these are times to stay on the offense, leveraging our financial strength to prioritize a quicker return to a healthy pull market. In this environment, strong brands set the pace and we are confident NIKE will emerge even stronger. We are focused on what we can control as we take a measured approach against an uncertain macro outlook.
Accordingly, we will tighten up our second half buys and liquidate excess inventory more aggressively beginning in the second quarter, focusing the flow of new product to our strategic partners and NIKE Direct. Headwinds from foreign exchange have also shifted significantly in the last 90 days as the trend of U.S. dollar strengthening has accelerated.
Based on current spot rates, net of hedging activity, we estimate the full year negative impact of foreign exchange on reported revenue and EBIT to now be approximately $4 billion and $900 million, respectively, creating a wide divergence in constant versus real dollar performance.
We continue to expect currency-neutral revenue growth of low double digits versus the prior year, equating to reported revenue growth of low to mid-single digits versus the prior year, assuming 800 basis points of foreign exchange headwinds. We now expect gross margin to decline between 200 to 250 basis points versus the prior year.
This reflects approximately 150 basis points of annual impact from higher markdowns and higher off-price mix to liquidate elevated inventory, a second straight year of more than 100 basis points of headwinds from elevated freight and logistics costs, and foreign exchange pressure now a 70 basis point headwind on the full year.
We now expect SG&A to increase high single digits as we prioritize investment in new transformational capabilities to serve consumers directly and at scale, partially offset by tighter expense control and limited headcount growth across the business. We now expect the fiscal '23 effective tax rate to be in the mid- to high teens range, primarily due to decreased benefits from stock-based compensation.
For the second quarter specifically, we expect reported revenue to grow low double digits on strong consumer demand despite 900 basis points of foreign exchange headwinds. We expect second quarter gross margins to decline approximately 350 to 400 basis points versus the prior year, the largest impact across the fiscal year as we discount out-of-season product more aggressively in a largely promotional marketplace. This will require higher markdowns in our own channels and through wholesale partners.
The second quarter also compares to last year's record level of full price realization and includes headwinds from freight, logistics and other supply chain costs as well as foreign exchange. As we look towards the rest of our fiscal year, we are confident in our strategy and in our opportunity ahead.
While we expect circumstances to remain dynamic, we are optimistic as we continue to make progress towards our long-term financial goals. Our brand momentum is strong. The power of our portfolio is unrivaled, and our vision of NIKE's limitless potential is clear.
On that note, I'd like to close by thanking our 79,000 NIKE, Jordan and Converse teammates around the world who serve our mission with a passion for sport and a culture of innovation unlike any other. They represent our true competitive advantage and our greatest reason for confidence as we create NIKE's future.
With that, let's open up the call for questions.
