Nike (NYSE:NKE) shocked investors by posting surprisingly strong fiscal first-quarter sales and earnings on Sept. 22. Just one quarter removed from an historic 36% revenue slump, the apparel giant battled back to flat results, thanks to rebounding growth in key markets like the U.S. and China.
In a conference call with Wall Street analysts, CEO John Donahoe and his team broke down the keys to that rebound, while explaining how management intends to take advantage of the new, digital-focused shopping environment through the rest of 2020.
Let's look at some highlights from that presentation.
Winning where it counts
We're getting stronger in the places that matter most. And even in the midst of disruption, we are on the offense. -- CEO John Donahoe
Nike posted sharp sales rebounds in China, where revenue growth accelerated to 8% from 1% the previous quarter. And in the U.S, revenue was down just 1% after diving 46% during the worst of the COVID-19-related shutdowns. Many factors went into that epic recovery, but management highlighted two particular standouts.
Nike's innovation engine is keeping customers excited about the brand with refreshed franchises like Air Max 90 driving growth in footwear. The company's digital business has matured into a game-changing segment too. It accounts for over 30% of sales today and posted accelerating growth this quarter, even as the physical retailing industry reopened for business.
"We know that digital is the new normal," Donohoe said.
We are reducing excess inventory at lower promotional levels relative to the overall marketplace, highlighting the strength of our brand and the value of our key product franchises. -- CFO Matthew Friend
Nike isn't immune to pricing pressures in the industry, but it's outperforming peers in this area. Modest price cuts allowed gross profit margin to decline by less than one percentage point year over year. That's about the same slump that lululemon announced in early September. Larger apparel sellers, like TJX Companies, have seen margins crater and have been forced to take large writedown charges.
But Nike has managed to avoid those challenges by focusing inventory production on the most in-demand new releases. That move helped the company stand out in a crowded retailing market, and executives plan to press the advantage into early 2021. "This is a trend we expect to continue throughout this fiscal year as we change the shape of the North American marketplace," Friend predicted.
We are managing our business to deliver financial results that will set a strong foundation for growth and profitability in fiscal year 2022 and beyond. -- Friend
Nike has seen enough demand data to feel confident projecting a significant growth rebound this fiscal year with sales rising in the high single-digit to low double-digit range. Most of that bounce will show up in the second half of the year since retailing inventories are a bit constrained right now.
Gross profit margin likely won't recover as quickly, thanks to continued price cutting in some parts of the portfolio. But Nike is aiming for a potentially transformational change in this area over time. Under normal conditions, digital sales carry gross profit rates that are roughly 10 percentage points higher than the wholesale retailing segment.
That factor could push profitability well above recent levels as the digital business shoots past 30% of sales and toward the 60% that rivals like lululemon claim today. "I wouldn't trade our position with anyone," Friend said.