Decline in sales despite gross margin…

• Revenue: Decrease of 10% on a reported basis and 9% on a constant currency basis.

• NIKE Direct: Decrease 12%, with NIKE Stores up 1% and NIKE Digital up 20%.

• Wholesale: Decline of 7%.

• Gross margin: Increase of 120 basis points to 45.4%.

• SG&A costs: Decrease 2% on a reported basis.

• Effective tax rate: 19.6% compared to 12% in the same period last year.

• Diluted earnings per share: $0.70.

• Sales North America: Down 11%, NIKE Direct down 11%, NIKE Digital down 15% and NIKE Stores down 1%.

• EMEA sales: Down 12%, NIKE Direct down 12%, NIKE Digital down 24% and NIKE Stores down 3%.

• APLA turnover: Decrease 2%, NIKE Direct 4%, NIKE Digital 15% and NIKE Stores 9%.

• Sales in Greater China: Down 3%, NIKE Direct down 16%, NIKE Digital down 34% and NIKE Stores down 4%.

• Sales forecast for the 2nd quarter: A decline in the range of 8 to 10% is expected.

• Q2 Gross Margin Guidance: A decline of around 150 basis points is expected.

• Q2 VVG instructions: The value is expected to remain approximately the same as last year.

• Q2 Other income and expenses: Expected to be $30 to $40 million.

• Effective tax rate for Q2: Probably in the upper teens.

Release date: October 1, 2024

For the full transcript of the conference call, please see the full conference call minutes.

Positive points

• Nike Inc (NYSE:NKE) reported a 120 basis point increase in gross margin to 45.4%, driven by lower product costs and strategic pricing actions.

• The company reported double-digit growth in new footwear products, indicating strong consumer interest in innovation.

• Nike Inc (NYSE:NKE) reported growth in several sports segments, including men's fitness, global soccer and running footwear.

• The launch of the company's Pegasus 41 delivered mid-teens growth over the previous year's model and demonstrated successful product innovation.

• Nike Inc (NYSE:NKE) receives positive partner feedback on its future product pipeline and has strong order books for spring '25.

Negative points

• Nike Inc (NYSE:NKE) reported first-quarter sales decline of 10% on a reported basis and 9% on a constant currency basis.

• The company experienced a significant decline in traffic to Nike Direct, particularly at Nike Digital and partner stores in Greater China.

• Retail sales fell short of expectations, resulting in increased market inventory and stronger promotional activity.

• Nike Inc (NYSE:NKE) is withdrawing its full-year guidance due to the CEO change and will instead issue quarterly guidance.

• The company expects continued declines in its men's and women's lifestyle businesses and the Jordan brand throughout fiscal 2025.

The story continues

Q&A highlights

Highlights of Nike Inc (NYSE:NKE) Q1 2025 Earnings Call

Q: Can you break down the inventory situation regionally, particularly in China and North America? A: Matthew Friend, CFO: Retail sales fell short of plans, resulting in slightly increased inventory levels in North America and China. We anticipate that we will need to advertise more to manage this inventory while scaling new ideas and concepts.

Q: What were the biggest challenges in the quarter and what metrics are you monitoring for comeback progress? A: Matthew Friend, CFO: Greater China fell short of our plan and there was general macroeconomic weakness across all regions. Digital sales fell 20%, primarily due to declines in traditional franchises. We focus on new products and innovations to drive growth.

Q: Can you reconcile the lower than expected spring order backlogs with the positive outlook for the second half of the year? A: Matthew Friend, CFO: Spring order books remained unchanged and were slightly below expectations. However, we are encouraged by the increase in novelties and innovations, particularly in the running space, which is seeing double-digit growth in order books.

Q: How large are the core businesses being repositioned and what are their margins compared to the rest of the product? A: Matthew Friend, CFO: Classics are an important part of our portfolio, but have become too concentrated. We manage these franchises to create a better balance. They provide attractive margins, especially on digital channels, but we are focused on accelerating novelty and innovation.

Q: How open are wholesale partners to new launches and how high is their inventory? A: Matthew Friend, CFO: Partners want to stimulate growth again. We are investing with partners to strengthen and differentiate our retail brand, with positive feedback on new concepts such as the women's fitness concept with DICK'S and the HomeCourt concept with Foot Locker.

Q: How far has walk-in business declined and what is the outlook for gross margins in the second quarter? A: Matthew Friend, CFO: We have lost market share in specialty running channels, but are seeing increasing momentum. Gross margin pressure is expected across the portfolio in the second quarter, with higher promotions and supply chain deleveraging being key factors.

Q: What are you seeing in the China business and what are the inventories by channel? A: Matthew Friend, CFO: Traffic was weak across all channels and the market was supportive. We carefully manage inventory and focus on innovative and high-performing products that resonate with consumers.

Q: What key metrics do you monitor to measure comeback progress throughout the year? A: Matthew Friend, CFO: We are encouraged by new product performance, which delivered double-digit growth. Key metrics include retail sales, inventory levels and the performance of new innovations in the market.

Q: How do you balance direct-to-consumer and wholesale channels? A: Matthew Friend, CFO: We continue to see opportunities to increase efficiencies in our direct business while focusing on balanced growth across the market. The investments in DTC are there and will become usable over time.

Q: How do you approach the challenges in the digital channel? A: Matthew Friend, CFO: Digital sales fell 20%, primarily due to declines in classic franchises. We carefully manage inventory and focus on placing products where traffic is highest to drive full price realization.

For the complete transcript of the conference call, please see the full conference call minutes.

This article first appeared on GuruFocus.