Even Nike Cannot "Just Do It" In These Challenging Macroeconomic Climate

On Thursday, Nike Inc NKE reported its fiscal second quarter results that fell short of Wall Street’s sales estimates for the second quarter in a row. The sneaker giant also lowered its sales outlook and announced it intends to cut costs by $2 billion over the next three years. Nike is considered a leader among industry peers such as Lululemon Athletica Inc LULU, adidas AG ADDDF and Under Armour Inc UA, but its profits have been under pressure and it has been in the middle of a strategy shift that has seen it rekindle its relationships with wholesalers including Macy’s Inc M and parent of DSW, Designer Brands Inc DBI. Nuke shares plunged upon results, pulling down Foot Locker FL for the ride as Foot Locker stores depend heavily on its merchandise. Nike shares fell more than 10% on their worst day since September 2022, back when Nike was ran over by inventory gluts, while Foot Locker shares plunged 5%.

Fiscal Second Quarter Highlights

For the quarter that ended on November 30th, Nike reported revenue grew about 1% to $13.39 billion, topping Refinitiv’s estimate of $13.43 billion. Revenue from Europe, the Middle East and Africa fell short of Street Account estimates but North America, Asia-Pacific and Latin America topped came ahead. 

Although Nike came short on revenue estimates, which is the first time has been missing revenue estimates for two consecutive quarters since 2016, Nike posted a strong earnings beat that showed its cost-cutting initatives are already well-underway. Nike made a net income of $1.58 billion or $1.03 in earnings per share, topping Refinitiv’s estimate of 85 cents. 

Leaving Concerns Aside, Nike Greatly Improved Its Gross Margin

During the quarter, inventories were down 14% to $8 billion, with Nike being in a significantly improved position compared to a year ago.

Nike’s gross margin finally increased 1.7 percentage points to 44.6%, making a turnaround from six quarters of declines.

Disciplined Cost Management Ahead

As part of its undergoing cost cutting strategy, Nike will be simplifying its product assortment, increasing automation, making more and better use of technology while streamlining the overall organization to increase efficiency. With the savings gathered from those efforts, it will be fueling its future growth that will be built upon accelerated innovation and long-term profitability. The execution of its strategy will cost Nike between $400 million and $450 million in pretax restructuring charges which are mostly related to employee severance costs. The results of these efforts are expected to be seen in the current quarter.

New Guidance That Concerned Investors

Nike lowered its guidance as a result of increased macro headwinds, particularly in Greater China and EMEA, along with a recent digital traffic softness and other unfavorable factors. Nike guided for full-year revenue growth of 1%, lowering its prior mid-single digits guidance. As for the current, fiscal third, quarter, Nike is expecting sales growth in low single digits due to tough comparisons from last year. Gross margin is expected grow between 1.4 and 1.6 percentage points, but excluding restructuring charges, Nike affirmed its full-year earnings outlook.

Nike’s Tone Was Somewhere In The Middle

Being among the last retailers to release a quarterly report before Christmas, Nike was both cautious and optimistic. Although its second revenue miss and increased focus on cost cuts are a red flag for deeper demand issues, its CEO John Donahoe proudly stated Nike digital had its best Black Friday Ever, along with a record number of consumers shopping in its stores over the Thanksgiving weekend. Nike entered the holiday season by outpacing the industry with growth of almost 10%. But the lowered outlook is a clear warning it cannot keep up the pace for the rest of its fiscal year and even Foot Locker felt that blow.

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