A customer enters a Nike store in the Magnificent Mile shopping district in Chicago, Illinois, on December 21, 2022.
Scott Olson | Getty Images
Nike plans to simplify its product assortment, increase automation and use of technology, streamline its overall organization and use its scale “to increase efficiency,” the company said in a press release as it announced second-quarter results .
The company plans to reinvest the savings generated from these initiatives into driving future growth, accelerating innovation and increasing long-term profitability.
“As we look at a weaker revenue outlook for the second half of the year, we remain focused on strong gross margin and disciplined cost management,” Chief Financial Officer Matthew Friend said in a statement.
The plan will cost the company $400 million to $450 million in pretax restructuring costs, most of which will be reflected in Nike's current quarter. These costs are primarily related to employee severance costs, Nike said.
Earlier this month, The Oregonian reported that Nike had been quietly laying off employees in recent weeks and signaling that the company was planning a broader restructuring. Cuts occurred in a number of departments, including recruiting, procurement, brand, engineering, human resources and innovation, the outlet reported.
The company did not immediately respond to a request for comment on The Oregonian's report.
In the second fiscal quarter, Nike reported a strong increase in profits, indicating that cost-saving initiatives are already underway. But the second quarter in a row fell short of sales estimates.
Here's the sneaker giant's performance compared to Wall Street's expectations, based on a survey of analysts by LSEG, formerly known as Refinitiv:
- Earnings per share: $1.03 versus expected 85 cents
- Revenue: $13.39 billion versus expected $13.43 billion
The company reported net income of $1.58 billion, or $1.03 per share, for the three-month period ended Nov. 30, compared with $1.33 billion, or 85 cents per share, a year earlier .
Revenue rose about 1% to $13.39 billion from $13.32 billion annually earlier.
Nike is considered a leader among industry peers such as Lululemon and Under Armour, but its profits are under pressure and it is in the midst of a strategy shift that has seen the company cut ties with wholesalers such as Macy's and Designer Brands, DSW's parent company. has revived.
Over the past six quarters, Nike's gross margin had declined compared to the same period last year, but things changed on Thursday. According to StreetAccount, Nike's gross margin rose 1.7 percentage points to 44.6%, slightly above estimates.
This time last year, Nike's inventory was up a staggering 43% and the retailer was in the midst of an aggressive liquidation strategy to clear out old models and make way for new ones, taking a toll on its margins. However, a few quarters later, Nike is in a much better inventory position, which has a positive impact on margins.
During the quarter, inventories fell 14% to $8 billion.
The turnaround in Nike's gross margin came as the overall retail environment became flooded with great promotions and discounts as retailers struggled to convince inflation-weary consumers to pay full price. When Nike reported first-quarter results in September, Chief Financial Officer Matthew Friend said Nike was “planning cautiously on modest discount improvements” given the overall advertising environment.
The company attributed the increase in gross margin to “strategic pricing actions and lower ocean freight rates” and said it was partially offset by unfavorable foreign exchange rates and higher product input costs.
As one of the last retailers to report earnings before the December holidays, investors are eager for good news when it comes to Nike's expectations for the crucial shopping season. When many retailers released their holiday quarter forecasts in November, commentary was largely muted and cautious, as companies hoped to under-perform and over-promise in an increasingly uncertain macroeconomic environment.
In its earnings release, Nike did not provide any guidance insight, but said the company would provide revised guidance during its conference call scheduled for Thursday at 5:00 p.m. ET. In September, Nike maintained its full-year forecast for mid-single-digit sales growth and gross margin expansion of 1.4 to 1.6 percentage points.
China is another important part of the Nike story. As the region recovers from the Covid pandemic and widespread lockdowns, China's economic recovery has been mixed so far. In November, retail sales in the region rose 10.1%.
It was the fastest pace of growth since May, but those numbers fell short of simple comparables and the growth was driven largely by auto sales and restaurants, according to a Goldman Sachs research note.
According to StreetAccount, China sales were $1.86 billion in the quarter, falling short of analysts' expectations of $1.95 billion. According to StreetAccount, sales in Europe, the Middle East and Africa also fell short of estimates, but sales in North America, Asia Pacific and Latin America markets were ahead.
Read the full earnings release here.
This is a developing story. Check back for updates.