Nike announced its intention to trim costs by approximately $2 billion over the next three years, concurrently revising its sales outlook, which led to a nearly 10% decline in stock after hours. Despite a 4.7% year-to-date increase in Nike shares, the performance lagged behind the S&P 500’s gains. Retailer Foot Locker, heavily reliant on Nike products, experienced a 7% drop after hours.
The sportswear giant now anticipates a modest 1% growth in full-year reported revenue, a significant adjustment from the earlier mid-single digits projection. For the current quarter, encompassing the latter part of the holiday shopping season, Nike expects reported revenue to be slightly negative due to challenging year-on-year comparisons, with sales projected to increase by low single digits in the fourth quarter.
Matthew Friend, the Chief Financial Officer, acknowledged the impact of macroeconomic challenges, particularly in Greater China and EMEA. These challenges include a robust U.S. dollar affecting foreign currency translation, fluctuations in consumer demand during the holiday season, and shifts in second-half wholesale order books.
To counter these challenges, Nike aims to enhance gross margins by 1.4 to 1.6 percentage points. The company plans to achieve this through simplifying its product lineup, increasing automation and technology utilization, streamlining the organization by reducing management layers, and leveraging its scale for greater efficiency.
Nike fell short of Wall Street’s sales estimates for the second quarter in a row.
The cost-cutting measures will incur restructuring charges of $400 million to $450 million in pretax, primarily in the current quarter. These charges relate to employee severance costs as Nike undertakes a broader restructuring, as reported by The Oregonian earlier this month.
Despite a strong earnings beat in the fiscal second quarter, with net income of $1.58 billion and earnings per share of $1.03, The Company fell short of sales estimates for the second consecutive quarter. The company’s sales for the quarter reached $13.39 billion, a 1% increase compared to the previous year.
The strategy shift includes a focus on margin improvement. Nike’s gross margin increased by 1.7 percentage points to 44.6%, marking a turnaround from six consecutive quarters of decline. Inventory management has improved, with inventories down 14% to $8 billion.
While acknowledging a challenging promotional environment, Nike highlighted strategic pricing actions and lower ocean freight rates as contributing factors to the improved gross margin. The company remains cautiously optimistic, emphasizing strong gross margin execution and disciplined cost management as it navigates the second half of the fiscal year. CEO John Donahoe expressed positivity regarding Black Friday week sales, where Nike outpaced the industry with close to 10% growth.
China’s economic recovery remains a crucial factor for Nike, with sales in the region falling short of analyst expectations at $1.86 billion during the quarter. Overall, The company faces demand challenges but remains focused on cost-cutting initiatives, margin improvement, and strategic reinvestment for future growth.
