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NIKE, Inc. (NKE): Regaining Its Edge Through Accelerated Innovation and Focused Execution
Published on September 24, 2024 | Ticker: NKE

NIKE, Inc. (NKE) is the world's largest seller of athletic footwear, apparel, and equipment, with a strong global presence and a reputation for innovation. The company reported annual revenue of $51,362 million, annual net income of $5,700 million, annual operating cash flow of $7,429 million, and annual free cash flow of $6,617 million in its latest fiscal year.

In the third quarter of fiscal 2024, NIKE, Inc. reported revenues of $12,429 million, up slightly from $12,390 million in the prior-year quarter. The company's net income for the quarter was $1,172 million, down 5% from $1,240 million in the same period last year. NIKE's operating cash flow for the first nine months of fiscal 2024 was $4,810 million, up from $3,588 million in the prior-year period, while free cash flow was $4,211 million, compared to $2,888 million a year earlier.

Business Overview

NIKE designs, develops, markets, and sells athletic footwear, apparel, equipment, and accessories worldwide. The company operates through the NIKE Brand and Converse segments. The NIKE Brand segment includes footwear, apparel, and equipment related to sports activities and lifestyle use. The Converse segment designs, markets, licenses, and sells casual sneakers, apparel, and accessories.

NIKE's strategy is to achieve long-term revenue growth by creating innovative, "must-have" products, building deep personal consumer connections with its brands, and delivering compelling consumer experiences through digital platforms and at retail. The company's Consumer Direct Acceleration strategy, launched in 2020, has driven revenue growth and millions of new consumer connections, while shifting the mix of the business toward owned stores and digital platforms.

Geographic Performance

In the third quarter of fiscal 2024, NIKE's North America segment reported revenues of $5,070 million, up 3% from the prior-year quarter. The Europe, Middle East & Africa (EMEA) segment generated revenues of $3,138 million, down 3% year-over-year. Greater China reported revenues of $2,084 million, up 5% compared to the same period last year. The Asia Pacific & Latin America (APLA) segment recorded revenues of $1,647 million, up 3% from the prior-year quarter.

Revenue Breakdown and Trends

NIKE Brand revenues, which represented over 90% of NIKE, Inc. revenues, increased 2% in the third quarter of fiscal 2024 on a reported and currency-neutral basis. Footwear revenues grew 3% on a currency-neutral basis, driven by higher revenues in Men's, Women's, Kids', and the Jordan Brand. Apparel revenues decreased 3% on a currency-neutral basis due to lower revenues in Men's and Women's, partially offset by higher revenues in Kids'.

NIKE Direct revenues, which include NIKE-owned retail stores and digital sales, were $5.4 billion in the third quarter of fiscal 2024, compared to $5.3 billion in the prior-year quarter. On a currency-neutral basis, NIKE Direct revenues were flat, driven by comparable store sales growth of 3% and the addition of new stores, offset by a 4% decline in NIKE Brand Digital sales.

Converse segment revenues were $495 million in the third quarter of fiscal 2024, down 19% from the prior-year quarter on a reported basis and 20% on a currency-neutral basis, primarily due to revenue declines in North America, Western Europe, and Asia.

Financials

NIKE's current ratio was 2.4 as of the end of the third quarter of fiscal 2024, indicating a strong liquidity position. The company's quick ratio was 1.69, also suggesting ample short-term liquidity. NIKE's cash and equivalents and short-term investments totaled $10.6 billion as of February 29, 2024.

The company's gross profit margin was 44.8% in the third quarter of fiscal 2024, up 150 basis points from the prior-year quarter, primarily due to strategic pricing actions, lower ocean freight rates, and improved supply chain efficiency, partially offset by lower margins in NIKE Direct and unfavorable channel mix.

NIKE's operating profit margin was 10.9% in the third quarter of fiscal 2024, down from 11.9% in the prior-year quarter, as higher gross margins were more than offset by increased selling and administrative expenses, including restructuring charges.

Outlook

For fiscal 2025, NIKE now expects reported revenue to be down mid-single digits, with the first half down high single digits. This revised outlook reflects more aggressive actions to manage the supply of the company's classic footwear franchises, continued challenges in NIKE Digital, a softer outlook in Greater China, and increased macroeconomic uncertainty.

NIKE expects full-year fiscal 2025 gross margin expansion of approximately 10 to 30 basis points on a reported basis, reflecting benefits from strategic pricing actions and lower product input costs, partially offset by supply chain deleverage, channel mix shifts, and net foreign exchange impact.

The company plans to increase investments in demand creation to ignite brand momentum, while holding operating overhead largely flat, resulting in full-year fiscal 2025 SG&A growth being up slightly versus the prior year.

Risks and Challenges

NIKE faces several risks and challenges, including intense competition in the athletic footwear, apparel, and equipment markets, the ability to successfully innovate and compete in various product categories, changes in consumer preferences, macroeconomic conditions, foreign currency fluctuations, and supply chain disruptions.

The company is also navigating a product cycle transition, with complexity amplified by shifting channel mix dynamics. NIKE is taking aggressive actions to manage the supply of its classic footwear franchises, which is expected to create short-term headwinds on revenue in fiscal 2025.

Conclusion

NIKE is regaining its edge through accelerated innovation and focused execution. The company is sharpening its focus on sport, driving bigger and bolder storytelling, and elevating the entire marketplace to fuel brand distinction. While the next few quarters will be challenging, NIKE is confident that it is repositioning the business to be more competitive, with a more balanced portfolio, to drive sustainable, profitable long-term growth.

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