NIKE, Inc. (NKE) Earnings

Management highlights

- Continued meaningful actions to improve business health, quality, and foundation. - Removed unhealthy inventory from classic footwear franchises, creating a five-point headwind but improving marketplace health. - Focused on sport offense in running and football, athlete-centered innovation, wholesale business, and North America. - New leadership in place for Greater China, Converse, and Sportswear with clearer strategies and structural changes. - Nike Running showed over 20% growth, global football transforming, and introduced innovative platforms. - North America wholesale momentum accelerating, Nike Direct elevating experiences. - ACG showcased at Winter Olympics, Sportswear and Jordan Streetwear moving from defense to offense, and actions in Greater China and EMEA to improve business.

Guidance

- Expect revenues to be down low single digits versus prior year, with gains in North America offset by declines in Greater China. - First quarter of fiscal 27 expected to be final quarter with higher tariffs as material headwind to gross margin. - Gross margin expansion to begin in second quarter due to actions to mitigate tariffs and recovery of transitory impacts. - Earnings flattish with gross margins beginning to inflect and disciplined SG&A management. - Fourth quarter of fiscal 26 expected revenues down 2 to 4%, Greater China down ~20%, sequential improvement in gross margin, SG&A flat to slightly down, other expense net of interest income 15 to 25 million, full-year tax rate in low 20% range. - Will return to providing full-year and long-term guidance at investor day in fall.

Segment performance

Nike Running had over 20% growth in the quarter. Global football is transforming into the sport offense. Innovation platforms like Nike Mind, Liquid Air Max, and AeroFit were introduced. North America revenue grew 3%, with wholesale up 11% and Nike Direct down 5%. EMEA revenue down 7%, inventory up double digits. Greater China revenue declined 10%, running grew double digits. APLA revenue down 2%, running up double digits. Gross margins declined 130 basis points to 40.2% on a reported basis, primarily due to higher tariffs in North America. Inventory decreased 1% versus prior year with units down mid single digits.

Risks & headwinds

- Macro environment factors like disruption in the Middle East, rising oil prices could impact input costs or consumer behavior. - Unplanned volatility due to various factors that could affect actual results. - Continued challenges in certain geographies like EMEA with promotional marketplace and traffic disruption. - Need to continue cleaning up marketplace and managing inventory in Greater China which could impact revenue growth.

Analyst Q&A

• Q: The performance in EMEA seems to have decoupled from some of the early successes you've seen in North America. How do you diagnose the problems and what's the strategy to fix it?

  A: EMEA has growth in performance like running, but sportswear sell-in not where hoped. Macro pressures, traffic disruption in Middle East. Teams pulling levers to keep marketplace clean, new leader Cesar Garcia, focus on performance and elevated integrated marketplace.

• Q: You're talking about the end of the calendar year, but your quarters kind of split the calendar year kind of in the middle. So I'm wondering if we should be thinking about revenue, you said down low single digit for that horizon. with North America up and improving, which would suggest that greater China is meaningfully negative, probably climbing from that negative 20. So just a little bit of help there with the shaping and what exactly is it, February quarter? The earnings being flattish would suggest, you know, 15%, maybe haircut, you know, to where, I mean, significantly more than where the street is. So again, Is that flat for the fourth quarter on EPS through the February quarter? And then should we think about the May quarter of that year sort of having a big inflection?

  A: Expect revenue down low single digits over period, momentum continues in North America offset by headwinds in Greater China. Margins expected to inflect in Q2, setting table for inflection and earnings.

• Q: In the spirit of all this information, which, again, thank you, I know you guys don't normally give this detail, but any color you can share on D2C gross margins or just any way to think about the health of that channel. I know I've gotten a lot of questions around wholesale growth versus D2C declines. It just might be helpful to hear a little bit more about the quality of those D2C sales versus the reported declines?

  A: DTC is important, moving to balanced and integrated marketplace. North America saw improvement in DTC quality, sequential growth in quarter, improvement in average retail discounts, demand on Nike app grew, sell through inflected up.

• Q: Just to clean up, it's the negative 2% to 4% in fourth quarters reported or currency. And then I guess bigger picture with revenues down 2% to 4% and America growing, I guess North America growing modestly, China down 20%. You didn't guide the MEA in the fourth quarter, but it seems like you're triangulating somewhere close to down mid-singles. Down a bit despite the World Cup, maybe just the shape of the major puts and takes in the MEA. in fourth quarter since the revenue rate changed so much in third quarter. And I guess the follow-up there is the margins in EMEA were surprisingly strong in third quarter despite the revenue decline. Could you just comment there on maybe any color and whether those positive offsets continue?

  A: Expect growth in performance dimensions, excited about World Cup, but sell-through on sportswear side modified outlook. Considered Middle East traffic disruption and marketplace management. Continued encouragement from North America momentum.

• Q: Elliott, Matt, I was hoping to get your latest thoughts on the opportunity to stabilize the sportswear business. How much additional reset activity is needed in the Classics franchise by geography? And are you seeing any green shoots in the North America sportswear portfolio that gives you confidence that the strength and performance can translate to better momentum in sportswear over time?

  A: Moving from defense to offense in sportswear, Air Force one and AJ one stabilized, dunks still work in progress. Green shoots seen in launches like AJ11 Gamma, AJ5 Wolf Grey, Nike Air Max 95 with strong sell-through.

• Q: The question I want to ask, I mean, you've mentioned several times in your comments, you know, that you're headed in the right direction, but the process is taking longer than you initially expected. So the question is that as you look at the reasons for that, is it more, you know, internal? Or is it more external? The environment, the different geographies or whatever, has proven more challenging for the turnaround effort here.

  A: A little bit of both. Starting points for each geo/marketplace different, structure varies. Comeback substantial and takes time, external factors like major comeback while dealing with external issues, but teams reorganized internally around product and consumer.

• Q: Elliot, could you, if we take a step back, just update us on health of the global sportswear backdrop or where does your outlook for the industry stand today relative to when you took the helm? And then Matt, On low to mid-single digit constant currency revenue declines for the back half of the year, is there a way to parse out self-inflicted headwinds or maybe where you see underlying demand exiting this fiscal year? And what have you embedded for overall sell-through rates through the balance of the calendar year, just relative to the pressure that you cited that you've experienced to date?

  A: Sportswear remains large part of industry, critical to success. Athletic industry seen as opportunity. For back half of year, revenue declines due to various factors, sell-through assumptions include balanced growth across channels, improvement in underlying profitability, managing sell-in in Greater China for sequential improvement in sell-through rates.