Nike on Tuesday posted surprise sales growth in its fiscal first quarter, but the sneaker giant still has work ahead to execute its turnaround.
The company said revenue rose 1% in the three months ended Aug. 31, after previously saying it anticipated sales would fall by a mid-single digit percentage in the period.
Still, Nike’s profits fell 31% while gross margin dropped 3.2 percentage points to 42.2% during the quarter — a warning sign to investors that its efforts to clear through old inventory are still ongoing.
In a press release, finance chief Matt Friend warned that “progress will not be linear.”
“I’m encouraged by the momentum we generated in the quarter, but progress will not be linear as dimensions of our business recover on different timelines,” said Friend. “While we navigate several external headwinds, our teams are focused on executing against what we can control.”
Here’s how Nike performed during the quarter compared with what Wall Street was anticipating, according to consensus estimates from LSEG:
- Earnings per share: 49 cents vs. 27 cents expected
- Revenue: $11.72 billion vs. $11.0 billion expected
Nike’s reported net income for the period was $727 million, or 49 cents per share, compared with earnings of $1.05 billion, or 70 cents per share, in the year-ago quarter.
Sales rose to $11.72 billion, up about 1% from $11.59 billion a year earlier.
In a statement, CEO Elliott Hill said the company is making strides in three key areas: wholesale, running and North America. During the quarter, wholesale revenue rose 7 to about $6.8 billion%, while sales in North America climbed 4% to $5.02 billion — better than the $4.55 billion analysts were expecting, according to StreetAccount.
However, beyond those three areas, Hill acknowledged parts of the business are still struggling.
“While we’re getting wins under our belt, we still have work ahead to get all sports, geographies, and channels on a similar path as we manage a dynamic operating environment,” said Hill.
During the quarter, Nike direct sales fell 4% to about $4.5 billion. Revenue in China — one of the company’s most important markets — was down 9%.
Since Hill took over nearly a year ago, he’s been working to get Nike back to growth and undo some of the work his predecessor John Donahoe implemented. One of the most important parts of that strategy has been reigniting Nike’s innovation engine and clearing through stale inventory to make way for new styles.
Though the strategy is crucial to Nike’s efforts to grow again and take back market share, it comes with pain in the short term. Clearing out old inventory has required Nike to rely on discounting and less profitable sales channels to move products, which has impacted its profitability.
During the quarter, inventories were down 2% compared to the prior year as units decreased, which was offset by increased product costs related to higher tariffs.
Ahead of Nike’s release, investors were looking for any clues into how those efforts are going and how much longer they’ll take. The company was expected to provide more insight into its progress during a conference call with analysts at 5 p.m. ET.
Beyond inventory management, Hill has also pledged to realign Nike’s corporate structure so it would once again segment teams by sport instead of by women’s, men’s and kids. In late August, the company started shuffling teams. As part of the restructuring, Nike said it would cut around 1% of its staff, and most employees would be moved into new roles by Sept. 21.Â
Hill has said a focus on sports over lifestyle will help the company win back its crucial athlete consumer, but lifestyle merchandise is still an important part of the strategy because it allows Nike to reach a larger consumer segment, and more women. Growing the number of female customers has been another important part of Hill’s strategy and Nike’s recent partnership with Kim Kardashian’s shapewear brand Skims is one of the ways it’s getting there.
NikeSKIMS, originally slated to release in the spring, officially launched last week. Investors will be looking out for color on how the new brand is performing and how it could affect sales.
This story is developing. Please check back for updates.
