Nike's shares dropped early Friday as the sportswear giant flagged revenue and gross margin declines in the fiscal third quarter amid increased transformation efforts. Despite this, its results from the preceding three-month period exceeded market estimates. The athletic footwear and apparel maker forecasts a low double-digit revenue decline in the ongoing quarter.
This reflects initial steps on certain strategic actions to reposition the business and challenges posed by deteriorating foreign-exchange conditions, stated Chief Financial Officer Matthew Friend during a late Thursday earnings call, as outlined in a FactSet transcript. Gross margin is anticipated to decrease by about 300 to 350 basis points as the company intends to 'clean and to reset the marketplace,' Friend stated. In premarket activity, shares decreased by 3.5%. The guidance considers the added pressures from Nike's franchise management initiatives, more aggressive near-term inventory clearance efforts, and additional brand marketing investments, as indicated by Truist Securities in a client note.
The brokerage has adjusted its price target on the company’s stock down to $90 from $97. Nike aims to shift its digital channel toward a full-price model while reducing the proportion of business driven by promotional activities. Friend elaborated during the call that the company plans to cut back on performance marketing investment, which is expected to ease paid traffic and 'necessitate short-term liquidation of excess inventory through less profitable channels.' To create capacity in the marketplace for seasonal newness, Nike intends to offer additional wholesale discounts to reclaim shelf space and aspires to significantly reduce the weeks of supply of its classic footwear franchises over the next few seasons.
Friend noted that 'the net effect of these actions will result in lower revenue, additional gross margin pressure, and higher demand creation expenses, with a greater headwind to the fourth quarter compared to the third quarter.' Truist suggested that the outlook may be conservative, considering that this earnings call was Elliot Hill’s first address to investors since assuming the role of CEO.
Hill, a former long-time executive at Nike, returned to the company in October to succeed John Donahoe. For the three-month period ending in November, Nike reported earnings of $0.78 per share, down from $1.03 the year prior, but surpassing street estimates of $0.65. Revenue fell 8% year-over-year to $12.35 billion, yet it still exceeded analysts' projection of $12.13 billion. Revenue for the Nike brand decreased by 7% to $11.95 billion, significantly impacted by declines in both footwear and apparel sales.
North American sales fell by 8%, while Europe, the Middle East, and Africa experienced a 7% decrease. Revenue from China also dropped by 8%, while Asia Pacific and Latin America saw a 3% reduction. Gross margin shrank by 100 basis points to 43.6%, primarily due to higher discounts and changes in channel mix.
This drop was partially offset by reduced product input, warehousing, and logistics costs. Selling and administrative expenses decreased to $4.01 billion from the previous quarter's $4.15 billion..