Nike’s cost cutting strategy was unveiled on Thursday, about $2 billion over the next three years as it lowered its sales outlook. Nike fell short of Wall Street’s sales estimates for the second quarter in a row. The sneaker giant also cut its revenue outlook for the fiscal year.
The Nike stock drop was about 10% after hours. Nike stock were up 4.7% so far this year through Thursday’s close, lagging far behind the S&P 500′s gains for the year. Retailer Foot Locker, which has leaned heavily on Nike products, fell about 7% after hours.
Expectations after Nike’s $2 billion cost reduction plan
After Nike’s cost cutting strategy, the company now expects full-year reported revenue to grow approximately 1%, compared to a prior outlook of up mid-single digits. Nike sales in Q4 2023, which includes the second half of the holiday shopping season, to be up low single digits in the fourth quarter. Nike reported revenue to be slightly negative as it laps tough prior year comparisons,
The company still expects gross margins to expand between 1.4 and 1.6 percentage points. Excluding restructuring charges, it expects to deliver on its full-year earnings outlook.
Nike’s plan to reinvent
As part of Nike’s $2 billion cost reduction plan, the company said it’s looking to simplify its product assortment, increase automation and its use of technology, streamline the overall organization by reducing management layers and leverage its scale “to drive greater efficiency.”
Nike’s cost cutting strategy is for plans to reinvest the savings it gets from those initiatives into fueling future growth, accelerating innovation and driving long-term profitability.
Nike’s financial restructuring announcement will cost the company between $400 million and $450 million in pretax restructuring charges that will largely come to fruition in Nike’s current quarter. Those costs are mostly related to employee severance costs, Nike said.
Nike layoffs
Earlier this month, The Oregonian reported that Nike had been quietly laying off employees over the past several weeks and had signaled that it was planning for a broader restructuring. A series of divisions saw cuts, including recruitment, sourcing, brand, engineering, human resources and innovation, the outlet reported.
Nike financial performance and outlook
Here’s how the sneaker giant performed compared to what Wall Street was anticipating, based on a survey of analysts by LSEG, formerly known as Refinitiv:
Earnings per share: $1.03 vs. 85 cents expected
Revenue: $13.39 billion vs. $13.43 billion expected
The company reported net income for the three-month period that ended November 30 was $1.58 billion, or $1.03 per share, compared to $1.33 billion, or 85 cents per share, a year earlier.
Nike’s sales rose about 1% to $13.39 billion, from $13.32 billion a year earlier.
Nike a leader in industry
Nike is considered a leader among industry peers such as Lululemon, Adidas, and Under Armour, but its profits have been under pressure and it has been in the middle of a strategy shift that has seen it rekindle its relationships with wholesalers including Macy’s and Designer Brands, the parent company of DSW.
Nike’s focus on margins
After Nike’s financial restructuring announcement, the focus is on margins. For the past six quarters, Nike’s gross margin has declined compared to the prior-year period, but the story turned around on Thursday. Nike’s gross margin increased 1.7 percentage points to 44.6%, slightly ahead of estimates, according to StreetAccount.
During the quarter, inventories were down 14% to $8 billion.
While the company repeatedly pointed out the overall promotional environment, it said the average sales price of footwear and apparel were up during the quarter and the average selling price grew across channels with higher-priced products proving particularly “resilient.”
The company attributed the gross margin uptick to “strategic pricing actions and lower ocean freight rates,” saying it was partially offset by unfavorable foreign exchange rates and higher product input costs.
Nike struck a note that hit somewhere in the middle. Its sales miss and focus on cost cuts signal larger demand issues, but CEO John Donahoe was upbeat when discussing Black Friday week sales.
“We outpaced the industry, driving growth of close to 10%, Nike digital had its strongest Black Friday week ever and a record number of consumers shopped in our stores over the long Thanksgiving weekend,” said Donahoe.
China important for Nike
China is another key part of the Nike story. As the region emerges from the Covid-19 pandemic and widespread lockdowns, China’s economic recovery has so far been a mixed bag. In November, retail sales climbed 10.1% in the region.
During the quarter, China sales came in at $1.86 billion, which fell short of the $1.95 billion analysts had expected, according to StreetAccount. Sales in Europe, the Middle East and Africa also fell short of estimates. Nike revenue was up in North America, Asia-Pacific and Latin America markets.
