Nike Inc - Class B (NKE) — Q3 2020 Earnings Call Transcript

Thank you, operator. Hello, everyone, and thank you for joining us today to discuss NIKE, Inc.'s fiscal 2020 third quarter results. As the operator indicated, participants on today's call may discuss non-GAAP financial measures. You will find the appropriate reconciliations in our press release, which was issued about one hour ago or at our website, investors.NIKE.com. Joining us on today's call will be NIKE, Inc. President and CEO, John Donahoe; and our Chief Financial Officer, Andy Campion. We are sitting together in a conference room six feet apart, practicing social distancing. Following Andy and John's prepared remarks, we will take your questions. We would like to allow as many of you to ask questions as possible in our allotted time. So, we would appreciate you limiting your initial questions to two. In the event you have additional questions that are not covered by others, please feel free to re-queue, and we will do our best to come back to you. Thanks for your cooperation on this. I will now turn the call over to NIKE, Inc. President and CEO, John Donahoe.

Thanks, Matt, and hello to everyone on the call. Over the last quarter, NIKE delivered 7% currency-neutral revenue growth, despite the material impact from COVID-19 in China. This performance reflects the strong business momentum we had in Q3 across all of our geographies and categories. But, let's take a step back. We're living in an unprecedented moment. And like never before, each day requires a close inspection of a very dynamic external environment, and a clear determination of how we will respond. So, let me tell you what we've seen over the past two months. When COVID-19 began to aggressively spread across China in late January, our top priority was to protect the health and safety of our teammates and our consumers. We immediately began closing stores. And as of 45 days ago, we had closed more than 5,000 stores in Greater China, while the remaining open doors were operating with severely reduced hours. Not surprisingly, retail volume in China plummeted. But, we acted quickly and decisively, leveraging our diverse sourcing base and digital capabilities to manage the business with flexibility, and shifting our inventory to serve consumer digital demand. At a time when people were confined to their homes, we moved swiftly to leverage our digital app ecosystem and NIKE expert trainer network to inspire and support consumers across China to stay active and connected while at home. As a result, our NIKE Training Club workouts in China saw an extraordinary rise in sign-up and engagement. In fact, our weekly active users for all of our NIKE activity apps were up 80% by the end of Q3 versus the beginning of the quarter. And here's what happened. The strong engagement of Chinese consumers with our activity apps translated into strong engagement with our NIKE commerce app. As a result, our digital business in China grew more than 30% and maintained strong momentum throughout this challenging period, a powerful statement of NIKE’s agile problem-solving in times of disruption. Then approximately 30 days ago, we began to gradually reopen stores in China. People got back to work and retail traffic began improving significantly. Today, nearly 80% of our stores in China have reopened with more coming back online every day. In fact, just last week, we reopened our first store in the Wuhan area. And the results are encouraging. Our digital business in China has accelerated even further over the past month, and we are now seeing double-digit increases in retail traffic week-over-week with some stores having already returned to prior year levels. Credit for this response goes to Angela Dong, who leads our Greater China geography, and her talented team of more than 1,600. I spoke with Angela two nights ago, and she's been telling me about the positive sentiment consumers in China are feeling for NIKE. And I can't overstate how impressed I am. It's become quite clear to me that when NIKE says we are a brand of China for China, it's really true. And it's no surprise to see the business already rebounding, given the depth of our connection, and the incredible strength of our local leadership team. So, today, I can say that we're seeing the other side of the crisis in China. And due to the resilience and creativity of our team in China, we now have a playbook that we can use elsewhere. In addition to Greater China, we've applied that playbook in Japan and South Korea over the past two months, and we're seeing early momentum in those markets as well. And with COVID-19 now spreading across Europe and the U.S., we are applying the same playbook. We have prioritized the health and safety of our teammates, and we've closed our stores. Over the weekend, we drove a strong digital marketing campaign to engage consumers across Europe and across the U.S. to stay healthy and connected while they're at home. And our digital commerce remains open and in growth mode, supported by our teammates in our distribution centers. We also know that this is a moment in society where the private sector has a major role to play. Companies like NIKE need to do our part. So, our teams in innovation and manufacturing are exploring designs for personal protective equipment or PPE to support doctors, nurses and others on the front line of this outbreak. Based on needs identified by the teams and health professionals at Oregon Health & Science University, our teammates are working right now on how to best help, including prototyping face shields for OHSU and others. It's been so energizing to see the quick strike efforts of the cross-functional team to try to help with this critical need. That said, we expect the next several weeks to be a challenging period for those living in the U.S. and Europe. And I can't precisely predict how long the containment phase of the outbreak will last. But, our experience in China, Japan and South Korea gives us confidence that we will see the other side of this crisis in the near future. And I can assure you this, as the situation continues to evolve, we will be ready and we will respond. We'll be guided by our values, and we will execute with empathy and decisiveness. For instance, we'll continue to maintain pay continuity, even while our facilities are closed or have altered schedules. We know that our people are vital to fueling our deep connections with consumers, whether they work in our stores or in our distribution centers. And what's more, it's simply the right thing to do. So, while this is an uncertain and challenging time, NIKE has the foundation in place to emerge from it stronger than ever. Thanks to our competitive advantages, the power of our brand in connection with consumers, our digital capabilities, our compelling product innovation and most importantly, our extraordinary team, we will manage our business back to full recovery. We know in times like these that strong brands get even stronger. And I truly believe that no one is better equipped than NIKE to navigate the current climate. So, with that said, let's go a bit deeper. I spent the last 90 days digging into this extraordinary Company. I thought I knew NIKE after five years on the board, but believe me, when you get to dive even deeper, this place is even more impressive than I imagined. Let me walk you through what I've learned through the lens of the four strengths I just mentioned: Our strong brand; our digital advantage; our product innovation; and our extraordinary team. These are the strengths that will continue to set us apart, and these are the strengths that will allow us to shape the future marketplace going forward. Since I started as CEO in January, I have visited with our teams in several of our key cities, experiencing firsthand our deep connections with local consumers around the world as well as our innovative retail concepts. I've also had the opportunity to meet with many of our most important strategic partners. During my first week as CEO in early January, I spent time in China and Japan before the virus took hold. I got to see firsthand just how deeply the NIKE Jordan and Converse brands are connecting with consumers, both in compelling retail executions and in the many ways that NIKE partners with regional local governments to grow physical activity and sport. Our brand is driving these powerful connections to consumers worldwide. In fact, we were the number one favorite brand in all 12 of our key cities in Q3, and we continue to gain market share in key cities such as Berlin, Mexico City and Tokyo. And during a time of physical store closures around the world, we know that our digital foundation will help us emerge out of this situation in an even stronger position. For instance, in Q3 digital delivered 36% currency-neutral growth and it will continue to be a powerful driver of our deep consumer connections. As I mentioned earlier, we are executing our learnings from China about fueling sport and fitness all over the world. We're using our digital advantage to connect with and support our consumers as behaviors around staying healthy at home continue to evolve. Over the weekend, we made the NTC Premium free for everyone in the U.S. for 90 days. NTC Premium offers the best on-demand workouts and expert tips from our master trainers and others, as well as inspiration and support for healthy living. Digital remains our fastest-growing channel with owned and partnered digital already representing more than 20% of our overall business. And our apps continue to be the sharp point of our growth, with the NIKE app growing revenue close to triple digits once again in Q3, fueling member acquisition and strong monthly engagement. And while we've driven impressive results in acquiring new members, engaging them and fueling increased digital demand, we know that the opportunity here is still far greater than what we've realized to date, and will become an even greater advantage for NIKE as we move forward. And even while our stores remain closed in Europe and the U.S., we continue to work on defining the future of seamless, physical and digital retail. To expand the advantage we have in digital, we continue to invest in our NIKE Direct businesses, enhancing rich experiences like those and the NIKE app at retail. And we're increasingly concentrating on our online to offline journey and accelerating our work to fully connect the marketplace while creating frictionless experiences for consumers throughout the world. Another clear competitive advantage is our product innovation. Our product and innovation have always set NIKE apart from others. And I firmly believe this will become even more important as a differentiator as we look ahead. Over the past couple of months, I've spent a lot of time with our innovation, design, product and merchandising teams. I've done several deep dives in these areas, and I am truly blown away. As a Board member, you get to see a lot, but you can never fully understand how impressive NIKE’s product innovation capability is until you spend time with our teams. For instance, today, we have more than 1,000 designers working at NIKE with broad and deep talent across footwear and apparel. And you can just feel how their creativity and vision for product inspires everyone here and inspires consumers around the world. I got to see some of this innovative product on display at the NIKE 2020 Forum last month in New York, which served as a great illustration of the power of our 2 times innovation offense. There, we announced a powerful array of breakthrough product, such as our NEXT% footwear line, which offers measurable benefits to consumers. We also launched a new aesthetic for sustainability, where we're delivering new scalable platforms like no one else. And by bringing together athletes and creative partners as only NIKE can, the forum was an optimistic statement about the future of sport culture. And our vantage goes beyond our incredible product pipeline. It has become even more clear to me why NIKE leads the industry. Our innovation, product and design teams have an unrelenting commitment to discovering what's next. This culture of innovation is pervasive across our organization and deeply embedded within NIKE teams around the world, from those who engage consumers at retail, to those creating the next wave of digital experiences that connect with consumers daily. Fueled by data and analytics capabilities, we are equipped with deep consumer insight that we combine with our design expertise and athlete research. This process directly translates into breakthrough products, season-after-season, allowing us to drive more separation in the marketplace. There's one last thing I'd like to mention. As you know, the organized sports world remains on hold, and yet the global culture of health and wellness continues unabated. In fact, in many ways, people are looking to health and wellness now more than ever. Whether it's to stay in shape at home or with the focus on mental health in stressful times, people all over the globe are finding ways to make sport a daily habit wherever, whenever and however they can. And as you may have seen, this past weekend, we encouraged consumers worldwide to work out at home with a simple message: Play Inside, Play For The World. We're seeing new behaviors normalize in countries all over the globe. And we're shifting our entire consumer ecosystem to deliver access to sports that speaks to consumers’ changing laws. Across key markets, we're working to create shared experiences and opportunities for virtual participation, connecting people to something bigger and showing how sport can inspire. And though there's no predicting when organized sports will restart, when our athletes, teams and leagues can return to competition, I do have one guarantee. When the gates reopen, when the first whistle sounds, the energy is going to be off the charts. The world's passion for sports remains undiminished. And when it all returns, NIKE will be right there with sports fans everywhere. In summary, I'm incredibly proud of our team and the results they delivered in Q3. And amidst unprecedented conditions across the globe, we are staying focused on not simply managing through this situation but taking the actions that will allow us to emerge from it even stronger than before. We know it won't be easy, but NIKE is better prepared than anyone else to regain that momentum, extend our brand leadership and reshape the future marketplace. NIKE has a long history of rising to the occasion in extraordinary times, to deliver strong results and effect extraordinary change in the world of sport and beyond. And that's what we're going to do once again. With that, I'll now turn the call over to Andy.

Thanks, John, and hello to everyone on the call. Before I speak to our business, our priority right now is first and foremost our people. Ensuring the health, safety and well-being of our teammates around the world is the foundation for all of the business decisions we're making. We have a message in NIKE: we win as a team. And I can tell you that the resilience, strength, empathy and creativity of our teammates has never been on greater display. Our team has always been NIKE’s greatest advantage. On that note, I want to congratulate one of my teammates, Matt Friend, on his new role going forward. Matt and I have worked closely together since he joined NIKE 11 years ago. He's been a great thought partner to me over that time, and we're working seamlessly together through this transition. As I move into my new role at NIKE, I could not be more confident in NIKE’s financial management with Matt as our CFO. So, as we close Q3 and look ahead, we see three key themes. First, as we enter these challenging circumstances, NIKE’s brand leadership and business momentum have been stronger than ever, and unrivaled around the world. In Q3, we delivered 7% currency-neutral revenue growth overall, led by 13% growth in both EMEA and APLA. NIKE Greater China was also on pace to deliver another quarter of strong double-digit revenue growth prior to the impact of COVID-19. And in North America, our strong mid-single-digit reported rate of revenue growth would have been roughly 3 points higher if not for non-comparable items including the sale of Hurley and our shift to a licensed business model with Fanatics relative to the NFL. While those transactions had a negative impact on our year-over-year revenue growth comparisons, they also result in higher profitability for NIKE. Across all of our geographies and Converse, digital remained our fastest-growing channel, growing 36% on a currency-neutral basis. In fact, each of our geographies and Converse exceeded 30% digital revenue growth in the quarter. Our growth was also broad-based across categories as well as across women's and men's, all fueled by innovation platforms and power franchises such as the Air Max 270, the Air Force 1 and the Air Jordan 1. Our launch of the Air Jordan 11 BRED was the largest in our history, with the product selling out in 28 minutes, powered by the SNKRS app. In fact, the Jordan brand grew double digits globally in the quarter. The LeBron 17, Giannis 7 Freak and the City Edition NBA jerseys fueled basketball's strong growth. And in running, we unveiled our most advanced performance running shoe ever, the Alphafly NEXT%. We also launched the new Infinity React, designed to help runners run longer. And we've seen very strong sell-through, particularly with women. Apparel also fueled growth in the quarter, growing faster than footwear with double-digit apparel growth in our sportswear training, basketball, women's and kids’ categories. Setting aside the non-cash, non-recurring charges related to our business model, changes in South America, NIKE, Inc.’s earnings exceeded the earnings that were implied in the financial guidance we provided 90 days ago. We were able to deliver that strong bottom-line performance, even including the impact of COVID-19 on Greater China. The second key theme as we look ahead relates to how we're addressing the evolving implications of COVID-19. As John said, we are executing on an operational playbook, focused on positioning NIKE for an expedited return to profitable, capital-efficient growth. We see each of our markets progressing through a time series that begins with the country addressing the COVID-19 outbreak, followed by three phases from a business perspective: One, a recovery period, including for example the ramp-up of store re-openings; two, a period of normalization across consumer demand and supply; and three, a period in which we return to strong growth. Why are we so confident in our approach? As John said, our team in Greater China has given us a playbook for the rest of the world. Based upon the most recent trends we see today, NIKE Greater China has already progressed through their recovery phase and is now transitioning into the normalization phase. Specifically, we are seeing accelerating strong double-digit, approaching triple-digit growth in our NIKE Digital business. At the same time, roughly 80% of our 7,000 brick-and-mortar NIKE owned and partner stores are now open. Based on the latest trends in our business, NIKE Greater China Q4 revenue will likely be roughly flat versus Q4 of fiscal year ‘19. We're also executing on this playbook in Japan and Korea. Both markets are entering the normalization phase, fueled by strong digital growth and significant week-over-week increases in retail traffic and demand for NIKE. Based on what we're experiencing in China, Korea and Japan, we are optimistic. At the same time, this has become a global pandemic. Each country is addressing COVID-19 differently. And accordingly, our markets will progress through the three phases from a business perspective on different timelines. That adds some complexity from a global point-of-view. So, we're also executing against a top-down enterprise-wide operational plan. Our top-down plan includes, one, tight cost management; and two, daily global demand and supply optimization. Accordingly, our Q4 SG&A will be lower than prior year Q4 spending. We're also taking decisive action with respect to supply on a global basis, while shifting our distribution focus to digital in the face of temporary retail store closures. As a result, Q4 fiscal year '20 and fiscal year '21 year-over-year revenue, margin and inventory growth rates will neither be intuitive nor linear. Our measures of success in the near-term will be rooted in the amount of inventory on hand relative to the pace of digital demand, store re-openings and traffic patterns. Now, going into this, we were fortunately experiencing a very strong pull market for NIKE globally with some of the highest rates of full-price sell-through we've ever experienced. So, we're now aggressively managing all of our operating levers to ensure that we expedite NIKE’s return to that strong pull market. Realigning supply and demand is our focus operationally. We're also executing this plan, leveraging two of NIKE’s longstanding and greatest competitive advantages. First, NIKE’s financial strength. Liquidity will not be an issue for NIKE. In order to ensure resilience during challenging times, we have long maintained a strong balance sheet, a strong investment-grade credit rating, and ample access to capital, all coupled with strong operating cash flow generation. NIKE’s liquidity and access to capital will not only allow us to be principled, for example, with respect to pay continuity, but also decisive with respect to real-time supply and demand management. Second, we have forged the strongest partnerships across the value chain in this industry. That includes, among others, our marketplace partners like Topsports, Pou Sheng and Tmall in China, as well as Foot Locker, DICK's, JD and Zalando across the U.S. and Europe. Of course, we also have longstanding partnerships that span decades with manufacturers such as Feng Tay, Shen Zhou, Changshin and many others. We're working closely with all of these strategic partners on a daily basis. Our partners recognize that the stronger NIKE is going forward, the stronger they are. Of course, NIKE is not operating in isolation. External factors will continue to be dynamic, and we will continue to adjust our execution accordingly. The third key theme as we look forward. While the setbacks from a business perspective will be significant for all, NIKE will come back even stronger as a brand and as a company. Consumer behaviors change in real time. We're all witnessing new normals emerge in terms of both how consumers shop and stay active. Sport is being redefined as much broader than competition, as the world finds new and creative ways to stay healthy and fit. And NIKE’s digital ecosystem is keeping us connected real-time. From a marketplace perspective, NIKE Digital growth is accelerating amidst these dynamics. From a digital capability perspective, the investments we've made to date are now proving to be the foundation for our resilience amidst challenge, and they will be a strength as we emerge. For example, we're leveraging select teams and tools to dynamically model demand, pricing, planning and allocation. We're leveraging our NIKE membership platform and NIKE mobile app ecosystem to inspire and enable people to be active at home while also providing targeted product offers and services to consumers. And the foundation we’ve built in enterprise data and analytics is fueling our more agile end-to-end execution. As we said, we're still in the early innings of NIKE’s digital transformation, but the capabilities we've already been building for the future are proving to be the strongest pillars within our business today. As John said, simply put, these are times in which strong brands get stronger, and we're confident that NIKE will come back stronger than ever. Now, let's turn to the details of our third quarter financial results and operating segment performance. NIKE, Inc. Q3 revenue grew 5%, up 7% on a currency-neutral basis, reflecting strong balanced growth across EMEA, APLA, North America and Greater China prior to the impact of COVID-19, all fueled by NIKE Digital growing 36% versus prior year. Gross margin declined by 80 basis points in Q3 as higher average selling prices and better off price margin were offset by the impact of COVID-19, primarily in Greater China as we managed inventory sell-through in that market. Gross margin was also negatively impacted by FX headwinds and incremental tariffs in North America. SG&A grew 6% in Q3. We continued to invest in our digital transformation, while also beginning to more tightly manage operating overhead and shift demand creation. Our effective tax rate for the quarter was 3.9% compared to 14.7% for the same period last year, due to a shift in the proportion of earnings taxed in the U.S., and increased benefits from discrete items. Third quarter diluted EPS was $0.53, including the $0.25 noncash nonrecurring FX-related charge associated with the transition of Brazil, Argentina, Chile and Uruguay to strategic distributor models. As of February 29th, inventories were up 7% compared to the prior period, reflecting healthy, full-price versus off-price mix prior to the impact of COVID-19. With that, let's turn to our reported operating segments. In North America, Q3 revenue grew 4% on a reported and currency-neutral basis, which again would have been approximately 3 points higher, adjusting for the sale of Hurley and our partnership with Fanatics regarding the NFL business. In Q3, NIKE Digital grew over 30% and the NIKE app grew over 60% in North America. New York City and LA each grew double digits, fueled by differentiated NIKE consumer experiences. As an example, in LA, we launched our newest NIKE Live concept store in Glendale, which blew past our expectations and significantly over-indexed in terms of the women's business. Now, as of today, we've closed our owned stores in North America. Going forward, we will reopen stores on a location-by-location basis as we closely monitor development. At the same time, NIKE Digital demand has been extraordinary with NIKE Digital commerce sales over just the past few days approaching holiday peak levels, growing triple digits over just the past week. We’ve maintained operations in our distribution centers, implementing social distancing and reduced staffing while focusing on the shipment of digital orders. Now, let's turn to EMEA where we continue to build on our extraordinary brand momentum. In Q3, revenue in EMEA grew 13% on a currency-neutral basis with double-digit growth in most key categories. Women's growth strongly outpaced men's, apparel accelerated faster than footwear, and digital was up over 40%. The NIKE brand has never been stronger in EMEA. In every key city in EMEA, consumers rated NIKE their number one favorite and cool brand. We also gained significant market share in Q3 across both footwear and apparel, driving further brand separation. Greater speed and agility also fueled our growth and share gains in EMEA in Q3 with over 30% of EMEA revenue and nearly 80% of EMEA incremental growth flowing through our Express Lane. In order to help limit the spread of COVID-19, we have also closed our owned stores in Western Europe and select Eastern European markets. And similar to the U.S., we will reopen on a location-by-location basis, based on developments. NIKE Digital continues to grow versus prior year and we're maintaining operations in our distribution centers, again, shifting their focus towards digital distribution. In our APLA geography, revenue grew 13% on a currency-neutral basis. Growth was fueled by our key cities and was balanced across key categories, nearly all of which were up double digits. The Jordan brand, in particular, was incredibly strong in APLA, growing nearly 50% in the quarter with new innovations like the Jordan Max 200 along with fresh new approaches to Jordan Icon, all resonating with consumers. In performance running, our accelerating momentum continued, especially in Japan where we've dominated Hakone Ekiden competitive race, seeing a record 84% of participants wearing NIKE. The energy around running in Japan is being fueled by the Vaporfly NEXT% as well as a halo effect that is impacting other performance models like the Zoom Fly, Rival Fly and Peg Turbo, which all grew triple digits in Q3. NIKE Digital grew 51% and wholesale grew double digits overall on a currency-neutral basis, as business with our differentiated strategic partners grew 5 times as fast as undifferentiated distribution. As we said, APLA is our most diverse geography. So, we're seeing the impact of COVID-19 very significantly across Asian and Latin American countries. With that, let's turn to greater China. While our full quarter results in Greater China were significantly impacted by COVID-19, it is worth providing some dimension. Our momentum in China continued to be extraordinary through mid-January. Our revenue growth was on track to exceed the expectations that we set 90 days ago, fueled by NIKE Digital. We launched the NIKE app in China in Q3, and today we already have 5 million NIKE app downloads. And as John said, we're also seeing a spike in weekly average users on our activity apps as we inspire and enable consumers to engage in sport at home. We're now, as I said, through the recovery phase and into the normalization period in China. Today, our digital commerce growth continues to accelerate with triple-digit growth in demand just this last week. Most of our stores and our partner stores are open, retail traffic is significantly accelerating week-over-week, and we're beginning to see a decline from the peak inventory levels we experienced. We are confident that NIKE Greater China is on track to return to growth in fiscal year '21. As we look ahead, we will not be providing financial guidance for Q4, due to the uncertainty resulting from the spread of COVID-19. For fiscal year '21, we have been planning performance in line with our long-term financial model. The year-over-year growth rate base comparisons will no longer be meaningful. So, we'll share the approach that we're taking with respect to fiscal year '21 on our next earnings call. All of that said, we are confident that executing our operational plan will position NIKE for a return to profitable capital-efficient growth. That will happen over time, as each country addresses COVID-19 at a different pace. But, our confidence in the return to growth is founded on the relatively rapid recovery and early signs of normalization we are already seeing in China, Korea and Japan. In these challenging times, NIKE’s competitive advantages are showing up as extraordinary resilience. As we emerge from these challenges, those same competitive advantages will show up as strength and brand distinction. Those unique strengths include NIKE’s deep, authentic connection to consumers, our pipeline of innovative products, our financial strength and capacity, our industry-leading digital capabilities, our strong partnerships, and most importantly, our talented and committed teams around the world. I would not trade NIKE’s team or position with anybody. With that, we'll now open up the call for questions.

I would like to ask about the inventory and the innovation pipeline. Considering the postponement of the Olympics and the impact on organizational aspects like sports and basketball, could you walk us through your thoughts on the pipeline? You presented some impressive products last month, and I’m interested in understanding your approach to that. Additionally, can you provide more details on how flexible your spending is for demand creation planned over the next six months?

Sure, it's John. I'll address the first part of your question and then Andy can take the second part. Clearly, the world of organized sports, including professional leagues and the Olympics, has come to a standstill. These organizations are rightly prioritizing the health and safety of athletes and fans, and we fully support that. We eagerly anticipate the return of organized sports, and when they do, we’ll be ready. However, it's crucial to distinguish between these sporting events and our innovation pipeline, which we will continue to advance. We are very enthusiastic about the products in that pipeline, more so than ever before. Although we announced some of these products in relation to the Olympics, even with a potential delay, we can still launch them on our own schedule. For instance, the NEXT% performance running line will enable runners of all levels to access the same technology and benefits as the Alphafly NEXT%, which elite marathoners use. We can launch that independently of the Olympics. Additionally, our sustainability products unveiled at the forum, like the VaporMax 2020 made from 75% recycled manufacturing waste and the Space Hippie line designed for a low carbon footprint, can also be launched when the time is appropriate, aligning with recovery phases. Consumer interest in these options is strong and will remain robust. Thus, we will continue to advance our product pipeline as the circumstances allow. Before handing it over to Andy, let me share one more example. In China, we adapted by shifting a few launches planned for February to be digital-only due to store closures, so we launched the Air Jordan Retro High OG and the Air Jordan 5 Retro in a digital format because of strong online demand. Therefore, we will continue to move confidently with our product pipeline. Andy, do you want to cover the second part of the question?

Yes, to summarize what both John and I have mentioned, we entered these circumstances from a very strong position with some of the highest full-price sell-through rates we've experienced, and our inventories are in a good place. Moving forward, we understand that there will be some promotions in the market. However, as John noted, we also have a fantastic pipeline of innovative and appealing fresh products. We will focus on the timing of these product launches and their flow over time, ensuring that while we manage energy and inventory, we are also introducing unique energy to the market and our consumers. Regarding our licensed business, it's important to note that it represents a very small fraction of our overall operations. This segment will be affected, but many of the elite sports activities or events have been postponed rather than outright canceled, even though some have indeed been canceled. Notably, some of our products have a longer lifecycle, and we believe that this fall could mark the beginning of one of the greatest years in sports history. You also inquired about SG&A. In short, we have considerable flexibility in our SG&A, which is why we managed to maintain profitability in Q3, even though we were taken aback by the intense impact of COVID-19. We exceeded the profitability guidance set 90 days ago. As I mentioned, our cross-functional teams have been quick and agile, and we anticipate a decline in SG&A in Q4 compared to the previous year. We have flexibility in demand creation, which ties back to your question about sports. As John commented, we've implemented some very creative digital connectivity initiatives that have made a significant impact. We believe we can conserve considerable resources for the rebound in sports that we expect in fiscal year ‘21. Our liquidity and access to capital within SG&A enable us to remain principled, maintaining pay continuity as John discussed while still investing strategically in long-term differentiators, albeit in a more focused manner. Additionally, there are many opportunities to optimize our operating overhead and capital expenditures. I must say that our team has shown remarkable resilience and creativity, particularly in tightly managing our costs.

And I just have one quick follow-up. Andy, you mentioned the Infinity React helps runners run longer. I can run a pretty solid 11-minute mile for 2 miles in my Epic React Flyknits. If I switch over to the Infinity Reacts, do you think I can get 3 10-minute miles out of those?

I think we should sign up for the New York marathon. I'll come out there and run with you in November. How's that?

Welcome John. Congrats to all three of you on your new roles. Sorry. It's not on a more normal circumstances. John, given NIKE’s leadership position in the global consumer landscape, I'd really appreciate a little bit more detail on this kind of successful China, coronavirus playbook that you mentioned you're now rolling out to the rest of the world. You hinted that some of the successful digital strategies to connect to consumers when they're stuck at home. Feel free to add any more color there. Maybe could you also distinguish between the recovery you're seeing and the behavior you're seeing in stores versus that strong digital offset you mentioned. Do you expect this share that you seem to be capturing digitally to be sticky long-term? And then, maybe most importantly, could you also talk about whether you'd expect a similar sort of demand curve in other markets as coronavirus rolls through? Thanks.

Certainly, Omar. One of the key benefits of being a large global company like NIKE is our ability to learn from different markets. To summarize what Andy and I discussed, we view the situation in four phases: first is containment when the outbreak occurs; second is the recovery period when stores reopen; third is normalization as we return to growth compared to the previous year; and fourth is the full return to growth. The data from China, Japan, and Korea has been quite similar. The containment phase lasted about five to six weeks, during which stores were closed, but e-commerce growth remained strong in all three markets as we connected with consumers about being active at home. Now that we are in the recovery phase, retail is reopening, and consumers are returning to the streets. Retail traffic is picking up, and even though many are wearing face masks, they are back in stores. Interestingly, digital growth has accelerated even more since stores have reopened, indicating that consumers no longer distinguish between digital and physical experiences. They want access to products in ways that suit them, whether that starts on a mobile device, involves visiting a store, or includes shipping items to their homes. In Japan, China, and Korea, we are successfully delivering this seamless digital and physical experience. As our business recovers in these markets, we are outpacing competitors, consistent with our goal to emerge from this period even stronger and maintain our leadership position. In the U.S., we are still in the early stages. Stores are closed, and we're focused on supporting our employees while connecting with consumers digitally about health and activity. Our brand remains visible every day. As Andy pointed out, we are experiencing significant digital growth even during these challenging times, and we are carefully managing our inventory to be prepared for the market's reopening. While it’s difficult to predict how long the containment phase will last in the U.S. and Europe, we do know that when stores reopen, we will be present digitally with activity apps and commerce. As stores start to open, we will leverage our unique strengths along with strong compelling products and an unmatched digital connection with consumers. We are collaborating closely with our partners to ensure a smooth transition as things recover. Over the past few days, I’ve spoken with the CEOs of major partners like Zalando, JD, and Foot Locker, as well as those of our two Chinese partners. This collaboration will help accelerate the digital transformation that was already underway, with consumers increasingly relying on digital in their lives. The future marketplace will see successful differentiated retail thrive, while those unable to adapt will face struggles, and we are committed to driving both trends.

John, regarding the two topics you mentioned, could you share your thoughts on how you view inventory in the wholesale channel as stores begin to reopen, potentially varying by geography? Additionally, could you provide an update on how traditional physical partners are considering their own investments and collaborating with you on initiatives like RFID as you integrate online and offline? Thank you.

Jamie, I'll combine a few thoughts. Andy, you can take over on the inventory aspect. What I mentioned earlier still stands: our strategic partners, who are our key collaborators committed to shaping the seamless digital and physical experiences of the future, are our focus. We aim to return stronger together in a healthier marketplace. We engage with them regarding both their physical locations and online presence. This morning, I spoke with the CEO of Zalando, an innovative e-commerce firm in Europe, where we are sharing data in creative ways to offer enhanced and differentiated experiences for consumers across European markets. The discussions about the future indicate that they all share a vision of a blended digital and physical experience that we are committed to establishing. We believe we are entering an era of differentiated retail, and they see potential in this. We must navigate these challenging times collaboratively, which we will, but I think they all recognize the opportunity to come out stronger and expedite the evolution of the marketplace. Andy, would you like to add something about the inventory discussions?

Yes. So, Jamie, what I’d say is, while obviously there are some elements of these current circumstances that are unprecedented, we came into this circumstance with a strategy. And our strategy was 2X Direct. That was a strategy that was not a NIKE-only strategy; it was really focused on driving more direct connections with our consumers, leveraging digital, both in our owned stores and online and with our partners and through their online presence. That's accelerating for everyone right now. So, if you think about the North American marketplace and Europe, with most stores closed, both our owned stores and most of our retail partners, what it's really accelerating is that perspective and on the opportunities to connect with consumers digitally from a brand perspective but also expand our ability to connect with consumers from a product and service perspective. When we say partnership, it's not just transactional, it's not a back and forth transactional has a dialogue with our partners. We're talking to our partners about both, how we come through this period and then what we build for the long term. And there are a couple of things that we're building. We're all expanding our digital pipe, so to speak. We in North America have already doubled the ability, the capacity to distribute product, one to one to consumers through our distribution centers in just several days. So, it's really accelerating what we saw is the future in terms of digital penetration. From an inventory perspective, right now digital is where the water is flowing, so to speak, or where the product is flowing. And so, we're working closely in partnership with folks like Zalando in Europe, as John mentioned. We already have an inventory partnership program with Zalando where we transact via their site and via their digital ecosystem and our digital ecosystem while leveraging each other's inventory. And we're working with our partners in the U.S. in a similar regard, managing the inventory they have on hand, the inventory we have on hand relative to them, and how best to flow that through their digital pipes as well as ours. So, I think in summary, what I’d say is, as John said, it's accelerating quite a bit of change in consumer behavior. It's also accelerating quite a bit of change in our partners’ behavior.

Good morning. Thank you for the question and for the valuable insights shared. I would like to ask for further clarification on the comments regarding gross margins. You mentioned rebates to wholesale partners and increased costs due to factory cancellations in your remarks about gross margins. Could you provide more detail on these points? Also, do you anticipate these effects becoming more pronounced as demand issues impact more of the revenue base?

Sure. I'll address that question, Alexandra. What we're finding is that there are various factors to consider when resetting inventory or supply concerning the pace of expansion and digital demand, the reopening of stores, and the volume of traffic and conversion rates in those stores. This situation requires a multifaceted approach. We're examining different strategies concerning our inventory and collaborating with our partners. We're aligning our product launch dates to manage inventory more effectively. Additionally, we have a strong pipeline of products, and we can adjust some of the launch dates while we navigate the inventory build-up in each market over the coming weeks. Our primary discussions with partners are focused on managing inventory flow and generating cash flow, aiming to stabilize our inventory levels at about 14 to 16 weeks in the market and maintain strong full-price sales. Some strategies we implement may negatively affect gross margin, which is expected. These could involve promotions or order cancellations. However, these individual data points do not indicate a broader trend. In the short term, we will prioritize supply and demand management, which may affect revenue and margins, but this is essential for establishing a strong foundation for profitable growth. This is not a new trend nor does it reflect our product strength. In fact, John mentioned successful launches in China, and we have also had product launches in the U.S. recently that sold at full price. Therefore, we will balance managing inventory—acknowledging its margin impact—with introducing innovative, appealing new products to consumers. We expect a sense of energy, inspiration, and optimism moving forward.

Great, thanks. So, maybe on North America, your 7% adjusted underlying constant currency growth I think translates to a mid-teens, two-year stack. Maybe can you speak to what's driving the domestic inflection? Andy, maybe pre-COVID, a little bit of insight, how you were thinking about the North American marketplace over the next 12 months? And just larger picture on the curve where we stand today on the move to differentiated retail?

Matthew, maybe I'll just make a comment or two and then Andy, you can flush out. But, I’ve spent time now in several of our markets across the U.S. And I've seen firsthand how NIKE’s key city strategy is paying off. Andy mentioned the growth in New York, growth in LA being double-digit. And that is because both with NIKE Direct and with our partners, we're getting closer to the consumer. Now, I'll just take a couple of examples. I had a chance to visit the Foot Locker, very innovative store in Washington Heights neighborhood in New York where the entire display of the inventory and the merchandise and the whole focus is being of the neighborhood. And you can just see consumers responding. And that store is experiencing significantly greater growth than other comparable stores that Foot Locker has in the area. So, it's a great example of differentiated retail and the future of retail. We're doing the same with some Latino communities in LA, providing retail concepts both through NIKE Direct and with our partners that are getting close to what consumers want in those markets, and give them more personalized feel. And when you wrap that around with a digital connection with membership, and the other digital tools, you can feel the energy and momentum. And so, I think at its core, this key city strategy that NIKE’s put in place in the U.S. and beyond is absolutely paying dividends.

Yes. I'll just add, Matthew that there are few really important drivers to highlight. I appreciate you recognizing that growth has been consistently strong in North America. And obviously, one of the things I should say is we are entering these challenging times in a position of strength. And as John said, strong brands get stronger during these times. So, we think we’ll emerge even stronger. For a little bit of context on the strength we had entering this fourth quarter, NIKE Digital continues to fuel strong growth in North America of a relatively extraordinary 33% in the quarter. We've talked to you about the significant opportunity that we think in terms of the Women's Business. Our Women's Business grew at a rate that was nearly doubled out of men's both in footwear and apparel. So, we're seeing strong growth there. Now, across footwear and apparel, our growth was relatively balanced, both in the mid-single-digit, and that's even taking into account the divestiture of Hurley, which was a largely apparel business and the shift in our business model with respect to the NFL, which is also largely an apparel business. So, what you can infer from that is we've told you we think we have an epic growth opportunity in digital in women's and in apparel. And when you take into account those non-comparables in the quarter, all three, including apparel are over-indexing in terms of growth. So, again, we feel great about the position of strength we had and have from a brand perspective as we work through these challenges. And we'll be doing everything we can in terms of managing demand and supply and fueling our brand, so that we emerge even stronger.

Thank you. And thank you, Matt, for your last call. Thanks, everyone, for joining us today. And we look forward to speaking with you all next quarter. Take care, stay healthy and stay safe and be safe everyone.