Nike Inc - Class B (NKE) — Q1 2021 Earnings Call Transcript

Thank you, Operator. Hello, everyone, and thank you for joining us today to discuss NIKE, Inc.’s fiscal 2021 first 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 an 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, Matt Friend. Following their 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 one. 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.

Thank you, Andy, and hello to everyone on today’s call. Before I get into our Q1 performance, I want to take a moment to acknowledge the passing of John Thompson last month. Coach, as many of us called him, was a beloved member of the NIKE family, having served on our Board of Directors for over 30 years. He was a true leader and an icon in the world of sport and we will miss him. And here on the West Coast, we are continuing to deal with the wildfires that have hit Oregon, Washington and California. Health and safety remain our first priority, so we closed facilities and stores where appropriate. For those teammates who have been impacted by evacuation orders, we have made additional benefits and support available, and the NIKE Foundation has donated $1 million to provide relief efforts for the Oregon wildfires, focusing on both intermediate and longer term needs. Moving to our business results. This quarter we continued to demonstrate NIKE’s full competitive advantage. Over the past several months, we have established clear objectives for our business and we have been relentless in our focus on those objectives and the results reflecting that. Our revenue trend is improving, with Q1 flat to the prior year on a constant currency basis. Greater China, EMEA, Japan and South Korea have already returned to growth. But more than the financial results, it’s the continued strength of our brand, the response we are seeing from consumers and our unique position to be able to capitalize on our potential that excites me even more. We are getting stronger in the places that matter most and even in the midst of disruption we are on the offense. We have continued our unmatched pace of launching innovative product, generating a continuous flow of brand moments that connect with consumers and open groundbreaking retail concepts, as we unlock significant long-term opportunity in a very dynamic environment. We can navigate; in fact, we can thrive in this environment thanks to our digital advantage and the full breadth of our global portfolio. Building on our foundational strengths, there are three structural tailwinds that play to NIKE’s advantage: the accelerated consumer shift toward digital is here to stay; the definition of sport to include all facets of health, wellness and fitness; and it’s the deeply connected authentic brands with scale that will win. NIKE’s strength amid these evolving conditions helped keep us in the lead. These advantages allow us to stay aggressive and it’s why I believe that no company is better positioned to emerge from this period than NIKE. Over the past quarter, we continued to prove this out across four key areas. As always, it starts with product innovation. As I mentioned, our innovation pipeline and cadence has not slowed even during this uncertain environment. Second, our brand continues to deeply connect. Through the power of sport, we are creating hope and inspiration at a time when the world needs it. Third, we continue to take greater advantage of our vast digital opportunities as the shift in consumer shopping preferences accelerates. And fourth, this digital focus is guiding how we create the future of retail as we continue to launch seamless premium brick-and-mortar experiences. Let me briefly touch on each of these four themes. Our belief in innovation is embedded in everything we do. New innovation continues to resonate with our consumers with key innovation platforms becoming an even bigger part of our mix in Q1. We had many product highlights this quarter. Let’s just take a look at a few. We continue to bring fresh points of view to our most beloved footwear, Air Force 1, Air Jordan 1 and our deep lineup of Air Max. By continuously adding new styles, we expand these popular platforms. And we are also focused on fueling a constant cycle of new, scalable, distinct platforms. For instance, we reenergized the iconic Air Max 90 this year and it was one of the quarter’s top growth drivers. We also push what’s possible in sport as seen in the latest launch of our NIKE NEXT% Footwear platform. Eliud Kipchoge broke the two-hour barrier in a prototype of the Air Zoom Alphafly NEXT% and now that consumers have access to this innovation, we have heard from many that they are running their fastest times ever. This summer we also released a training shoe, the Air Zoom Tempo NEXT%, bringing the measurable benefit of NEXT% to runners focused on pace and endurance. And we are continuing to execute on the incredible opportunity we see in women’s apparel. In Q1 we launched NIKE (M), NIKE’s first dedicated maternity collection. We also introduced a new NIKE Yoga collection that serves all genders and body types with performance fabric innovation that’s the result of more than two years of development. The response to this best-in-class Yoga collection has been amazing and is already driving incredible growth for our women’s Yoga business. And last but not least, our sustainable footwear platform known as Space Hippie saw amazing sell-through in our highest-heat innovation launch ever. Coupled with the popularity we saw for VaporMax 2020, we are seeing real consumer appetite for sustainability, especially with our youngest consumers. Sustainability will continue to be a key aspect of our innovation agenda going forward. This is how NIKE leads. Innovation is deeply ingrained in this company, and over the past three months, as most companies focused on just surviving, we are continuously bringing forward new compelling product to market. Our innovation pipeline demonstrates both our strength, as well as our endurance. At NIKE, innovation is the systemic approach and it’s how we extend our lead. Second, the power of the NIKE brand continues to be felt all over the world. In all 12 of our key cities, NIKE remains consumers' number one favored brand. In challenging times, we know how to drive meaningful connections with our consumers. You can see this in our market share gains across the NIKE and Jordan brands. Most notably, during the pandemic we have seen an acceleration of share gains in U.S. women’s and apparel, two areas of strategic focus, and as always, we connect with consumers through the power of sport. We continue to see strong consumer engagement in the You Can’t Stop Sport campaign with over 2.6 billion impressions, as we have reached more than 800 million unique consumers around the world. Our latest film celebrates sport as a source of inspiration. From Serena and Venus Williams and You Can’t Stop Sisters to a spot celebrating Kobe Bryant who continues to inspire athletes all over the world on and off the court. The consumer energy around this broader campaign is testimony to NIKE’s brand appeal at a time when so much is going on in the world. And at the same time, we create experiences and services that inspire and enable our members to keep pushing themselves further. In Q1 we saw an all-time high of the percentage of our members working out on the NIKE Training Club app with more than 50% of our members worldwide starting a workout in Q1. And in the NIKE Running Club, we have seen four consecutive months of more than 1 million downloads each month of our audio-guided runs. For those that have missed the camaraderie of group runs during the pandemic, runners are telling us they are enjoying the connection and extra push offered by this feature. And in Q1 for the first time ever, women completed more of these runs than men. We are also connecting to our purpose and values, as our brand continues to be culturally embedded throughout the world of sport and beyond. Our athletes are doing the same. Just this month, you saw Naomi Osaka give voice to the Black Lives Matter movement by sitting out the finals of the tournament just prior to the U.S. Open before returning to the U.S. Open and winning it. With leadership from global sports icons like Naomi and NBA players like LeBron and Giannis, as well as the thousands of others who have stood up and spoken out, our athletes are having a profound impact in our society. All-in-all, from the cultural resonance of our brand to our expansion of what sport can mean, Q1 was a quarter that showed a relentless focus on deepening connections with our consumers matters. Third, I continue to be excited by the opportunity I see for NIKE in digital. We know that digital is the new normal. The consumer today is digitally grounded and simply will not revert back. Our NIKE Digital business is already meeting our mix goal of 30%, nearly three years ahead of schedule and we will continue to grow from here. This quarter, our owned digital channel grew 83% on a currency-neutral basis, driving almost 900 million of incremental revenue versus the prior year, and an acceleration versus the prior quarter even as our doors at retail reopened. Our engagement and membership metrics show incredible momentum. For example, we are seeing almost 200% growth in demand for our NIKE Commerce app, with triple-digit growth in monthly active users. This is significant for us, as it speaks to the increasing consumer adoption of our apps and while we have had tremendous success in digital and quickly pivoted to the accelerated consumer shift, I truly believe that NIKE is just scratching the surface of what’s possible. With our breadth and depth, no one has the advantage in this space that NIKE has to directly connect with consumers. NIKE’s digital transformation strategy is not easily replicated. Simply put, scale matters and NIKE leads and we will continue to lead in this space for all the reasons I have already mentioned. Our size, our incredible product, our brand strength and infinity, the direct consumer relationships that deepen each day and our ability to create seamless and differentiated shopping experiences, that is how we drive continued separation. Now we know this is a multiyear journey and we have a bright future and lots of opportunity, but in many ways, we are just getting started. To date, we have done some impressive things to achieve scale, highlighted by our app ecosystem, our RFID investment and our omnichannel distribution centers. And as part of the Consumer Direct Acceleration, we have some clear immediate priorities including scaling O2O, improving personalization and creating a consistent end-to-end technology platform. And of course, we remain focused on increasing member engagement to unlock value for both NIKE and our consumers. After all, we know a consumer who connects with us on two or more platforms has a lifetime value that’s four times higher than those who don’t. In particular, I am focused on how we will leverage consumer data and insights in our digital ecosystem to understand and serve consumers better, and ultimately, increase our competitive advantage. We will use data to stay a step ahead and help us create a better product as consumer insights power our business end-to-end toward even greater growth. Fourth and finally, digital is fueling how we create the future of retail. This is the first quarter since the start of the pandemic where our retail was essentially opened. And as more consumers return to our stores, we saw impressive conversion in-store, even as our Digital business accelerated even further. Our store traffic and sales are improving quarter-over-quarter and we are also seeing consumers increasingly self-identify as a member during checkout, or as we call it, a linked transaction, which is leading to even more engagement on our apps and an elevated O2O journey. This is our vision for the marketplace, a digitally connected experience where membership is a true differentiator. Just as our continuous product pipeline, we continue to innovate in the retail space. We are accelerating the shift we discussed last quarter to OneNike Marketplace as part of our digital PDA acceleration. As you will recall, our OneNike Marketplace approach leads with NIKE Digital and our own stores, as well as a smaller number of strategic partners who share our vision to provide a consistent and seamless consumer experience. In fact, during the quarter, we took focused actions to proactively shift the North America marketplace as part of our strategy to serve consumers more consistently and more personally. Simply put, we are on the offense and accelerating toward this future vision and this is evident by our new and innovative retail concepts, amplified by an elevated O2O consumer journey. Just in Q1, we launched new stores in Guangzhou, China, Seoul, Los Angeles and Paris, with two new doors coming in New York City in the next two weeks. These stores range across many different formats, from our House of Innovation concept in Paris to a new NIKE factory store in the Watts neighborhood of L.A. as we deepen our connection in key cities and all of these concepts are underpinned by digital. I will go a little deeper in one just as an example. Our new store in Guangzhou is a data-powered store concept that curates a one-to-one personalized shopping journey. We are already seeing member checkout in our Guangzhou store significantly outpace the rest of the fleet. This is just one reflection of how digitally enabled our future of retail is and how membership is a critical differentiator. Personally, one of the things I am most thrilled about is the return to organized sport. In fact, there was a day earlier this month when you could watch the NBA, NFL, Major League Baseball, WNBA, NHL, Tennis, U.S. Open, a Golf tournament and about six different global football leagues all taking place within the same 24 hours. Though health and safety remain paramount, you can just feel the optimism and excitement of sport coming back. And as we look to the Tokyo Olympics next summer, NIKE remains in a unique position to serve our consumers and fuel their passion for sport. And so, as you can see, even during market uncertainty, we are not slowing down. NIKE is staying on the offense and looking to extend our leadership position. We have that ability. And as I have said before, these are times when the strong can get stronger and I am energized by our incredible potential. In closing, I want to thank our teammates all over the world who continue to innovate, execute and show tremendous resilience throughout a challenging year. I could not be more proud of them and we can’t wait to show you what we are going to do next. With that, I will now turn the call over to Matt.

Thank you, John, and hello to everyone on the call. NIKE entered the pandemic with unparalleled brand and business momentum, and while we continue to navigate through uncertain dynamics, sport has returned, interest in activity and health, fitness and wellness has never been greater, consumer connection and engagement with our brand is growing and NIKE is transforming the way we operate to better serve all consumers. Looking forward, we believe that NIKE is stronger and now even better positioned to drive separation than prior to the pandemic. As I reflect on the first quarter, there are three key strategic and financial themes that stand out. First, NIKE is recovering faster, fueled by brand momentum and our relentless focus on execution. Second, we are accelerating investments in capabilities and services that will create value for the consumer while simultaneously accelerating productivity. And third, our consumer-led digital transformation is clearly a catalyst for long-term revenue and earnings growth. Let me take a few minutes to walk through each of these points. First, as discussed on previous earnings calls, we implemented an enterprise-wide operational plan at the onset of the pandemic. Our teams have navigated with agility and focus to recalibrate supply and demand, to increase digital distribution capacity, to secure liquidity and to tightly manage costs, all while ensuring the health and safety of our employees and consumers. As a result, NIKE, Inc. first quarter reported revenue declined 1% versus the prior year and was flat on a constant currency basis. And reported EBIT grew 13% versus the prior year, all a sharp acceleration from last quarter and exceeding our internal plans. There are a few elements that are important for me to highlight here. Despite ongoing uncertainty, more countries are emerging from containment and have returned to growth: China, Japan, South Korea, the U.K., France and Germany just to name a few. Marketplace inventory is healthy and within our targeted guardrails. NIKE's inventory levels have improved since May, with Q1 inventory growing 15% versus the prior year, as compared to 31% growth in Q4 and is on track to be normalized in the next 60 days. We are reducing excess inventory at lower promotional levels relative to the overall marketplace, highlighting the strength of our brand and the value of our key product franchises, and we ended Q1 in a net cash position, generating positive free cash flow and increasing our liquidity to over $13 billion. These financial results offer clear evidence of a faster marketplace recovery for NIKE, fueled by consumer demand for all our brands. Our momentum is building, and more importantly, our market share is accelerating around the world. We now expect reported revenue to be roughly flat versus the prior year in the first half of fiscal ‘21. This leads me to the second theme. We are accelerating investments in capabilities and services that will create value for the consumer while simultaneously accelerating productivity. As you have seen over the last two quarters, our priorities are clear. We will continue to both accelerate investment against our digital transformation and prudently manage other spending. At the same time, we are focused on amplifying our brand impact. Over the past two quarters, as we have seen demand for our Digital business rapidly accelerate, we have invested to further increase digital fulfillment capacity and inventory visibility. Our new regional service center near Los Angeles went live this month and uses predictive modeling to anticipate consumer demand and ensure the product our consumers want is available and will arrive within one to two days. We will achieve this level of service at a lower fulfillment cost over time. We scaled ship-from-store capabilities in North America’s NIKE brand in-line stores, which now represent over 20% of revenue in enabled doors. These capabilities will be enhanced by our RFID investments, highlighting the dramatic improvement we are making in our O2O service performance. We are scaling robotics and automation in our logistics operations, accelerating digital throughput and cutting order cycle times by up to 50%, especially during times of heightened safety measures due to COVID-19. This allowed our teams to serve higher levels of digital demand with greater efficiency and precision. We have already deployed this automation in North America, Japan and EMEA, and we will continue to scale these critical improvements further as delivery becomes increasingly important in consumer buying decisions and while we double down on the strategic capabilities required to fuel our digital acceleration, we are simultaneously driving a sharper prioritization and sequencing of our investments. For example, we drove significant leverage in our demand creation spending versus the prior year in the last two quarters, creating fewer but significantly more impactful brand campaigns. We were also able to increase the return performance marketing investment, driving accelerated digital demand and greater digital engagement. The NIKE and Jordan brands are stronger than ever, delivering historic records of engagement through nearly 5 billion social media impressions just this quarter. Another example is how our organizational restructuring will simplify the way we work, eliminate duplication and redundancy, and realign our resources to focus on our biggest growth opportunities. While we will incur a non-recurring charge to affect this plan in fiscal ‘21, this restructuring will also create a similar level of recurring annual cost savings that will help fuel the acceleration of our digital transformation. In this moment, the pandemic has allowed us to accelerate where and how we will invest. Ultimately, we will drive deeper consumer connections and continue to amplify our brand strength, using technology to operate more efficiently and at greater scale. This brings me to my final theme. Our consumer-led digital transformation is clearly a catalyst for long-term revenue and earnings growth. Our Digital business grew 83% in Q1 on a currency-neutral basis. And as John mentioned, Digital, across owned and partner, now represents over 30% of our total business, up more than 10 points of share versus the prior year. But more importantly, we saw tremendous momentum in the measures of success that matter most to create scale and drive long-term profitability. These include member engagement and owned digital market share. In Q1, NIKE active members increased nearly 60%, with even higher growth in buying members. We also drove strong double-digit growth in contactable members. We saw owned digital market share gains across both the U.S. and key countries in EMEA, which gives us confidence in our ability to sustain and to grow our digital penetration even as physical retail traffic continues to recover. What’s even more important though is that we can see several strategic and financial benefits from accelerating our digital transformation. First, by leveraging data to enhance membership, personalization and consumer-oriented O2O services across the marketplace, we can drive greater inventory efficiency and unlock accelerated growth in key opportunities like women’s and apparel. Second, in a normalized period, we earn roughly 10 points higher gross margin rate on our digital revenue versus wholesale. And while we will need to continue investments to expand digital fulfillment capacity, we can improve operational efficiency through predictive modeling tools, data-driven member personalization and inventory staging. And finally, we will manage digital transformation within our SG&A guardrails. As we accelerate the pace of investment, our technology foundation will enable us to unlock operating efficiency through automation and increase productivity across the organization. Further, as we grow digital engagement and we retain a higher proportion of engaged members with increased buying frequency, we will be lowering customer acquisition costs, increasing our return on ad spend and changing the shape of our demand creation investment. As John said earlier, we know that digital is the new normal and as we drive continued separation in the market, through connected, seamless and modern consumer experiences, we will fuel growth and profitability. Now let’s turn to the details of our first quarter financial results and operating segment performance. NIKE, Inc. Q revenue declined 1% and was flat on a currency neutral basis, as NIKE Direct grew 13% led by strong digital growth offset by declines in our wholesale business. Gross margin decreased 90 basis points in Q1 versus the prior year, as a result of impacts from COVID-19 including higher promotions to reduce excess inventory across the marketplace and higher supply chain costs. These factors were offset slightly by favorable full-price product margins and the reversal of certain reserves associated with purchase order cancellations due to higher than anticipated consumer demand. SG&A declined 11% in Q1. We tightly managed operating expenses, including lower and more effective marketing spend as live sporting events slowly started to resume, while investing to support accelerating digital growth and transformation. Our effective tax rate for the quarter was 11.5%, compared to 12.4% for the same period last year, primarily due to benefits from stock-based compensation, offset by a reserve for a discrete tax matter. First quarter diluted earnings per share were $0.95, up 10% versus prior year. With that, let’s turn to our reported operating segments. Despite varied recovery curves and macroeconomic dynamics, our geographies have some key themes in common in Q1: first, strong digital growth and increasing member engagement; second, women’s outperformance versus men’s and a growing Jordan brand; and third, lower physical traffic in our NIKE owned stores versus last year, although substantially improved versus the prior quarter. Traffic trends were partially offset by higher conversion rates and higher spend per transaction. In North America specifically, Q1 revenue declined 1% on a currency neutral basis and EBIT increased 18% on a reported basis. Digital was up nearly 100% driven by triple-digit growth in full-price sales and fueled by strong momentum in iconic styles like the Air Force 1 and Air Jordan 1, along with women’s apparel, which grew nearly 200% in the quarter. Demand on the NIKE App grew 150% in Q1, highlighting the continued shift to mobile experiences. Finally, as we cut purchase orders to recalibrate supply and demand in North America during the first half in fiscal ‘21, we shifted product allocations to fuel higher demand in NIKE Digital and our smaller group of strategic wholesale partners. The result was high single-digit growth in differentiated wholesale, offset by a decline of over 20% in undifferentiated wholesale, all with a higher full-price realization versus the prior year. This is a trend that we expect to continue throughout this fiscal year as we change the shape of the North America marketplace. In EMEA, Q1 revenue grew 5% on a currency neutral basis and EBIT grew 14% on a reported basis. Recovery in Italy and Spain continues to lag recovery across the rest of Western Europe. NIKE Direct grew over 25%, with over 100% digital growth driven by lifestyle products as the consumer focus on comfort continues. Apparel in EMEA grew 11% on a currency-neutral basis, led by the performance categories of running, training, basketball and global football, which featured our biggest club launch ever with Liverpool FC. EMEA also continues to lead globally with our Express Lane offense, maximizing supply availability and actively managing inventory while capturing emerging trends. Express Lane drove revenue growth and generated higher full-price realization in the quarter. With that, let’s turn to Greater China, which continued its strong momentum with 80% growth on a currency neutral basis, with Mainland China delivering double-digit growth. NIKE Direct grew over 20%, with more balanced channel growth as digital grew nearly 30% and NIKE owned stores were up double-digits fueled by key consumer moments like 6/18 where NIKE was the number one sports brand on Tmall. NIKE Sportswear and Basketball grew double-digit growth in the quarter, with strong sell-through of key innovation launches like the Alphafly NEXT%, Space Hippie and the AJ 1 FlyEase. Retail sales in the China marketplace are accelerating, with an increasing proportion of full-price sales. Physical retail traffic continues to grow and is approaching prior year levels and we are also well positioned for Singles’ Day in November. Finally, in our APLA geography, Q1 revenue declined 12% on a currency neutral basis, including digital growth that exceeded 90%. We continue to see varied impacts of COVID-19 across countries in the region, with growth in the Asia-Pacific region being led by Japan, Pacific and South Korea, while recovery in Latin America and certain countries in Southeast Asia continues at a slower pace. Performance footwear resonated with consumers in APLA this quarter, as we saw strong results from the Alphafly NEXT% and the Pegasus 37. Jordan has also continued to excite the consumer with locally relevant products, like the AJ 34, Rui Hachimura, which was Japan’s best-selling basketball launch ever. As I have said last quarter, fiscal ‘21 will continue to be a time of uncertainty, because virus containment patterns around the world remain volatile. Therefore, each market recovery will not be linear and the comparisons with prior year will become increasingly less intuitive. We are focused on what we can control, deepening our consumer connections while we manage risk and uncertainty in this environment. We are tightly managing inventory and are focused on ensuring the long-term health of all of our brands and our key product franchises. With the first quarter now complete, I will update our full-year financial outlook. Despite the continued uncertainties, we now expect revenue to be up high-single digits to low-double digits versus the prior year. Stronger than anticipated demand for our brands will be constrained in the near term due to supply decisions we made in the face of the pandemic, with growth in the second half to be up significantly versus the prior year. Our gross margin outlook will continue to be a function of prioritizing a return to normalized inventory levels by the end of Q2. In the second half, we expect to see sequential improvement in full-price sales, but we do expect a continuation of higher markdown activity in our factory stores to sustain conversion rates on lower traffic. For the full year, we now expect gross margin to be flat versus the prior year, including 40 basis points of foreign exchange headwinds. We now expect SG&A will be flat versus prior year, including approximately $200 million to $250 million of non-recurring execution costs incurred in the first half associated with simplifying our organizational structure. NIKE is poised to emerge from the current environment stronger and better positioned, with a sharper focus, a clearer view of our brand’s long-term future and with a team that is energized to compete and to win. At the same time, we are managing our business to deliver financial results that will set a strong foundation for growth and profitability in fiscal year ‘22 and beyond. The future for NIKE is bright. I wouldn’t trade our position with anyone. With that, we will now open the call up for questions.

Hi, guys. Good afternoon.

Good afternoon, Bob.

My first question is about the gross margin performance. Could you provide more detail on the different components? Specifically, can you share any information regarding promotions, the supply chain, and full-price selling to help us understand the various factors affecting the gross margin this quarter? Also, Matt, while you provided some insights for the full year, could you elaborate on the key drivers of that performance for the rest of the year? Thank you.

In the first quarter, our gross margin decreased by 90 basis points compared to the prior year, marking a significant improvement from the fourth quarter, which reflects the strength of NIKE’s market recovery. However, Q1 included about 55 basis points of one-time accrual reversals from Q4, primarily related to factory purchase order cancellations, as we reinstated some supply due to strong demand. If we adjust for that, the gross margin is down roughly 145 basis points year-over-year, driven by markdowns needed to adjust and normalize our supply. Looking ahead to Q2, our margin will continue to depend on supply and demand management, with our main goal being to normalize inventory by the end of the second quarter. We anticipate that Q2 will likely be more promotional than Q1 due to holiday seasonal moments like 11.11 in China, and this year, Cyber Monday falls in Q2 whereas last year it was in Q3. Despite our strong performance, we still see a lot of inventory in the marketplace, which influences our approach for the first half of the year. For the second half, we expect sequential improvement with a higher proportion of full-price sales, and we will start to see benefits in our supply chain as we move away from the extra storage we needed for inventory in the first half. However, we will likely need to keep investing in discounts at our factory stores since we don't anticipate traffic returning to previous year levels for the rest of the year. Consequently, we expect ongoing promotional activity in the second half to support conversion rates and unit velocity as we progress through the year.

Great. Thanks. I guess, just a follow-up quick question is, have you guys considered with the Cactus Jack, maybe some sort of collaboration with McDonald's in terms of do the happy meal with the Cactus Jack and get a pair of shoes or anything like that, is that in the pipeline at all?

Bob, I can give a one-word answer to that question, no.

All right. Thanks very much and nice quarter guys. Way to go.

Thanks, Bob.

Thank you very much. I appreciated your comments, Matt, regarding the digital margins, which I believe you mentioned to be 10 points higher than wholesale in your digital channel. Could you elaborate on some of the key factors you foresee that will help the digital operating margin improve over the next few years? Are there aspects such as lower customer acquisition costs, more efficient order fulfillment, or increased scale that will play a role? Any insights on this would be appreciated. Thank you.

Sure, Kimberly. You nearly answered my question, but to expand, it begins with John’s earlier comments. We believe that growing our digital business will lead to significant financial advantages as we scale up and utilize the capabilities we are developing. I see three main factors driving improvements in operating margins through this scale. First, it involves leveraging the increasing data we collect to create personalized product offerings for consumers, which will result in better pricing and fewer markdowns. Second, this data also informs our inventory placement and flow, allowing us to be closer to consumers and reduce fulfillment costs, driving gross margin expansion. Lastly, we need to enhance our performance in marketing by focusing on retaining existing members rather than just attracting new ones. By understanding and engaging our current members more effectively, we anticipate improved productivity and returns on our marketing investments, leading to further operating margin expansion.

Fantastic. Thank you.

Thanks.

Hey, guys. Thanks a lot for taking my question and a nice job in the quarter in a very tough backdrop. I guess, looking at the North America and maybe, I mean, EMEA EBIT dollar growth significantly outpacing revenue growth in those markets. I guess, dovetailing off Kimberly’s question, how helpful was improving digital markets, I am sorry, digital margins in those markets in this quarter? Is that something that’s already on the move as you see the growth rates that you are seeing in those markets with the digital business?

Yes, Michael. So we are seeing a benefit from increased digital penetration on our margins within those two geographies. But I would also want to highlight that the strategy and the focus on shifting the marketplace, exiting undifferentiated wholesale distribution and focusing on our direct business and our strategic partners drove higher full-price realization as well in both of those markets in the quarter, which also fueled our gross margin. And so those two factors in particular were large drivers of gross margin performance in the quarter. And then we also had some SG&A leverage in those geographies in the quarter as we were managing spend and working through new ways of working from a corporate perspective and that also helped to fuel EBIT growth relative to revenue growth in the quarter.

Got you. And then I guess as a follow up, as you look at North America, John, as you have gotten into the business and had a chance to kind of think about the different regions, the sales growth in North America has been very strong for a couple of years gathering a few billion dollars over the last few years but the margins have been fairly stagnant there, despite the brand being very strong, obviously, gaining momentum. As you saw more pronounced shift in the business in wholesale here in the quarter, some of that probably forced on you by the macro backdrop. But what do you think about the margin evolution in North America from here as we normalize and get on the other side of this COVID period and look out to the second half of this year and into 2022?

If I take a broader view, I would say that the North America market, particularly the retail sector, is the most fragmented and is behind where it needs to be compared to other major global markets. In this context, consumers are seeking a seamless experience that integrates both digital and physical elements. They desire consistent, premium, and modern interactions. Currently, the North America retail market is the farthest from achieving this. This scenario is driving our OneNike Marketplace, where we prioritize digital engagement to connect directly with consumers for the reasons Matt has already mentioned. We then advance with our NIKE Direct offerings, which provide high-quality experiences, often enhanced by digital components. We also collaborate with a select few strategic partners who share our vision and aim to deliver consistent experiences and knowledge to consumers, no matter where they shop. Customers want what they desire when they want it, and we're speeding up that transition. We aim to accelerate what would have naturally developed in the retail landscape over the next four to five years into the next one to two years for our business. This strategy, as Matt has highlighted, will yield financial benefits, profitability improvements, and growth in market share, which are our primary focuses.

John, thanks a lot for the help.

Great.

Thank you for answering my question and for all the information. I would like some clarification on the digital trends. Last quarter, you mentioned that the exit rate was in the triple digits in June, which is certainly a significant figure for the overall quarter. Could you explain whether the digital rate has slowed in stores and if there has been a shift back to brick-and-mortar sales in your direct-to-consumer business? Additionally, I would appreciate your updated perspective on the return of teams in organized sports, particularly with the NBA playoffs and NFL returning. Do you anticipate this trend to continue growing over time at the youth and collegiate levels? Also, how are you leveraging your integration and strong presence in these sports? Thank you.

Sure, Omar. I'll take the first part, and then perhaps John can address the second part. During our last earnings call, we mentioned that we were experiencing strong triple-digit growth in digital for the month of June. In North America, EMEA, and APLA, we are continuing to achieve growth at or above 100% in digital this quarter. The area where we saw more balanced growth was in Greater China, where retail traffic has nearly returned to previous year levels, although digital remains the fastest-growing channel in that market with over 30% growth. The only indication of a slowdown might be in Greater China's growth as the market stabilizes. However, we still believe that digital will drive growth in Greater China.

Got it.

And Omar on the second, how cool is it to be able on a weekend to watch literally within hours NBA, NFL, MLB, WNBA, NHL, Tennis, U.S. Open, a Golf tournament and about six different global football leagues all taking place within the same 24 hours. Though health and safety remain paramount, you can just feel the optimism and excitement of sport coming back. And as we look to the Tokyo Olympics next summer, NIKE remains in a unique position to serve our consumers and fuel their passion for sport. And so as you can see, even during market uncertainty, we are not slowing down. NIKE is staying on the offense and looking to extend our leadership position. We have that ability. And as I have said before, these are times when the strong can get stronger and I am energized by our incredible potential.

Thanks, John. Thanks, Matt. Best wishes.

Thanks, Omar.

Thank you. Hello, everyone. Terrific rebound in the business. My question, I am hoping you can provide an update on the RFID implementation and any benefits you are seeing with inventory management, demand forecasting? And then maybe talk about how these benefits materialize in the model in coming quarters and years? What are some of the key metrics we should watch for the progress on that?

So, Jim, during the quarter, we continued to implement RFID technology across both our supply chain and our stores. Given the current state of the pandemic, we were able to utilize the increased visibility of our inventory to capitalize on the demand we experienced in the marketplace and within our retail locations. Currently, we have 100% of our footwear and 75% of our apparel tagged. We have surpassed 1 billion units with a 99.99% readability, allowing us to monitor our inventory effectively in all our factory stores and our own locations. This visibility enhances our online-to-offline capabilities by providing clear insight into our inventory levels. RFID is expected to reduce our inventory holding costs and transportation expenses in both direct and wholesale channels. We believe this will be essential in creating a fully connected marketplace for NIKE products across both our owned stores and our strategic partners.

I want to elaborate on what Matt discussed last quarter. The key issue is data. The acquisition of Celect allows us to predict demand reliably by forward deploying inventory, ensuring that we can offer one to two day ground shipping to many consumers nationwide. This capability provides us with a competitive advantage in our supply chain, as we can accurately forecast demand and position the right inventory in the right locations to deliver quickly to consumers. This also presents a potential benefit for our strategic wholesale partners over time.

Very helpful. Thank you, guys.

Thanks, Jim.

Thanks very much. John and Matt, you both talked about some of the examples of the digital investments that you made so far, the app ecosystem, the omnichannel fulfillment capabilities and RFID. So I am wondering as you think about the business from here, Matt, you talked a lot about continuing to invest. Are there particular areas where you feel like you need to invest further? Is it greater data capabilities? Is it just building out more fulfillment options like the one you have on the West Coast or are you now at the point where you can start to leverage some of the investments behind data and RFID, is it really just a matter of scale?

Jamie, it's interesting to share my perspective on this from a Board standpoint. I've observed the significant investment NIKE has been making in digital, and it's clear that this has given us a distinct advantage today. However, from my technology background, I believe there are still numerous opportunities ahead, and we are merely beginning to tap into what's possible. We specifically focus on consumer-facing digital aspects, such as demand sensing and other elements. This quarter, we implemented machine learning in our search processes, which resulted in an improved conversion rate. It's important to note that this is an ongoing process. The use of AI and machine learning, digital demand sensing, insights gathering, digital marketing, and personalized memberships, along with inventory optimization, still hold substantial potential for us on the consumer-facing front. These advancements are not abrupt changes but rather a series of continuous enhancements that are measurable and contribute positively to growth or profitability. Furthermore, we have a unified technology roadmap that we are applying throughout our entire operation, from manufacturing to supply chain, focusing on automation opportunities. Our head of design, John Hoke, is particularly enthusiastic about how digitization can boost both productivity and creativity among our designers. We now have a clear three-year plan to integrate technology across all facets of our operations and business model. The great aspect is that, in most instances, we can identify tangible benefits, whether in growth, stronger connections with consumers, or improved efficiency through automation and intelligent technology. We all see this as a significant opportunity.

Operator, we have time for one more question.

Great. Thanks and congrats on a nice quarter. So on the financial algorithm and as we think through the accelerated shift to digital, and I think you had said, within the guardrails of SG&A that you have outlined. Are there any offsetting headwinds constraining your ability to potentially outpace your outlined high single-digit topline and mid-teens earnings growth rates as we think moving forward?

Well. Hey, Matt. Thanks for the question. As I mentioned in the last call, we believe that the Consumer Direct Acceleration is clearly a tailwind or a fuel to our long-term financial model. Our goals and our principles related to how we financially manage the business are really unchanged: to deliver sustainable, profitable and capital-efficient growth over time. Obviously, right now, we are in the middle of quite an uncertain moment and pandemic. And while we are sharing with you our perspectives on the opportunities that we see as we look toward the future, the reality is that this environment right now is quite uncertain. And so, what we are going to be focused on over the next 90 days to 120 days is continuing to clean our inventory, continuing to create those consumer connections like we have been talking about and really focus on our OneNike marketplace strategy, exiting undifferentiated wholesale distribution and focusing on the opportunities that we see for NIKE Direct and our strategic partners. We believe that this strategy will fuel growth and profitability in line with the long-term financial model that we have previously communicated. Obviously, there are a number of factors that are outstanding that may create disruption over periods of time as we look at it and the most obvious one right now is just the pandemic and the impact it has on consumer demand and consumption in the near term. And so we are continuing to focus on the strategy and the shift because we think it’s the right thing to do long-term and that’s where our focus and attention is going to be at this time. We are investing in building this business for the long-term and that’s where our focus is.

Great. Congrats. Best of luck.

Thank you, Matt, and thanks, everyone, for joining us today. We look forward to speaking with you next quarter. Take care.

Thank you, everyone.