Nike Inc - Class B (NKE) — Q4 2022 Earnings Call Transcript

Thank you, operator. Hello, everyone, and thank you for joining us today to discuss NIKE, Inc.'s fiscal 2022 fourth 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 question to one. Thanks for your cooperation on this. I will now turn the call over to Nike Inc., President and CEO, John Donahoe.

Thank you, Paul, and hello to everyone on today's call. This quarter, NIKE celebrated our 50th anniversary. On May 1, 1972, NIKE became its own company, a new standalone brand with its own mission and vision. As Phil and I put it recently, back then all we had was a dream, a ton of ambition, a trunk full of shoes, and a big Swoosh on all of them. And over the 50 years since, NIKE has been a growth company. For 5 decades now, we innovated for athletes, redefining sport for generation after generation. And today, we're the biggest champion in the world for athletes and for sport, and we've inspired a global community and remain driven by the power of sport to create a better world. This spring, we've been celebrating our 50th anniversary across the globe, and these moments have been particularly special as many of us have now returned to our workplaces. It's been great to see the collaboration and creativity as we strengthen our culture of innovation, team, and community. I have personally loved feeling the energy of our teammates being back together again. In fact, I got to feel that energy, not just here in our campus in Oregon, but also across Europe when a group of us visited our team there a few weeks back. After a couple of years of virtual meetings, it was great to finally spend time with our European teammates in person. Another highlight from that trip was touring our European Logistics Center in Laakdal, Belgium, and getting to see firsthand how efficiency and sustainability help us serve our consumers while minimizing our environmental impact. And I love getting a chance to spend some time with some of the players on England's Women's National Football team, The Lionesses, who were inspiring as they prepare for the Women's EURO Champs in England this summer. Seeing our European teammates in person again reminds me of how deeply grateful I am to all of our 79,000 global teammates. As we conclude this fiscal year, our NIKE, Inc. team has navigated so much together, working with commitment and resilience to serve our consumers and our communities. And our teams have proven their ability to be unrelenting in executing against the macro complexities while also building our future. In particular, I want to acknowledge our Greater China team, who have managed the business through a challenging period for them and their families. I've said it before, and I'll say it again, this team is the greatest collection of talent in the world, and I sincerely thank them. This fiscal year, and certainly this past quarter, macroeconomic challenges have created a dynamic environment. And yet, looking at our full fiscal year '22 results, it's clear that our strategy is working and that NIKE's unique competitive advantages continue to drive the business. Today, we're better positioned to drive sustainable long-term growth than we were before the pandemic. Over the past 2 years, we've transformed our business, building a muscle that won't just help us navigate future adversity, but one that gives us the ability and agility to continue to drive our growth. We now have a proven operational playbook with many levers at our disposal. Fiscal '22 posed operational headwinds throughout the year, but we continued to invest. As other companies have pulled back, our investments have made us stronger. And we're excited by what we see as we look at our growth opportunities and the strong consumer demand we continue to enjoy. And as we look ahead to fiscal '23, we remain very confident in our long-term strategy and our growth outlook. Our structural tailwinds, which include the expanded definition of sport, the societal movement toward health and wellness and comfort and the fundamental shift in consumer behavior toward digital, continue to create energy for us. These advantages, along with our size and scale, the strength of our portfolio of brands and having the right strategy, give us the confidence to move even faster against the opportunities we see ahead. Now, NIKE's growth has been and will continue to be the result of 3 areas I'll walk through today. First, our brand deeply connects with consumers, fueled by authenticity in sport and compelling storytelling. Second, our culture of innovation drives a continuous pipeline of new products. And third, we continue to have a competitive advantage in digital as one of the few brands that can connect with and directly serve consumers at scale. So let's start with the strength of the NIKE brand. You've heard me say that these are times when strong brands can get stronger, and that has never been more clear than it is today. Our passion for sport continues to drive our deep connections with consumers. While visiting our team in Europe, I was able to attend the NIKE versus NIKE FA Cup final, which Liverpool won in a thrilling penalty shoot-out over Chelsea at Wembley Stadium. In April, Scottie Scheffler won the Masters. And earlier this month, Rafael Nadal won his 14th French Open. And it's been a great month for basketball as the WNBA season kicked off and an incredible NBA season concluded. The power of our full portfolio of brands was felt with NIKE Basketball highly visible as the official supplier and partner for both leagues, and Converse and Jordan showing up proud in the NBA finals with Draymond Green and Jayson Tatum, respectively. It was also a quarter defined by a series of only NIKE moments; none bigger than the April unveiling of the Serena Williams Building here on our campus. This 1 million square foot building is the new home for our design and product creation teams. More than 200,000 square feet is dedicated to lab space, which allows our innovation and product creation teams to test new ideas in developing, presenting, and merchandising products. And along with the LeBron James Innovation Center that opened last fall, these facilities represent the single greatest investment in sports science, research, innovation, and design in the world. Also in the quarter, we were thrilled to launch the Nike Athlete Think Tank, which brought a group of female athletes together on our campus to share their experience and insight. The 13 athletes, including Serena, Sabrina, and Shalane, also selected community organizations that NIKE will help fund through grants. Soon, we plan to grow the Think Tank, creating even more long-term impact at the grassroots level fueled by our goal of empowering the next generation of women in sport. This quarter, we also connected with our consumer through a powerful brand campaign tied to our 50th anniversary. The film directed by and starring Spike Lee celebrates NIKE's past and the promise of our future. The film was complemented by programming across our app ecosystem, Nike.com, social media, and more to incredibly strong consumer response. In fact, our 50th anniversary campaign led to the highest NIKE commerce app traffic in our history, even higher than some of the major commercial moments in the past, which once again shows how brand heat can translate to member engagement. We saw particular energy with Gen Z as our campaign's song went viral on TikTok, reaching #1 on the list of top trending TikTok songs. Another only NIKE moment in Q4 was the launch of No Off-Season, our podcast focused on mental health and starring athletes, including Karl-Anthony Towns and Laurie Hernandez. We created this podcast to help redefine sport for our new generation as another new and creative way we drive relationships with consumers with an energy and scale as only NIKE can. And finally, we began the next chapter of our relationship with Kobe Bryant and his family this quarter as we launched a new Kobe shoe that pays honor to Gigi Bryant, with all profits donated to the Mamba and Mambacita Sports Foundation. This was a launch with deep global resonance from L.A. to Shanghai with much more to come as we continue to build our Kobe business within our portfolio of signature franchises. My second point today is our relentless pipeline of innovative products, which continues to drive separation between us and our competition. No other brand has our ability to resource all and scale in response to a consumer opportunity. In Q4, we again introduced new performance innovations to the market, including new footwear technology from both NIKE Women's and the Jordan brand. In women's, we launched the NIKE Spark Flyknit, a new lifestyle shoe that introduces NIKE Running's latest innovation, the Spark cushioning system. Spark offers a new sense of comfort and energy return through its dual density foam midsole. The Spark Flyknit is one of the first projects from our NIKE Sports research lab focused on injecting performance technology into lifestyle products. In this case, responding to the consumer insight requesting a women's shoe for those who are on their feet all day long. Moving forward, we will be scaling our use of performance innovation into lifestyle footwear with a special focus on the opportunity we see in the women's business. And in Jordan, this quarter, Luka Dončić debuted its hotly anticipated Luka 1 signature shoe during the NBA playoffs. The Luka 1 introduces a brand-new performance foam called Formula 23, which provides a lightweight and responsive ride, the fitting of one of the game's best players. Formula 23 is one of the most sustainable performance foams ever made by NIKE, and Jordan now plans to scale it across its product line, including into its next Air Jordan shoe. And speaking of sustainability, we continue to scale our industry-leading solutions in this space. In April, we launched new sustainable iterations of 2 footwear icons, the Pegasus Turbo Next Nature running shoe and the Mercurial Vapor Next Nature football boot, both of which are made with at least 50% recycled content by weight. Next Nature continues the work we started with Space Hippie with plans to scale even further across our franchises. And we're also innovating how we reduce waste beyond individual products and franchises. This led to the NIKE Re-Creation program, in which vintage and obsolete products are collected and used to create new, locally designed, and manufactured products. The program, which combines design, retail, and distribution, launched in L.A. with plans to expand to London and Paris in fiscal '23, building a local ecosystem in all 3 cities. We know that singular is the future of sustainability, and these local ecosystems are creating the exciting beginnings of a fully circular infrastructure at NIKE. And looking ahead, we're excited to introduce a new platform that we believe has the potential to change the apparel industry. It's a new material that brings together scale, innovation, sustainability, and design like only NIKE can. This material isn't a knit or a woven, and it significantly reduces environmental impact through fewer carbon emissions and by not using water or dyes. We believe this platform could do for apparel what Flyknit did for footwear. Its first products will be unveiled this September, and we can't wait for all of you to see it. Now for my third and final point today, NIKE's increasing digital advantage. With an owned digital business that grew 18% in fiscal '22, we continue to set the pace in our industry by creating a premium, consistent, and seamless experience that drives one-to-one consumer experiences at scale. This quarter, our app ecosystem grew into an even greater share of our total digital demand, helping our digital share of the business reach 24% in Q4. This is a shift being led by the consumer as they pursue the most personalized shopping experience that NIKE provides. And we do not take lightly the choice made by consumers to put us in the most prized real estate that exists today: the home screen of their phone. No other brand occupies that space globally like NIKE, and it remains one of our biggest competitive advantages. Moving to physical retail, we continue to bring to life our vision of giving consumers personalized digital experiences regardless of channel. We know that consumers expect us to know who they are online or offline and across the full array of mono-brand stores, NIKE Digital and our wholesale partners. Within our NIKE-owned stores, higher levels of connectivity across physical and digital are simply driving a better consumer experience. Online to offline services, such as Buy Online, Pick Up in Store, and ship from store are driving growth, with 100% of our North America stores now offering at least one element of O2O. And in addition to our owned physical retail, we continue to innovate and co-design great partner experiences and business models to better know and serve consumers. We started this journey through connected inventory to provide better allocation, extend product choice for consumers, and reduce friction such as products being out of stock. And increasingly, we're moving beyond inventory to a broader approach of knowing and serving our consumers as NIKE members, particularly when shopping through our retail partners. As you know, this is a journey we announced in Q2 through our partnerships with DICK'S Sporting Goods to connect member accounts. And then we continued in Q3 with NSP partners in Greater China. With clear success thus far in knowing our shared members better, our strategy expanded in Q4 to serving our shared members one-to-one through connected data. Consumers are responding to the meaningful benefits we're now testing and we'll continue to extend the best of NIKE to our members across the marketplace with additional partners and expanded services in fiscal '23. At the same time, our growing participation in new digital platforms continues to expand access points to NIKE across the digital ecosystem. After last quarter's first official NIKE NFT collaboration with RTFKT, we took another step in our journey to serve our community with innovative virtual products in Q4. Our first co-branded virtual sneaker, the RTFKT by NIKE Dunk Genesis CRYPTOKICKS, continues our connection with an audience that will help shape the future of sport and culture. In the end, as we look to start a new fiscal year, NIKE will do what we've done for 50 years now, and that is stay on the offense. We have a proven playbook, and our unique strengths and competitive advantages give us even more confidence about our future. Our focus is on the long term, and we're not slowing down. And with that, I'll now turn the call over to Matt.

Thanks, John, and hello to everyone on the call. NIKE's 50th year has been a year of transformation. Through dynamic conditions, our team has remained focused on what we can control, continuing to lead with speed, agility, and responsiveness. Most importantly, we stayed focused on accelerating our strength and building NIKE for the future. In this environment, what guides us is a relentless focus on creating value for our consumer, and what fuels our confidence is the way our consumer is responding. Fiscal '22 was our largest revenue year ever, even with supply constraints challenging our ability to serve consumer demand. We are optimistic as we enter fiscal '23, with our source base fully operational, production surpassing pre-pandemic levels, and inventory flowing again into our largest geographies. As we set the foundation for another year of strong growth, I'd like to provide some broader context around our strategic transformation. Two years ago, we introduced a bold new phase of our strategy, our Consumer Direct Acceleration. In the early months of the pandemic, we set our sights beyond simply navigating through short-term volatility. Instead, we outlined a clear vision to pursue even further competitive separation by expanding our digital advantage, reshaping the marketplace of the future, and creating deeper, more direct consumer relationships. Today, NIKE's continued momentum shows that our strategy is working. As we look forward, let me briefly highlight 3 of NIKE's foundational elements for long-term value creation: our global portfolio, our consumer-led digital transformation, and our expanding direct-to-consumer operational capabilities. First, one of NIKE's greatest strengths is our unrivaled global portfolio. Together, NIKE, Jordan, and Converse represent 3 of the world's most connected consumer brands, dimensionalized across sports and lifestyle, footwear and apparel, up and down price points, throughout geographies at the center of cultural relevance. Today, NIKE is the #1 cool and #1 favorite brand in all 12 of our key cities around the world, leading as the champion for athletes and sport. With a sharpened consumer construct across men's, women's, and kids, we're deepening our sport focus, expanding our product pipeline, and accelerating our long-term growth potential. The next chapter of our partnership with Kobe Bryant and the Bryant family is just one example of how we continue to bring new energy and dimension to our portfolio. Jordan Brand's momentum has also been unstoppable, with some of the most exciting young athletes in sport and some of the most iconic products in the world. Since fiscal '20, Jordan Women's has tripled. International geographies have grown over 60% and apparel has grown over 50%. Now with approximately $5 billion in revenue, fiscal '22 was Jordan's biggest year ever, with epic growth potential ahead. Converse also delivered incredible milestones in fiscal '22. Product and storytelling through the lens of youth and creativity are resonating deeply with growing strength among women consumers. As Converse scaled its digital offense and invested in new product creation, the impact is clear with global revenue approaching $2.3 billion, total digital penetration reaching 27% globally, and EBIT more than doubling since fiscal '20. Across all 3 of our brands, we're driving a more direct, digital, and differentiated future, and I wouldn't trade our position with anyone. Next, our consumer-led digital transformation is driving long-term growth and value. A more digitally connected NIKE is a more valuable NIKE. Today, our own digital business, representing over $10 billion in revenue, is more than double in size versus pre-pandemic levels. After increasing market share and gaining 3 percentage points from the prior year, NIKE Digital now represents 24% of total brand revenue. More importantly, we are accelerating the pace and scale of NIKE's direct consumer connections. With growing digital traffic and NIKE App downloads, our apps now represent almost 50% of total digital demand. In turn, increased digital engagement is translating into more repeat buyers, a higher buying frequency, and increased average order value, ultimately driving higher lifetime value through membership. And as retail consolidation continues and consumers converge around fewer digital platforms, a distinct NIKE consumer experience is driving more direct connections, positioning us well for long-term growth. Lastly, we are transforming our operating model with new capabilities in order to move at the speed of the consumer. This year, we will begin to see value from our biggest investment in NIKE's digital transformation, our new ERP. As we shift to an increasingly direct-to-consumer future, an ERP will be foundational for increasing speed and agility across our supply chain. This will give us real-time visibility to inventory across our network, plus dynamic transactional capabilities to optimize consumer demand and inventory productivity. We will go live with our new ERP in Greater China in July and continue building and testing in North America for deployment in fiscal '24. We will also see a new consumer marketing offense in action in fiscal '23. Through new capabilities activated in partnership with Adobe, we will unlock additional productivity and demand creation and member retention across our NIKE ecosystem. We have started testing audience segmentation in North America with real-time data and personalized journeys on the NIKE app with plans for further expansion in the coming months. In Greater China, we are also accelerating our digital capabilities, building on our 40-year history in the market with an ecosystem from China and for China. In fiscal '23, we will deliver a new suite of commerce and support activity apps, deepening our connections with Chinese consumers through an enhanced user experience, including locally relevant features across our digital apps, services, and our owned and partner retail stores. Finally, we continue to scale our Express Lane which combines hyper-local consumer insights with improved responsiveness and speed to market. In fiscal '22, Express Lane drove approximately 25% of total NIKE Brand revenue with higher profitability. We expect to build Express Lane into a larger portion of our business in fiscal '23 and beyond. Now, let me turn to NIKE, Inc. fourth quarter financial results and operating segment performance. In Q4, NIKE, Inc. revenue declined 1% and grew 3% on a currency-neutral basis. This was led by 11% growth in NIKE Direct, offset by a 3% decline in wholesale. NIKE Digital grew 18%, fueled by strong demand across our app ecosystem. Fourth quarter reported gross margin declined 80 basis points versus the prior year. This was primarily due to specific actions taken to manage supply and demand in Greater China following COVID-related disruption, as well as elevated freight and logistics costs. Headwinds were partially offset by benefits from strategic pricing actions, favorable foreign currency exchange rates, improved NIKE Direct margins, and a higher full price mix. SG&A grew 8% in Q4, primarily due to strategic technology investments, increased NIKE Direct variable costs, wage-related expenses, and increased demand creation expenses. Our effective tax rate for the quarter was negative 4.7%. This was due to a shift in our earnings mix and a non-cash one-time benefit related to the onshoring of our non-U.S. intangible property. Fourth quarter diluted earnings per share was $0.90. This includes a $0.10 nonrecurring non-cash charge related to both the deconsolidation of our Russian operations as well as the transition of our Argentina, Chile, and Uruguay businesses to a strategic distributor model. Finally, inventories were $8.4 billion, up 23% compared to the prior year period. This was driven by elevated in-transit inventories due to extended lead times from ongoing supply chain disruptions, partially offset by strong consumer demand. Now let's move to our operating segments. In North America, Q4 revenue declined 5% and EBIT declined 18%, in line with our expectations as we lapped supply shifts in the previous year. Elevated ocean freight and logistics costs continue to dampen near-term profitability in this geography. NIKE-owned inventory grew 30% versus the prior year, with extended lead times causing in-transit inventory to be 65% of our total inventory at the end of the quarter. Wholesale revenue declined 12% due to inventory supply constraints. Strong marketplace demand drove closeout units down double digits versus the prior year. NIKE Direct grew 5% versus the prior year, delivering its highest quarterly revenue ever. Marketplace channel growth was led by 11% growth in NIKE Digital with another quarter of historically low markdown rates and lower available inventory supply. NIKE Digital total penetration reached 27% for the quarter, led by strong NIKE app growth. Even with lean available inventory, our power franchises continue to resonate deeply. Pegasus led the wafer performance footwear, Jordan launch delivered a record-breaking quarter, and classics such as Dunk and Blazer drove strong full price growth. Meanwhile, we continue to test and learn across our newest retail concepts, such as our NIKE Live doors, which are increasing member buying amongst women. In EMEA, Q4 revenue grew 20% on a currency-neutral basis. EBIT grew 63% on a reported basis. With broad-based growth across channels, consumer dimensions, and product engines, NIKE Direct grew 25% on a currency-neutral basis, powered by healthy retail traffic as we anniversary COVID-related closures from the prior year. NIKE Digital grew 21%, driven by positive launch sell-through, improved full price selling mix, and lower markdown rates. Sport continues to power our EMEA marketplace, highlighted by growth in running and fitness, performance franchises such as Metcon and Mercurial, and apparel launches such as the Alate bra in women's. Looking ahead, EMEA will kick off the most unprecedented 12 months of global football in NIKE's history, starting with the Women's EURO Champs this summer, Men's World Cup in the fall, and Women's World Cup next summer. NIKE is meeting the moment with a complete offense, including new kit launches, new training and lifestyle assortments, and new Mercurial, Tiempo, and Phantom footwear innovations across men's, women's, and kids. Next, I'll provide some deeper color around our results in Greater China. In Q4, revenue declined 20% on a currency-neutral basis, and EBIT declined 55% on a reported basis. This follows the region's most widespread COVID disruption since 2020, impacting over 100 cities and over 60% of our business. As conditions shifted, our experienced local team acted quickly and decisively. We leveraged the diverse logistics network and strong local partnerships, returning to 100% capacity at our central logistics center within 3 weeks. Our marketplace team also adjusted inventory to meet digital demand. As a result, NIKE Digital landed Q4 with low single-digit growth. Despite a dynamic operating environment, NIKE extended its leadership position as Chinese consumers' #1 cool and #1 favorite brand. We saw this translate into positive business impact on NIKE Tmall Super Brand Day, which drove 90% number demand penetration and nearly 1 billion impressions. NIKE also created a clear separation on 6/18 as the undisputed #1 store and #1 brand on Tmall's sport channel, outperforming the market. In addition, as lockdowns lifted in specific trade zones in late April, May, and early June, we saw improved store traffic and overall consumer demand. Key footwear franchises continue to win in the marketplace, led by G.T. Cut as the #1 style in performance basketball and Pegasus 39, which drove strong results in men's and women's running. Express Lane also drove incredible sell-through with locally inspired launches such as the Air Force 1 logo and the head-to-toe street dance pack in footwear and apparel. As I mentioned earlier, we took specific actions in Q4 to recalibrate forward-looking supply and demand, prioritizing the return to a healthy pull market by the end of the second quarter. While there may be near-term risk of further COVID disruption, longer-term, we continue to be encouraged by another quarter of brand momentum in the marketplace. As we turn to APLA, Q4 revenue grew 24% on a currency-neutral basis and EBIT grew 31% on a reported basis, reflecting our largest quarter ever in the geography. We saw double-digit currency neutral growth across Korea, Mexico, Southeast Asia, and India and Japan. NIKE Direct grew 43% on a currency-neutral basis, led by 59% growth from NIKE Digital. Membership fueled double-digit growth across all territories as our sneakers app drove its best ever quarter in Japan, Korea, and Mexico. We also saw our biggest quarter in women's, led by performance running, classics, and lifestyle apparel. Kids led the way within NIKE Digital, up nearly 100% from last year. We're expanding support for a new generation, driving strong results with proven franchises such as the Court Borough plus newer innovations such as Dynamo GO. Now I'll turn to our financial outlook for fiscal '23. We enter the year confident in our brand strength, consumer connection, product pipeline, and normalizing inventory supply into a healthy pull market in North America, EMEA, and APLA. We continue to see momentum against our largest growth drivers and our most iconic product franchises. At the same time, we are closely monitoring consumer behavior and the implications of high inflation on near-term economic growth and consumer demand. We are also taking a cautious approach to Greater China, given uncertainty around additional COVID disruptions. As such, we have factored various risk scenarios into our guidance for fiscal '23. We expect revenue for the full year to grow low double digits on a currency-neutral basis, partially offset by foreign exchange headwinds of approximately 400 basis points. In the first quarter, we expect real dollar revenue growth to be flat to slightly up versus the prior year due to COVID disruption in Greater China and more than 500 basis points impact from foreign exchange translation. We expect gross margins to be in the range of flat to declining by 50 basis points versus the prior year with a wider-than-usual range reflecting our consideration of a number of scenarios. We expect to benefit from mid-single-digit pricing actions and continued gains from our shift to a more direct business, offset by another 100 basis points headwind from elevated ocean freight costs, increased product costs, discrete supply chain investments, and normalization of historically low markdown rates. We expect foreign exchange to be a 30 basis point headwind on gross margin due to strength in the U.S. dollar, largely offset in fiscal '23 by favorable hedge rates versus current spot rates. We expect gross margin pressure to exceed 100 basis points in the first quarter of fiscal '23, both as we recalibrate supply and demand in Greater China and as we anticipate higher promotional activity to sell seasonal inventory, which has arrived late due to a combination of factory closures and longer transit times. We expect SG&A to increase high single digits to low double digits as we continue to invest in our people, our brands, new stores, and our transformational capabilities. Finally, we expect the fiscal '23 effective tax rate to be in the mid-teens range. As we move forward, we will stay focused on what we can control and continue managing the business for the long term. This includes leveraging our scale and financial strength, optimizing supply and demand, and most importantly, creating value for our consumer from the products we design to the stories we tell, to the experiences that we deliver. Our consumer-direct acceleration is working. Our long-term vision has never been more clear. And if there is anything that's 50 years of growth have proven, it's that with the right team and the right strategy, the future is ours to create. On that note, I'd like to close with a heartfelt thank you to the team that makes it all possible, the people behind the art, science, and magic of NIKE. Our team is and always will be NIKE's greatest competitive advantage. And as proud as we are of all that NIKE has achieved over the past 50 years, what excites us most is what comes next. With that, let's open up the call for questions.

I was wondering if you could maybe just comment some more around China. I think when you look at what's happened over the last few months and even more recently with the reopening, just exactly how you're balancing the compares that you're facing versus the concerns that you have over the next few quarters?

Yes, Bob. I'm happy to share that we're maintaining our long-term approach. NIKE has had a presence in China for 40 years, and we see it as a market with significant growth potential. Our brand is well-regarded among Chinese consumers, thanks to the exceptional work of our team over the last few months and years. The core factors driving our strategy remain unchanged. Understanding how to deliver innovation and inspiration in ways that resonate locally is crucial for the Chinese consumer. Recently, Angela mentioned their research indicating that Gen Z is particularly drawn to innovation and inspiration, which aligns with our objectives. NIKE is recognized as the top cool brand and its appeal has strengthened in Beijing over the last year, influenced by events like the Chinese New Year and the Beijing Olympics. Our digital initiatives have shown growth this quarter, enhancing our direct consumer connections. We're also set to incorporate local digital apps in the next six months. Our localized products, facilitated through our Express Lane, are creating significant momentum with items like the Pegasus, the Dunk, the G.T. Cut basketball shoe, and the Air Force Low. We believe in the enormous potential here and will continue to invest accordingly, focusing on building for the Chinese market through our tech stack and hyper-local technology center, enabling us to effectively reach and serve Chinese consumers. We have a medium- to long-term outlook and feel very confident moving forward. Post-lockdown, we're observing an uptick in engagement from Chinese consumers.

Yes. And I just would add, Bob, that we entered the fourth quarter positioned for a strong quarter on building brand momentum in the marketplace. And our fourth quarter results were impacted by COVID-related disruption and lockdowns, impacting over 100 cities and about 60% of our business. As we look at the dynamics in that particular marketplace and the risk of ongoing disruption in the first half of fiscal '23, we decided to prioritize the health of that marketplace. And as we've learned from experience over the years, having a healthy pull marketplace in a monobrand marketplace like Greater China is critical to brand health and long-term growth. And so we made decisions to recalibrate supply and demand in the fourth quarter. And that included reducing our inventory buys at the factories for forward seasons. We took some reserves on our existing inventory, and we also plan for some investment in promotional activity with our partners. Because we expect that as the marketplace reopens, it's going to be more promotional. And so those were the charges and the impacts that we had in the fourth quarter in order to prioritize that inventory health and pull market by the end of Q2. As John said and some of the examples I gave, we continue to see brand strength growing and consumer connection. And we're seeing it in our brand strength results and also in the way the consumer is engaging with our brand. We invested in the brand this quarter again for the third straight quarter, and we're seeing the impact of that on our business. And as lockdowns lifted in specific trade zones, in late April, May, and early June, we saw improvement in traffic and strong overall consumer demand. So we're trying to take the right decisions for the marketplace to position us for growth over the long term. And despite the short-term disruptions, we're increasingly confident in our local market strategy and our ability to fuel long-term growth in the China marketplace.

Just a few on the model click, and then a bigger picture question. I guess, just if we could get a sense of SG&A in the first quarter. I think we got it for the year, a little bit of help there. And then I guess it looks like you're guiding to or at the high end of the revenue algorithm for the year despite the caution that you mentioned to us on China in the first part of the year. Maybe just some thought on what parts of the portfolio overgrow those long-term rates you gave us last year in the year just so we can think about that alongside you? And then I guess just a little bit more on your thinking on structural margins in China over the long term. Obviously, you took some actions in the quarter. We see the output here in the margins. But how should we think about those as you move into things like the new ERP system and into a better pull market?

Sure, I'll take that question. As we mentioned last quarter, we believe the factors coming together are setting us up for another strong growth year in fiscal 2023, reflecting the strength of NIKE's portfolio. Inventory supply is stabilizing in a robust market across North America, EMEA, and APLA. We have experienced three consecutive quarters where consumer demand has significantly outpaced our available inventory. Considering our brand strength, product pipeline, and the significant growth opportunities ahead, we feel well-positioned for fiscal 2023. However, we are taking a cautious stance in Greater China, as we aim to address the issues impacting our performance in the fourth quarter. We believe that focusing on a healthy market environment is essential due to ongoing risks in that region. Nonetheless, we are optimistic about the substantial growth potential in that market in the long run. We have confidence in the underlying growth drivers and are closely monitoring consumer behavior, with no signs of pullback at this time. Therefore, we continue to implement our strategy effectively. Regarding SG&A, we expect high single-digit to low double-digit growth for the full year, reflecting our ongoing multiyear investment plan to build the capabilities necessary for serving consumers directly and personally on a larger scale. This operational transformation is in progress, and we are already witnessing benefits from it. We are prioritizing resources to support initiatives that will drive long-term growth while reallocating from outdated practices. We remain confident that our investments will yield business benefits, many of which we are beginning to see by the end of this fiscal year and into fiscal 2023. In response to your question about structural margins in Greater China, we do not see any immediate concerns that would affect our profitability. This quarter, we implemented measures to manage inventory and support our plans for fiscal 2023 and beyond. We anticipate a promotional marketplace in the first quarter and have adjusted our markdown strategies and collaborations with wholesale partners to clear inventory not directly owned by NIKE. Our primary objective is to achieve a healthy market by the end of the second quarter. Looking ahead, the core drivers linked to our consumer direct acceleration strategy, which emphasizes direct and digital engagement, will enhance profitability in Greater China, and our ERP will play a critical role in capitalizing on those opportunities.

In the past, you've mentioned a significant gross margin benefit from the shift to the Direct business, but this year, it's been difficult to observe due to various factors. If we could set aside supply chain issues, foreign exchange impacts, and other variables, are you noticing an underlying benefit from this shift? Are you still confident that as some of these temporary costs decrease, you will reach your high 40s gross margin target in a few years? Additionally, regarding gross margin and your comments about markdowns normalizing, considering the discussion around premiumizing your assortment and a higher percentage of Direct and Digital sales, I would have anticipated you would have better control over markdowns and pricing this year compared to a couple of years ago. Is it reasonable to expect that the extent and severity of markdowns will stabilize at a lower rate, given the more stringent control over the channel you now possess?

Let me start by discussing the gross margin in the fourth quarter, as I believe it will clarify the broader context. Our gross margins decreased by 80 basis points in the fourth quarter, which reflects two key factors. From an operational standpoint, considering the growth at NIKE Direct and the improving margins in both NIKE Direct and NIKE Digital, along with a higher mix of full-price sales overall, our gross margins would have actually increased by over 100 basis points in the fourth quarter. However, the decisions we made in Greater China had a 200 basis point negative impact on NIKE, Inc.'s margins for Q4. When we examine the underlying health of our business and the margin growth resulting from the shift in our business mix from wholesale to a greater focus on direct and digital sales, we are witnessing the associated financial benefits in our gross margins. Since 2020, our gross margins have increased by over 260 basis points, despite a 100 basis point headwind in fiscal year 2022 due to elevated ocean freight costs. We are currently paying about five times what we paid before the pandemic to transport products from Asia to the U.S. So, the increase of 260 basis points includes a 100 basis point challenge. Looking ahead to fiscal 2023, we expect margins to be flat or decline by 50 basis points, while also planning for mid-single-digit price increases and further expansion from our growing NIKE Direct and digital businesses, which we believe will lead our growth. However, this is being countered by another 100 basis point impact from ocean freight costs. Thus, if we consider both 2022 and 2023, we face about a 200 basis point effect over this two-year period due to these higher shipping costs. This significantly influences our current position compared to where we could be. We remain confident in achieving our high 40s gross margin goal and believe these costs are temporary, though we anticipate it will take a few years to return to normalcy. On your point regarding markdowns, we have anticipated a normalization in full-price realization and markdown rates for fiscal 2023. Over the past year, we've experienced a full-price realization exceeding 70% in three of our markets, while our long-term target is 65%. Regarding markdown rates, both our channel partners and our business have experienced historically low markdowns due to reduced supply, which we expect to normalize this year. Given the uncertainties and our risk assessments in planning for fiscal 2023, this has led to a broader range in our gross margin guidance for the year. In the long term, we remain committed to that high 40s target, which will be supported by the ongoing consumer shift towards direct and digital channels.

So if you move into fiscal '23, I just wondered if you could dig into the overall product flows and what you're seeing around lead time? If you're seeing any recent improvement there. Then I was just wondering if you can elaborate on demand and how you feel about the product pipeline moving ahead? You mentioned in your prepared remarks that you're expanding it. So I was wondering if you can just talk about that.

John, you want me to go first looking at the product piece?

Sure.

Okay. Look, we continue to see transit times be elevated relative to pre-pandemic levels. It's about 2 weeks longer than where we were. This is specifically in North America. We're about 2 weeks longer in the low 80s days in the fourth quarter relative to where we were in the fourth quarter of last year. And that's obviously a big impact on our in-transit inventory and the flow of goods into the marketplace. Right at the end of the quarter, we did start to see a little bit of improvement vis-à-vis the boat backlog at the West Coast ports. But at this point in time, given all the variables that we see there, we're not planning for a significant increment in transit times in fiscal '23. So we're managing our inventory accordingly. We're making decisions about our assortment, product life cycles. We're taking some of our styles to seasonless that we can manage it on more of a rolling basis. We'll continue to leverage the experience that we've had over the last 2 years navigating through this environment from a supply chain complexity and congestion perspective.

Gaby, regarding the product pipeline, it's interesting you brought that up. About two weeks ago, we had our first in-person VP meeting in two years. Since we hadn't met in person for a while and had the chance to see physical products, we showcased our entire innovation pipeline for the next three years across six different rooms in the new Serena Williams Building. This included offerings from NIKE for men, women, and kids, covering performance and lifestyle across various sports, with dedicated rooms for Jordan and Converse. Everyone left the meeting feeling excited about the extensive innovation pipeline, which was almost overwhelming to see all together. We have recent examples like the Spark Flyknit, which showcases how many of our innovations are designed for women but can benefit everyone. There’s also the ZoomX foam, one of our most responsive materials, utilized throughout our running line, along with Formula 23, Next Nature, and sustainability innovations. Looking ahead, we’re very enthusiastic about upcoming apparel innovation, which we believe will present a significant platform opportunity later this fall. Matt mentioned the upcoming year in global football with the EURO Women's Championship this summer, the Men’s World Cup in the fall, and the Women's World Cup next year. We have remarkable innovations planned, both in performance and lifestyle, especially within global football, running, and the Jordan brand in footwear and apparel. The Converse room was a highlight as many people don’t usually see the full extent of Converse’s innovations. Overall, we feel very positive about our innovation pipeline. With our teams now working together in person again, we anticipate that the speed and quality of innovation and design will accelerate significantly, fueling our optimism on this front.

Just hoping to get your thoughts on channel mix in the coming years as you think about wholesale versus direct, if there are any big call-outs that you would make? Obviously, you're making the investment in technology. Would you expect that to return wholesale to a faster growth rate? Or do you think the Direct business will continue to lead?

We will be guided by the consumer. The key to success in the future is providing consumers with what they want, when they want it, and how they want it. Consumers do not differentiate between channels; they desire a seamless, premium, and consistent experience. Our efforts are focused on delivering this experience and ensuring that we are flexible regarding where they make their purchases. They may begin shopping on our mobile apps or website, conduct product research, make a purchase through our apps, visit one of our stores to try items on, or go to a partner store if it's more convenient. If they are in a DICK'S store and find what they want but it's out of stock, we are able to fulfill their needs through our connected inventory. Our aim is to provide consumers with their desired products at their preferred time and manner. We believe we are establishing a competitive advantage rooted in our direct connection with consumers; our membership program will be robust, whether through NIKE Direct or our partners. Achieving this will give consumers true choice, allowing the channel mix to naturally evolve.

Yes. I want to add that our wholesale revenue this year was negatively impacted because we had to reduce our supply by 130 million units due to a 12-week closure of our factories in Vietnam. Looking ahead to 2023, NIKE Direct will drive our growth, and NIKE Digital will be the fastest-growing channel. We anticipate that wholesale growth will differ, meaning it will change and grow based on the available inventory supply returning to our regions. We expect to see wholesale growth in fiscal 2023. As John mentioned, this shift is part of a consumer-led digital transformation. We still envision that NIKE Direct will make up about 60% of our business, with owned digital accounting for 40%. Our digital business is growing faster than the overall marketplace. We're observing an increase in our digital traffic and rising NIKE app downloads, which enhance consumer engagement with our digital platform. This is driving growth and differentiation compared to the broader market. While we've improved our business mix by about 9 percentage points since fiscal year 2020, we firmly believe that, as John has repeatedly stated, digital will serve as a key growth catalyst for us over the next three to five years.

Yes. Just want to say thank you to everyone for participating in our fourth-quarter call. We appreciate you joining, and we look forward to speaking with you next quarter. Take care.

Thank you, everyone.

Thanks.