Nike Inc - Class B (NKE) — Q3 2023 Earnings Call Transcript

Hello, everyone, and thank you for joining us today to discuss NIKE, Inc.'s fiscal 2023 third quarter results. 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. We delivered another strong quarter in Q3, with revenue growth of 14% on a reported basis and 19% on a currency-neutral basis, exceeding our plan. Our growth this quarter was broad-based across our brands, channels, and geographies. We had strong digital growth of 24%, which once again was fueled by double-digit increases in traffic on mobile and our apps. And while Direct, led by Digital, remains strong and will continue to drive our growth, our wholesale channel continues to be an important part of our strategy as we access key consumer segments and achieve distribution scale across the marketplace. Wholesale grew 18% in Q3, reflecting strong retail sales with growth that over-indexed across our strategic partners. This quarter continued our positive currency-neutral growth in all four of our geographies. North America, EMEA, and APLA all delivered double-digit revenue growth. Greater China grew 1% despite a very challenging December following the shift in the country's COVID policies. And we're making great progress on inventory with our inventory dollars down sequentially versus last quarter. In Q3, we had inventory growth of 16% year-over-year. Our decisive actions are enabling us to navigate through the shifting dynamics with continued improved efficiency. These results demonstrate yet again that we're on track to hit our fiscal '23 priorities of getting inventory in a healthy position and delivering revenue consistent with the financial goals we set earlier in the year. In an environment of increasing macro volatility, the distinction of our brands and our Consumer Direct Acceleration strategy set NIKE apart. Looking ahead, CDA continues to unlock our future growth potential by powering up our holistic offense across innovation, brand engagement and marketplace, all fueled by consumer insight. As we know, consumers today have rising expectations and changing behaviors. What creates separation for NIKE in this dynamic environment is our innovative product, brand scale, and direct connections we have with our consumers. It's these connections that serve as one of our greatest competitive advantages as we translate insight into innovation. Thanks to our consumers' love of our brand, we enjoy a high rate of engagement, fueling richer, deeper understanding. Across the company, our insights model creates confidence in growth in ways that are uniquely NIKE as we make the entire enterprise faster, more efficient and more targeted in the growth opportunities that we go after. So today, I thought we'd go through three areas where we leveraged our insights model this quarter. You may have heard us say before that running is the heart of NIKE and basketball is the soul. I'll discuss these two businesses, and then I'll talk about a product franchise that's a multibillion dollar business in its own right, Air Max. So first, let's start with Running. Since our founding, we've used elite athlete insight to innovate at the edges of human potential. And that's led to platforms like NEXT%, which remains at the front of the pack in the world of distance running. And then we use these insights and innovations to serve everyday consumers no matter where they are in their running journey. Today, we leverage our direct relationships with runners worldwide, fueled by insight from our Nike Run Club app, along with consumer feedback across brand and marketplace touch points to know how our consumers are using our product and what pain points we can solve to keep them moving. For example, we saw our Invincible consumers pushing more distance on their runs, which requires better support and protection. So this quarter, we introduced the Invincible 3, which is designed to provide maximum cushioning and comfort. It also offers a wider fit than some of our past running footwear and uses the most ZoomX foam of any of our road running shoes. It's a shoe that demonstrates how NIKE isn't just innovating for performance, but also designing to drive the lifestyle of running. Consumer response to the Invincible 3 was strong across our geos and throughout NIKE Direct, strategic wholesale partners and running specialty doors. And what really sets Invincible 3 apart is how we executed across the marketplace, driving consistent storytelling across channels, working closely with our partners to elevate our own retail presentation and theirs, all with a sharp focus on helping consumers find the right shoe for them. This approach will be accelerating as we focus on positioning ourselves for share gains in this important category. Our research with runners also leads us to launch product in complementary categories, such as trail running, which is our fastest-growing running segment. This fueled the launch in Q3 of the Pegasus Trail 4. The Peg Trail 4, which has seen over-indexing strength with female consumers, takes many of the well-loved attributes of the Peg and adds rugged features that let runners keep the pace even on looser terrain. The combination of React foam and underfoot traction has proven to be a perfect crossover shoe for runners looking to split time between road and trail. Thanks to our ability to use analytics and insight to discover opportunities for growth in running, we continue to connect to the grassroots of this global community, and we remain confident we can take full advantage of these opportunities over the long term. Next, our Basketball category is in the strongest position it's ever been as we continue to grow the energy of the game globally. Across NIKE Basketball, Jordan Brand, and Converse, we've strengthened our signature athlete portfolio, adding Gen Z superstars while still being anchored by some of the game's greatest players. Last month, LeBron James set the all-time NBA scoring record in a thrilling game in L.A. I was fortunate enough to be there with our Co-Founder, Phil Knight. After the game, Phil turned to me and said, 'that moments and athletes like this are why we got into this business,' and he's right. And as I said last quarter, the LeBron 20 was the strongest LeBron launch in years, fueled by storytelling and the blend of innovation with sportswear design. This created greater commercial appeal, as seen in Q3 with very strong sell-through throughout the marketplace, in full family sizing. This is approach we use across the portfolio, across our Nike Basketball product construct. Thanks to our ongoing dialogue with athletes from the elite to the everyday we design around three key aspects of the game: cutting fast, playing long and jumping high, all while emphasizing off-the-court style. So when we began work on a signature shoe for a playmaker and generational talent like Sabrina Ionescu, we knew the shoe would focus on cutting: helping her stop on a dime and accelerate back again. The Sabrina 1 uses research from thousands of athletes, both female and male, to create a unique traction pattern and a low-to-the-ground design that has lifestyle appeal that we’re thrilled about. We’re excited about the potential with the Sabrina 1, and the continued power of our increased focus on Women’s coming out of CDA. Over in Jordan Brand, Q3 saw the release of its own young signature shoe. Jayson Tatum debuted the Tatum 1 last month at the NBA All-Star game with fireworks, breaking the all-star record for points scored. The Tatum 1 joins the Luka, Zion, Westbrook, and Game Shoe franchises for the strongest signature portfolio in Jordan Brand's history, helping fuel robust growth for the brand alongside its consistent strength in retro. Crafted with efficiency in mind, the Tatum 1 is Jordan Brand's lightest basketball shoe and has a large volume Zoom Air bag in the forefront for energy-returning stability. Special care was given to the Tatum 1 Kids design. The kids-specific model has specialized zonal rubber on the outsole for the durability needed for young kid's style of play. But the biggest innovation in the kids design came directly from parents, including Jayson himself, who asked for an easy-on, easy-off system. In preschool and grade school versions, designers came up with a new innovative tailgate system. And in toddler sizing, there's an even simpler collapsible entry technology. The Tatum 1 represents an evolution for the Jordan Brand, shifting from serving an individual athlete to also serving the next generation to come as well. The potential here to bring innovation into our kids business is vast as we build lifelong relationships with younger generations. Third, let's discuss NIKE's Air Max franchise. Our Air Max business continues to expand, growing double digits in Q3. Like Air Jordan, Air Max is a great example of how we build significantly scaled businesses off our greatest performance innovations. Looking again at our Insights model, Air Max also exemplifies how we brief new product by leveraging qualitative and quantitative member data science to have a sharper and more targeted focus. We're able to ask ourselves, who are the consumers we want to serve and what are they looking for? For example, the 270 has been a top 5 Air Max franchise for the past five years. But we heard from younger age groups that they want their own version, a more street-engineered durable shoe, one with a new lifestyle identity. This vision of building a future franchise for the next generation led us to create the Air Max Pulse with the broader goal of creating an entire portfolio of Classics for this generation. The Pulse connects the 270 style Air bag with a brand-new upper, bold and versatile styling and new Air Max branding. The Pulse launches on Air Max Day next week, and we can't wait for consumers to give it a try. Another Air Max model launching next week is the Design by Japan Air Max 1 '87. This women's exclusive model represents the first time our members influence product creation using polling on the SNKRS App as well as local member polling data. With just a year from conception to delivery, we relied on our Express Lane capabilities to make and deliver the product in such a short turnaround. Members who participated will be the first targeted for the shoe, creating NIKE's first full circle insights-to-shopping experience. And this is only the first example of this kind of product creation, and we look forward to seeing what we can do next. Overall, we're excited by how our focused approach to insights will fuel future growth. We're still in the early innings, and we're thrilled by the possibility ahead of us as we stay dedicated to listening to the athlete and leveraging membership data to inform future products and consumer experiences. Before I close, I want to mention that in two days, on March 23, we'll release our fiscal '22 Impact report. As you know, at NIKE, purpose is deeply ingrained in everything we do. For example, you read that we've given more than 375,000 girls expanded access to sport through our community partners. In addition, we've maintained one-to-one pay equity for women and U.S. racial and ethnic minorities internally, while also helping the first of our suppliers' facilities achieve a gender equitable workplace with upward mobility for women. As you recall, two years ago, we set new quantifiable ESG targets, focusing on a wide range of priorities across people, planet, and play. I encourage everyone to learn about the measurable progress we've made at purpose.nike.com as we continue to create long-term value by shaping a better future through sport. In the end, we're redefining what's possible, thanks to our close connections with consumers and how those relationships make us better again and again. We're supercharging how we serve athletes around the world with innovative product, brand engagement, and experiences at retail. This promises to be yet another incredible year for sport and there's never been a better time to be in the business we're in. I could not be more excited about our future. And with that, I'll turn the call over to Matt.

Thanks, John, and hello to everyone on the call. NIKE's third quarter showed that in a dynamic environment, strong brands set the pace. Two quarters ago, we took clear and decisive action in response to changing marketplace and supply chain conditions. Our top priority was to strategically manage excess inventory and drive a quicker return to a healthy pull market, and our Q3 results prove that NIKE is leading the way. NIKE is more agile, responsive, and resilient than before the pandemic with operational capabilities and an experienced team that enable us to create competitive separation. While we may continue to face heightened volatility, we are confident in our ability to drive sustainable and more profitable growth. Consumer demand for our portfolio of brands remains uniquely strong, fueling unit growth of approximately 10% despite increased macro uncertainty. NIKE, Jordan, and Converse all drove double-digit currency-neutral growth this quarter. NIKE Direct outperformed with member buying frequency increasing and store sales growing across all geographies. Another quarter of industry-leading digital growth, up 24% in Q3, drove our digital share of business up to 27%. Our wholesale channel delivered a second straight quarter of outsized growth with a planned recapture of retail partner open to buy on improved inventory supply versus the prior year and strong consumer sell-through. Revenue from performance dimensions grew double digits versus the prior year with strong momentum from the Phantom GX, Invincible 3, LeBron 20, and other new product innovations. Revenue from lifestyle dimensions also remained strong as consumers continue to shift wallet share towards sport-inspired products that provide innovation, comfort and style. NIKE has been fueling this shift for more than 50 years, built on our passion for serving athletes. We have created the lifestyle around sport and have forged a deep connection to youth culture through our most iconic footwear franchises. Time and again, we take the consumer somewhere new. This quarter, we introduced new iterations of the Air Force 1 with Tiffany's Undefeated and Drake. We drove energy around our top Jordan franchises with our latest Travis Scott AJ1 and a women's exclusive AJ4. We welcomed the Year of the Rabbit with a Dunk inspired by the iconic White Rabbit candy. We celebrated the NBA All-Star Game with an Air Force 1, Dunk, and Blazer collection inspired by its host city. And we connected consumers to the Air Max 1 through craftsmanship, heritage storytelling, and new modern renditions. The energy that we are creating for the consumer continues to set NIKE apart. Even in a promotional environment, full price sales remain strong. And for the seventh consecutive quarter, ASP growth was positive for NIKE, Inc. with benefits from strategic pricing, product mix, and our shift to direct more than offsetting the short-term cost of promotions to liquidate excess inventory. In addition to driving strong top line results, we are making tremendous progress on inventory. Let me walk through a few key points. First, inventory dollars and units are down meaningfully from last quarter. In the third quarter, total inventory dollar growth was 16% year-over-year. In North America, inventory dollar growth was 14%. In Greater China, inventory dollars declined 4% versus the prior year, positioning us well for the momentum that we are creating in the China marketplace. Next, we are making even greater progress where we are focused most. In Q3, total apparel units were down year-over-year as we continue our sharp focus on liquidating excess apparel inventory. In North America, apparel units were down high single digits. Finally, we are confident looking ahead with strong traffic and retail sales growth and reduced inventory buys for the spring and summer seasons, we are increasingly confident that we will exit the year with healthy inventories across the marketplace. In fact, given our brand momentum, we now intend to move through even more units by year-end than we had previously considered. Both transit and buying timelines continue to tighten towards pre-pandemic levels, and free cash flow accelerated this quarter through improvements in working capital. Along with an improving flow of seasonal supply, our decisive actions will enable NIKE to compete at its best, driving consumer energy through new product, seasonally relevant assortments, and fresh storytelling and premium retail experiences. Regardless of the near-term uncertainty facing consumers, we will be prepared to lead and to operate from a position of strength. Now let me turn to our NIKE Inc. third quarter financial results. In Q3, NIKE, Inc. revenue grew 14% and 19% on a currency-neutral basis, with broad-based growth across brands, channels, and geographies. NIKE Direct grew 22%, led by 24% growth in NIKE Digital and 19% growth in NIKE stores. Wholesale grew by 18%, driven by strong partner demand based on accelerating retail sales, higher shipments based on earlier supply availability, and lower shipments in the prior year given supply constraints. Third quarter reported gross margins declined 330 basis points to 43.3% due to higher markdowns, increased product input costs, elevated freight and logistics expenses, including higher supply chain network costs in North America, partially offset by strategic pricing actions. This also includes approximately 140 basis points of impact from unfavorable changes in net foreign currency exchange rates. SG&A grew 15% in Q3, primarily due to wage-related expenses, variable NIKE Direct costs, and increased demand creation expenses. Our effective tax rate for the quarter was 16% and substantially consistent with the same period as last year. Third quarter diluted earnings per share was $0.79. Now let's review the operating segment results. In North America, we drove strong holiday sales with momentum continuing into the new calendar year. Q3 revenue grew 27% on a currency-neutral basis, with NIKE Direct up 23% and NIKE Digital up 25%. EBIT grew 23% on a reported basis. Consumer demand drove strong growth across performance and lifestyle. LeBron, Giannis, and Luka grew high double digits, fueling market share gains in basketball. A strong Invincible 3 launch energized the marketplace, doubling digital sales compared to the Invincible 2. Air Max grew double digits, and the Jordan Brand kicked off its 23rd year, also known as Jordan Year with strong double-digit growth, incredible momentum, especially with women consumers and even greater potential with a path toward becoming the #2 footwear brand in North America. Across the marketplace, we continue to capture opportunity with our growing digital advantage. Member moments throughout the quarter drove double-digit growth in repeat member buying. On the NIKE app, we integrated personalized product recommendations for members using available inventory to increase sell-through of key products. In addition, return on ad spend improved for another quarter as we test personalization and consumer experiences with activity and preference data. In EMEA, we saw strong growth across all Western European markets, including positive trends in the UK. Q3 revenue grew 26% on a currency-neutral basis, with NIKE Direct up 39% and NIKE Digital up 43%. EBIT grew 10% on a reported basis. New product innovation resonated deeply. Invincible 3 drove strong sell-through in NIKE Direct and with our retail partners. Our statement Go Leggings delivered positive early results with strong sales in NIKE Live and NIKE Rise Doors where we've been able to create a unique retail experience for her. In football, we are gaining share with a very successful launch of the Phantom GX plus sustained momentum in the Mercurial franchise. We saw strong consumer response as we continue to transform the consumer journey in Digital. Traffic grew double digits with average order value growing mid-single digits, and NIKE.com leading new member acquisition. On the NIKE App, member engagement grew double digits with the new Jordan member home button driving the highest click-through rate ever on the app. We also continue to drive convenience and improve NIKE Digital profitability by expanding O2O services, optimizing last-mile delivery, and reducing digital split shipments. In Greater China, we drove top line growth despite another quarter of volatility. Q3 revenue grew 1% on a currency-neutral basis, declining 8% on a reported basis. NIKE Direct grew 3% on a currency-neutral basis with NIKE Digital declining 11% as consumer buying shifted to brick-and-mortar with the country's reopening. EBIT declined 10% on a reported basis. In December, we managed through disruption from the country's shift in COVID policies with widespread door closures. Starting in January, we began to see a rebound in brick-and-mortar traffic with strong retail momentum around Chinese New Year, accelerating into February, especially as our clean inventory position enabled us to serve consumers with fresh seasonal assortments. Throughout the quarter, we gained traction in some of our most important business dimensions: performance footwear outpace lifestyle with running up double digits, led by the Invincible 3. Meanwhile, in basketball, LeBron 20 and the GT Series resonated deeply with energy around our local Space Maker Summit and Jordan Brand's China High School Basketball League All-Star Weekend. Growth in kids surpassed other consumer segments with a positive response to Hyperlocal collections, such as our Chinese New Year Leap High Express Lane pack. We are optimistic as our business momentum continues to build. In Beijing, NIKE's brand strength is deepening, extending our lead as the #1 cool and favorite brand. We are also seeing the benefits of a more local operating model as we have made investments over the past two years to serve the marketplace's unique needs. Long term, we are confident that the fundamentals of growth for NIKE in China remain strong. Finally, in APLA, NIKE's brand momentum continues to fuel strong growth. Q3 revenue grew 15% on a currency-neutral basis, including approximately 8 percentage points of headwind due to the first full quarter of impact from the transition of our Chile, Argentina, and Uruguay businesses to a distributor model. NIKE Direct was up 22% with NIKE Digital growing 23%. EBIT grew 1% on a reported basis. Football grew double digits with a successful Phantom GX launch, strong sales for the Men's World Cup in December, and excitement building for the Women's World Cup this summer. In Running, we saw strong momentum across our top footwear franchises, including double-digit growth for Invincible, Infinity, and Pegasus. And in fitness, the Metcon Free continues to win with consumers, growing triple digits. We also continue to accelerate opportunity in this geography through marketplace innovation. This quarter, we expanded Express Lane to bring more Hyperlocal product to consumers. In March, we introduced the NIKE App in Korea, which launched as the #1 free shopping app in one of our most digitally connected markets. And later this week, we'll open our newest World of Flight door in Tokyo, expanding the Jordan Brand's international growth. I will now turn to our financial outlook for fiscal '23. To date, we continue to see uniquely strong consumer demand as our product innovation, brand storytelling, and consumer connections drive distinction and growth in the marketplace. That being said, we are closely monitoring the building pressure on consumer confidence and the uncertainties of the macro environment. We continue to take a cautious approach in planning our business, leading with intentional financial and operational guardrails. And looking ahead, we will continue to transform our operating model, unlocking speed, agility and efficiency with an improved marginal cost of growth. As a result of our strong Q3 performance, we now expect fiscal '23 reported revenue to grow high single digits, an improvement from mid-single-digit guidance in the prior quarter with approximately 600 basis points of foreign exchange headwinds. For the fourth quarter, this translates into flat to low single-digit revenue growth. Remember, more than six months ago, we strategically reduced our inventory commitments for the spring and summer seasons to ensure that both NIKE and our partners can work through excess and early arriving inventory. As a result, we expect wholesale revenue growth to moderate for the next few quarters. We expect fiscal '23 gross margin to decline approximately 250 basis points at the low end of our previous guidance range. This reflects ongoing and accelerated actions to reduce inventory by year-end, elevated freight and logistics expenses, including higher supply chain network costs in North America, and 100 basis points of foreign exchange headwinds. For the full year, we expect SG&A to grow approximately 10%. We continue to expect our tax rate to be in the high teens range. And consistent with my approach over the past few years, I will provide specific guidance for fiscal '24 on our next earnings call. In this environment, what sets NIKE apart is our portfolio of leading brands, our proven playbook, and a team and culture of innovation that continues to deliver. We have managed through cycles like this before, and we will be well prepared for the volatility that is in front of us. With that, let's open up the call for questions.

Great. Thanks. Congrats on a very nice quarter and progression with all of your priorities. So John, maybe as you break down underlying drivers of the current business momentum, could you just speak to market share acceleration opportunities that you see across running, basketball, and women's? As from your tone, the forward-looking product pipeline sounds pretty robust. And then just, Matt, with increased confidence in the inventory on track to finish the year in a healthy position, help us to think about the timing or magnitude of margin headwinds from this year turning to tailwinds as we look forward?

We are optimistic about our ability to increase market share in each of the three areas mentioned and more broadly, as well as our product pipeline. Starting with running, we categorize it into three segments based on consumer insights: Racing, where we lead on Race Day with the NEXT% platform; Trail, where we are currently gaining market share with shoes like the Peg Trail 4 and other innovative models; and Road Racing, where we have concentrated our efforts over the past six to twelve months on six models. In Q3, we launched the Invincible 3, which was well received across all four geographies and channels, including our direct channels, wholesale partners like DICK'S, and running specialty stores. We see great potential for the Invincible in the coming quarters and years. Additionally, we plan to make significant updates to the other five road running models in the next six to twelve months, incorporating innovations from our racing platform for everyday runners, particularly advancements in foams and other materials. Running is a key priority for us, and we anticipate sharing gains, especially in road running, over the next eighteen months. Regarding basketball, our signature portfolio has never been stronger or more refreshed, featuring stars like LeBron, Giannis, KD, and emerging talents such as Ja, Devin Booker, and Sabrina. In the Jordan line, we have Zion, Luka, and Tatum, alongside the return of the Kobe line. Our GT Series will also see major updates across the run, cut, and jump segments. Our basketball portfolio is impressive, and we are eager to continue promoting it in the marketplace over the next six to twelve months. In women's, we are encouraged by the initial reception of products like Go and Zenvy leggings and Alate bras. We have a strong innovation pipeline that we are excited about. Coincidentally, this week, several hundred of our global leaders are on campus planning for our spring '24 season, which spans from January to March next year. While I can't share specifics now, the breadth and depth of our innovation pipeline is impressive. As our teams return to the office and come together in person, the combination of consumer insights driving product innovation, storytelling, and marketplace engagement is gaining momentum. Overall, we are very optimistic about our future product pipeline.

We have made significant progress on inventory. Two quarters ago, we established clear goals and took decisive actions to respond to the changing supply chain and marketplace conditions. We managed to leverage our brand momentum through the holiday season and maintain it into spring. We are increasingly confident that we will finish fiscal year '23 with healthy inventory levels across the marketplace and across channels. In fact, I noted earlier that we will end up with even leaner inventory than we initially expected, thanks to the momentum we're experiencing. Regarding the impact on gross margins for fiscal year '24, I mentioned that I will provide full guidance next quarter. However, I can share that we've discussed 350 basis points of temporary cost headwinds affecting our gross margins over the past two years, due to high ocean freight and logistics costs, as well as promotions needed to move through excess and early arriving inventory. We anticipate that these temporary headwinds will start to recover in fiscal year '24, and I will give specific guidance next quarter on the extent of that recovery.

I'd love to ask my question on China. Maybe you could dive in a little bit deeper on the outlook for the recovery there, maybe across a few different dimensions, being the consumer recovery, how the consumer is behaving, what you're seeing there, the competitive landscape, especially vis-a-vis locals, which may have taken some share. And then also the marketing landscape. Are you having unfettered access to all the different marketing channels that you need to resonate with the consumers?

We are really optimistic about our momentum in China. In Q3, we saw significant growth in the post-lockdown environment, especially in the second month of the quarter, and our inventory levels are very healthy. Looking ahead, the fundamentals of the market are strong. It's a large and growing market that benefits from trends in sport and wellness, along with a strong desire for innovation and style. Winning in this market hinges on delivering great innovation and effectively connecting with Chinese consumers in a way that resonates locally. Our product innovation is striking a chord with the Chinese consumer, combining global platforms like the LeBron 20 and the G.T. Cut, which received a positive response, with localized innovations such as the Chinese New Year pack and the Year of the Rabbit pack targeted at Gen Z and Gen Alpha. We are very focused on appealing to younger consumers in China. Our brand strength continues to grow; we are recognized as the preferred brand, and this gap expanded in Q3 in Beijing. Having 6,000 monobrand stores gives us a real advantage. We are committed to investing in China, supported by a fantastic team there. We were thrilled to meet them in person for the first time in three years this quarter, and they are very optimistic about our future. We are developing hyperlocal products and storytelling capabilities, which allow us to serve consumers more effectively with locally driven apps and rapid storytelling. Our technology is increasingly tailored for the Chinese market, enabling us to connect with consumers in a more agile and personalized manner than ever before, enhancing our competitive position in China. We are highly focused on this and feel very positive about our ongoing momentum.

Yes. Omar, I would like to add to the monthly trends I mentioned earlier. In December, we addressed the changes in COVID policy and how they affected the number of retail locations open and the traffic. Our business experienced a decline in high single digits that month. However, in January, we returned to growth, observing a rebound in brick-and-mortar traffic and strong retail sales. By February, our momentum picked up further compared to January, despite the comparison to last year's Lunar New Year period. As we consider our inventory position, which remains lower for the second consecutive quarter compared to the previous year, the fundamentals support our sustained momentum. We firmly believe that China presents a continued growth opportunity for NIKE.

Thanks, guys. Paul Lejuez. Can you give us an update on your shared apps and the partnerships that you've developed with certain retailers? Are they progressing as planned? And what are your thoughts on linking up with any new partners in the future?

Yes, Paul, our marketplace strategy focuses on giving consumers access to what they want, when they want it, and how they want it through our digital platforms, retail stores, and wholesale partners, all supported by our membership program with 150 million active members. The idea of connected membership with our wholesale partners is starting to show positive results. For instance, with DICK'S, we are able to offer a personalized experience to shared NIKE and DICK'S members that they can't find elsewhere, which benefits both us and DICK'S. As baseball season approaches, we can identify a DICK'S consumer interested in baseball and send them an email promoting NIKE's baseball cleats along with DICK'S bats and mitts. Consumers are responding positively to this tailored messaging from both NIKE and DICK'S, showing clear benefits for both parties. Our partners in China, including JD, are experiencing similar results. We plan to thoughtfully expand these efforts with our other strategic wholesale partners, which gives us a competitive edge in serving consumers across various channels while maintaining the largest and most engaged membership program in the industry.

Great. And congrats on another really great quarter. I saw that you guys took the SG&A guide up a bit for the full year. So I'm just wondering, can you just review what's driving that? And should we think about that as moderating next year? Or what are your priorities going forward? Then just one quick second one. I think you mentioned numerous quarters of ASP growth that you guys have posted. How much pricing have you taken versus pre-COVID levels? And are you expecting to take more in the upcoming seasons? Or how should we think about that?

Sure, Alex. Well, we wanted to sharpen our guidance as we finish this fiscal year. But maybe to take a step back for a second as it relates to SG&A, we started the year with an SG&A guide of high single digits to low double-digit growth. And at the end of the first quarter, when we saw the change in conditions, we decided that we were going to prioritize our efforts around inventory liquidation and getting back to a healthy pull market. And so what we said was that we were going to prioritize the investments that we've been making for several years in our consumer-led digital transformation, the capabilities and the ways of working that are enabling us to create a new operating model for NIKE. And we would manage expense growth tightly, and we would reduce our planned headcount growth. And we've absolutely done that over the last two quarters and feel very good about the momentum that we've been making with regards to ensuring that our resources are flowing towards the priorities that we have. And we've got some exciting things that are going to land from a transformation perspective in the next six months. When you step back even further, our revenue guidance at that point in time was for low single-digit to mid-single-digit revenue growth. And given the brand momentum that we're seeing, our updated revenue guidance now being high single-digit revenue growth, I'm actually quite proud that we've been able to manage expense growth on a variable basis even as we've seen our revenue continue to increase. And that focus and attention on expense growth or managing expense growth and headcount growth, we definitely intend to carry into our next fiscal year. As it relates to your question about ASPs and pricing, we've increased prices this year mid-single digits on average across our portfolio. As I think I've said in prior quarters, it wasn't a peanut butter across every product in style. It was a surgical approach, but on average, it averages out to mid-single-digit growth. As we look ahead to next year, we're absolutely continually looking at the profitability of our product, we're looking at inflationary costs in the supply chain and also inflationary costs that are impacting the make of our product. And we will continue to focus on managing those levers together in order to try to drive profitable growth going forward. I'll give you more guidance next quarter on the specifics, but that's absolutely our strategy and the way that we've been managing product pricing and margin for many, many years.

Just a couple of questions on inventory. You made a lot of progress with your numbers. Can you talk about two pieces I'm interested in, wholesale inventories, meaning at the wholesale level at your retail partners, where you see the channels, specifically in North America, maybe even in Europe? And then on the apparel side, that's been where you had a lot of excess inventory. Just wanted to understand your sort of learnings from working through all the apparel? And maybe you could give us an updated outlook on how you think apparel is positioned over the next few quarters in the pipeline there?

Sure, Bob. Regarding inventories in the marketplace, the actions we implemented two quarters ago involved our partners and NIKE Direct. With the momentum we're experiencing, particularly from the holiday season into spring, we devised specific plans with our partners to balance promotions and move inventory of slower-selling products. This included being more proactive with apparel to tackle some of the late-arriving seasonal items, which presented challenges initially. We've made significant progress. When we examine our wholesale partners in North America and EMEA, the sales rates in those channels give us confidence in the strides we've made. In fact, this quarter, retail sales to consumers through the wholesale side exceeded our sell-in numbers, which is promising. Regarding apparel, one key learning came after our factories closed in late summer and early fall last year; we chose to continue producing late products due to market constraints. In retrospect, we would prefer to focus more on delivering seasonally appropriate products to consumers. The advantage of addressing excess and early inventory is that the delivery timing for current season products has improved significantly compared to past quarters and is now approaching pre-pandemic levels. Offering the right selection, colors, materials, and stories at retail gives NIKE a competitive advantage by enhancing the consumer experience in a way that's hard to replicate.

Yes, I'll expand on that. The lesson learned is to avoid a supply chain crisis in a highly seasonal business. As I mentioned earlier, Matt and I are overseeing our spring '24 plans, which are still six to nine months away. It's clear that when we have the right assortments in apparel and the right colors align effectively, the results are very impactful. The outlook for that pipeline is quite promising.

I'm curious to know a little bit more about your trends through the quarter in China. I know you talked about December being a really tough month. Would it be possible for you to talk about December versus 2023 in terms of how the quarter behaved and possibly the exit rate out of the quarter so we can get a sense of how demand is trending at the moment? And then I have a second question around your sales guidance. Your sales guidance implies about flat quarter-over-quarter between Q4 versus Q3. Are you expecting inventory to be down kind of similarly to this quarter, so down a few percent quarter-over-quarter on a flat sales base?

Sure, I previously addressed the monthly trends in China when responding to Omar's question, but I'll summarize it again briefly. Due to door closures, reduced retail traffic, and changes in COVID policy in December, our business experienced a decline in the high single digits. However, we returned to year-over-year growth in January and noticed an improvement in brick-and-mortar traffic in China. February saw an even greater improvement compared to January, particularly as we compared it to the Lunar New Year period from the previous year, which fell in a different month. We are optimistic, especially as our inventory levels remain healthy. The momentum we observed as we exited the quarter encourages us. Regarding our full year revenue guidance, we have again updated it upward, influenced by strong momentum during this quarter. Specifically, our outlook for the fourth quarter is currently higher than it has been in the last two quarters. Our brand momentum and confidence continue to grow. The primary factor driving our Q4 revenue guidance is the decision we made six months ago to reduce our spring and summer purchases to ensure a healthy inventory situation for both us and our partners as we wrap up the fiscal year. We are making significant strides toward that goal. We anticipate ongoing improvement in Q4 regarding our inventory and are confident we'll finish this year in a strong position as we look ahead to fiscal year '24.

Curious if you can just expand on some of the movement we've seen in digital margins over the last couple of quarters. Sounds like you continue to see benefits associated with reduced digital shipments. It seems like you're pleased with some of the movement on the ROAS front. So I'm curious now if you can just kind of speak to more detail about the margin delta maybe you're seeing between the wholesale and direct channels. And just how should we think about the digital margin flow through at this point?

We've been discussing for a while how our consumer-driven digital transformation is reshaping NIKE's financial model. This change is evident in our revenue and gross margin performance. We've gained approximately 3 points from a greater proportion of sales through our digital and direct channels. You can see this reflected in our growth projections, as well as in our average selling price performance. Digital sales have surged from about 9% of our business in fiscal year '19 to 27% by the end of this quarter. We've consistently stated that the margins from our digital business are more favorable than those from wholesale channels, which has contributed to gross margin growth from fiscal year '19 to fiscal year '22. As I mentioned earlier this quarter, we believe the channel mix is helping us grow our digital business, and we see opportunities to enhance its profitability. Two specific examples I provided were from EMEA, where our team is working to lower fulfillment costs through various strategies and enhancing our membership and marketing efforts. By attracting more engaged members who buy more often, we anticipate an improvement in our return on ad spend, reinforcing our ability to sustain and grow our digital business. These examples highlight our commitment to enhancing the profitability of our digital channel. Looking ahead, we are confident in our capability to achieve our long-term goals. This year, we've encountered higher markdowns and promotions in our direct channels due to excess inventory, but we believe these costs are temporary and expect to see recovery starting in fiscal year '24.

We have time for one last question.

My question is on EMEA. Curious if you can dig into what you're seeing in the region? It seems like it continues to be quite resilient despite the macro environment. But are you seeing any meaningful differences between countries?

I mean I'd just say a broad statement, and then Matt, you can fill in some of the specifics. The EMEA consumer has held up remarkably well. And what's clear is our brand strength has really strong across demand. That's both for NIKE and Jordan. You saw really strong across channels, digital, very strong this entire year as well as this quarter as well as our direct and wholesale channels. So the brand connection with NIKE across our major fields of play across NIKE and Jordan is as strong there as it is anywhere.

Yes, I would like to add that we are actively engaging in the marketplace and are experiencing significant growth across our brands, performance and lifestyle segments, and various demographics and price points. The team is doing an exceptional job in this area. When we review our country portfolio, we previously noted a decline in the UK, yet we are now observing strong growth in all our Western European markets, including a recovery in the UK. As we consider the dynamics mentioned by John, we remain committed to enhancing brand authenticity through sport and lifestyle in this key region. Honestly, many elements that resonate with sneaker culture worldwide originate in the European market. Therefore, our connection with consumers there is vital not only for driving growth in that area but also for influencing trends and behaviors in other markets.

Thanks for the question, Gaby, and thank you all for participating in our Q3 earnings call. This concludes the conference call for today. We'll talk to you next time. Thank you.