Nike Inc - Class B (NKE) — Q2 2024 Earnings Call Transcript

Thank you, operator. Hello, everyone, and thank you for joining us today to discuss NIKE Inc's Fiscal 2024 Second Quarter Results. Joining us on today's call will be NIKE, Inc. President and CEO, John Donahoe; and our CFO, Matt Friend. Before we begin, let me remind you that participants on this call will make forward-looking statements based on current expectations and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in NIKE's reports filed with the SEC. In addition, participants may discuss non-GAAP financial measures and non-public financial and statistical information. Please refer to NIKE's earnings press release or NIKE's website, investors.nike.com, for comparable GAAP measures and quantitative reconciliations. All growth comparisons on the call today are presented on a year-over-year basis and are currency neutral, unless otherwise noted. We will start with prepared remarks and then open up for 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'll now turn the call over to NIKE, Inc. President and CEO, John Donahoe.

Thank you, Paul, and hello to everyone on today's call. NIKE is the market leader in sport. It's a role we take seriously. We create innovation that pushes human potential. We expand the world of sport inviting new generations all around the globe into the community of athletes. And we fuel the energy and excitement of sport itself, both on a global stage and on the ground in community and cities everywhere. One thing that distinguishes NIKE, more than any other brand in the world, is that we get our inspiration from athletes and sport. And it was a great quarter for NIKE and the athletes who inspire us. Here's just a few examples. Kelvin Kiptum broke the marathon world record wearing the Alphafly 3, which built on our proprietary system of speed that continues to set the standard. A'ja Wilson earned WNBA Finals MVP after leading the Las Vegas Aces to their second straight title. LeBron James and Anthony Davis led the Lakers to the first-ever NBA in-season tournament championship. Aitana Bonmati won the Women's Ballon d'Or and Sha'Carri Richardson was named USA Track and Field Female Athlete of the Year. Being inspired by world-class athletes like these keeps us focused on redefining what's possible. That's what sets us apart. No one changes the game like NIKE, from our breakthrough innovation for toddlers with the Swoosh 1 shoe to being able to elevate beloved products like Toby's into an entire franchise to NBA players increasingly choosing to play in the Sabrina 1, a shoe deeply resonating across gender. Again and again, it’s NIKE that pushes what's possible to break the status quo. Now in addition to creating best-in-class innovation, great companies must also focus on strong execution. And that's what we did in Q2, delivering our second $13 billion quarter. This one on top of last year's extraordinary 27% growth, and we drove more than 20% growth in earnings per share this quarter. Simply put, this is the result of relentless execution by our team in an uneven macro backdrop. Looking at holiday, we outpaced the industry, driving growth of close to 10%. NIKE Digital had its strongest Black Friday week ever, and a record number of consumers shopped in our stores over the long Thanksgiving weekend. And in Greater China, brick-and-mortar grew double digits during National Day holiday, and NIKE once again outperformed the industry during Double Eleven as the number one sports brand on Tmall. These holiday results, when combined with Q2's earnings growth and our continued healthy inventory, showcase how we're executing against our priorities even in the face of a highly promotional environment and increasing macro volatility. Last quarter, I talked about how we're getting back on our front foot, accelerating the flow of our innovation, and executing with excellence across our winning formula of innovative product times distinctive storytelling times differentiated marketplace experiences. Let me give you a few examples of where we demonstrated progress. Within our running business, we are driving deeper connections with the running community. We recently launched our most innovative trail shoe yet, the Ultrafly at the world's Pinnacle trail race. We hosted over 1,000 runners for uniquely NIKE experiences that drove energy and positive feedback from both elite runners and the broader trail running community. And we partnered with top retail partners for a series of community activations centered on the Ultrafly and other key products like Peg Trail and WildHorse. All this led to growth of over 20% in our trail running portfolio for the quarter. In global football, we're fueling growth through strategic only NIKE athlete storytelling. As you know, we have a three-silo construct in men's football, having paired Erling Haaland with a Phantom boot, Jamal Musiala with the Tiempo, and Kylian Mbappe and Marcus Rashford leading the Mercurial. With the game's greatest showcasing our product superiority and our seamless execution to pull this innovation through the marketplace, all three franchises are up strong double digits, even lapping last year's strong performance with the Men's World Cup. And in lifestyle, we're driving a women's led geo by geo marketing acceleration behind V2K, a standout shoe in our fast-growing retro running line. It's being fueled by a tongue-in-cheek campaign that's resonated with this consumer and a creator partnership strategy that's delivered head-to-toe style inspiration into her preferred media channels. All this catalyzed the V2K to very strong sell-through in the quarter with exciting potential for this style still to come. All three of these examples offer an early indication of the growth we aspire to. We have real opportunity to drive progress across many dimensions of our business, and that's our priority moving forward. At NIKE, we'd like to say we're on the offense always. When we see something that needs solving, we don't wait around; we solve it. And so, as we look to the future, we know where we must focus. Three areas will always drive our distinction and competitive separation: product innovation, storytelling that connects, and marketplace execution. When NIKE's at its best, we create impact on a scale that can't be matched, rooted in sport, centered in youth culture, inviting consumers around the world into our brands. The second half of fiscal '24 represents the start of a multi-year product innovation cycle that will introduce new franchises, concepts, and platforms, elevating our full portfolio. And while there will be some key moments in the second half, this new innovation cycle will take some time to fully ramp up, given our size and scale. Now, we know we have an outsized opportunity to drive long-term profitable growth. And we have areas of significant growth potential like Women's Jordan brand and running, each of which requires focused investment to reach full potential. We also must get deeper traction on our key speed initiatives. Today, we know we must be faster: increasing the pace of innovation, increasing the pace of market-to-consumer, and increasing our agility and responsiveness. To drive this, we will embrace a significant savings plan to create investment capacity to fuel profitable growth at speed and scale. Areas of potential savings include simplifying our product portfolio, increasing automation and the use of technology, streamlining our organization, and leveraging our scale to drive greater efficiency. Let me just acknowledge that this work will be led with respect and thoughtfulness as we move to improve the ways in which we work and build a leaner and stronger company for the future. Matt will provide more detail on this later in the call. Now, we've made some progress as we look to accelerate growth in our business, and I want to walk through two key areas today where we're investing for the future and further growth: our Women's business and Jordan brands. Both Women's and Jordan are opportunities that are grounded in performance and the ability to drive culture and lifestyle, with the latter providing even greater scale and growth opportunities. First, let's discuss Women's, which is already a roughly $9 billion business, and that's just the NIKE brand excluding Jordan and Converse. Our Women's business has grown high single digits on average over the past three years. And while we are encouraged by this progress, we now have line-of-sight into what we believe is the best plan we've ever had to accelerate growth in Women's. Our plan makes us even more confident in serving her through sport and style. Today, about 40% of our members are women consumers. They make up a bigger proportion of new members, and their demand per member is growing faster. We see great opportunity to better serve this consumer by responding to her needs across the spectrum of performance and lifestyle. Let me first touch on performance where we're focused on innovating for her to create new opportunities we did not previously serve. We've now built a collection of bras and leggings across different price points. This includes our statement leggings, Zenvy, Go, and Universa, all of which are above $100, which is a price point we were not previously in. These leggings serve her with a whole new approach to fit and comfort, thanks to new material innovation. And we're holistically elevating our retail presentation and storytelling to help her find the right product for her exact needs. More and more women are joining our brand by purchasing these leggings. In fact, all told, statement leggings fueled our fitness apparel growth in women's for the quarter. And in footwear, we're seeing very strong sell-through for the Motiva, a shoe with a comfortable and distinctive design. This shows how we dimensionalize performance and to walk in. And Free Metcon is also performing very well, serving her need for versatility by expanding a fitness shoe into comfortable everyday wear. And at the same time, when we look at women's lifestyle, we've established our leadership position in women's sportswear through a focus on style and comfort. With iconic franchises like Air Force 1, Dunk, Court, and Fleece, all of which drive continued momentum with new energy and design. And we're also fueling the rapidly growing retro running trend with our portfolio of styles like the Vomero 5, V2K, and P-6000. In fact, even with sequentially increasing the supply, demand for this entire line is so strong that there remains tremendous opportunity to grow further. We're excited to scale these styles over the next few seasons. And so today we're taking the right steps to serve our women consumers with energy and sharpness, and we're fully aligned and accelerating our offense to raise our game with an eye to the immense opportunity we see going forward. Now let's discuss the Jordan brand, which is on a clear path to become the number two footwear brand in North America, the biggest brand not named NIKE. We're fueling the strong momentum in Jordan by growing a Monday-to-Friday business with a more diverse product portfolio on top of our very successful launch business. Over the past few years, we've driven strong growth in the Jordan business by bringing more dimensions into the brand. We're proving that Jordan can be more than retro, more than footwear, more than men's, and more than North America. Our approach to growth will continue to bring life and growth over the coming years. And this is just the beginning for the Jordan brand as we see even greater growth potential through our plan for deeper investment, which for Jordan will come in areas like merchandising, marketing, and marketplace. For instance, today, Jordan brand performance product is outpacing overall growth with Jordan reigniting its core presence in basketball with the strongest signature portfolio ever as Tatum, Luka, and Zion push the brand to new heights, both on and off the court. Jordan is also expanding beyond basketball into, for example, golf, global football, and American football. And Jordan Women's and Kids continues to lead the brand's overall growth. Women's and kids' business share within Jordan has increased seven points over the past three years. And Jordan Apparel is now a roughly $1 billion business, averaging almost 20% growth over the past three years. We're also building new dimensions in the iconic AJ1 franchise across high, mid, and low, as well as through women's-led dimensions such as the Elevate and the Brooklyn boot. And I'd also like to spotlight Jordan's strategic approach and success with our remix footwear line which again has already surpassed the $1 billion annual revenue mark with high double-digit growth, led by styles like the Max Aura and the Stadium 90. Remix has increased Jordan's accessibility through more affordable price points and expanded distribution with key partners. And last but not least, Jordan's share from international markets continues to expand as we bring the brand to global cities in an authentic way. This is shown up as we pilot the Jordan destination tab in the NIKE commerce app in EMEA with strong early results, and the Jordan World of Flight doors in Milan, Tokyo, and Seoul have emerged as the company's most productive retail concepts. The sky is the limit for Jordan as we continue to invest and explore what's possible for one of the world's leading brands. In the end, we are moving with confidence against the opportunities we see. And looking ahead to the next calendar year, we remain single-minded in our focus to compete and win. I wouldn't trade our position with anyone.

Thanks, John, and hello to everyone on the call. NIKE's second quarter financial performance reflected our proactive marketplace management and disciplined execution with tremendous delivery by our teams in a dynamic environment. Revenue was up slightly versus the prior year, growing 1% on a reported basis as we compare to 17% reported and 27% currency-neutral revenue growth one year ago. Gross margins expanded despite a highly promotional marketplace. And combined with disciplined SG&A management, earnings per share and free cash flow accelerated. As I said last quarter, we believe we are turning the corner and driving more profitable and sustainable growth. At the same time, there were a number of puts and takes in the quarter. So before I walk through our financial results, let me share some perspective on our performance in light of current macro and consumer trends as well as additional insight into our business direction. Now, as you recall, we moved proactively in the prior year to liquidate excess inventory and reduce wholesale sell-in for the first half of fiscal '24. And while this dampened our reported revenue growth through Q2, total retail sales in the quarter grew across the marketplace on top of double-digit growth in the prior year. ASPs were up across both footwear and apparel, and AURs grew across channels. Average order values among NIKE members increased versus the prior year. Our higher-priced products, in particular, have been resilient with our $100-plus footwear models driving strong growth in units sold across the marketplace. And overall, we have maintained lower markdown rates than many of our competitors. In the most impactful consumer shopping moments, NIKE's brand strength created even greater separation. We delivered market-leading results in Greater China and Double Eleven. And over the Black Friday and Cyber Week period, NIKE Direct grew approximately 10% across North America, EMEA, and APLA. In Q2, NIKE Direct once again led our growth and wholesale shipments exceeded our expectations. Having said that, we are seeing indications of more cautious consumer behavior around the world in an uneven macro environment. Total retail sales across the marketplace fell short of our expectations with softer demand outside of the key consumer moments. While NIKE's store traffic continued to grow, we saw softness in digital traffic and higher levels of promotional activity across the marketplace. As a result, we are adjusting our channel growth plans for the remainder of the year. Looking to our product portfolio, our top franchises continue to drive strong full-price sales, but we intentionally manage the lifecycle of these models across the marketplace for long-term value. Given the promotional environment and the cautious consumer behavior that we're seeing, we are stepping up our plans to reduce marketplace supply of our key franchises. Our goal is to focus NIKE's brand heat and energy on what is new as we accelerate our product innovation cycle. We have seen encouraging signs from recent consumer activations around some of NIKE's latest innovations and newness and we intend to accelerate our pace through the Paris Olympics and beyond. While this will initially take some time, we are confident in our pipeline and the product journeys, stories, and consumer energy to come. Now, as you heard from John, our priority is to drive sustainable and profitable long-term growth while building a faster, more efficient NIKE. Since fiscal '19, our investments in accelerating NIKE's Consumer Direct vision have created new operating capabilities, added tens of millions of new members to our member base, and delivered a return of more than $12 billion of incremental revenue. However, we have also added complexity and inefficiency. In this competitive environment, we need to accelerate our pace of innovation, elevate our marketplace experiences, maximize the impact of our storytelling, and increase our speed and responsiveness, all in service of the consumer. To do this, we are creating investment capacity to fuel NIKE's next phase of innovation, growth, and profitability. We are identifying opportunities across the company to deliver up to $2 billion in cumulative cost-savings over the next three years, both up and down our P&L and across our value chain. Some examples include simplifying our product assortment, improving supply chain efficiency, leveraging our scale to lower the marginal cost of operations, increasing automation and speed from data and technology, streamlining our organizational structure, reducing management layers, and enhancing our procurement capabilities. And as we look to drive greater efficiency and productivity, we will reallocate and invest the majority of these savings to deliver the greatest consumer impact on our largest growth opportunities. Ultimately, we believe that building a faster and more efficient NIKE will accelerate future growth and innovation and deliver long-term profitability, creating value for years to come. We will continue sharing updates over the coming quarters. Now let me turn to our NIKE, Inc.'s second quarter results. In Q2, NIKE, Inc. revenue was up 1% on a reported basis and down 1% on a currency-neutral basis following our strong topline growth one year ago. NIKE Direct grew 4% with NIKE stores up 9% and NIKE Digital up 1% while wholesale declined 3%. Gross margins expanded 170 basis points to 44.6% on a reported basis, driven by strategic pricing actions, lower ocean freight rates, improved supply chain efficiency, and modest markdown improvements, partially offset by higher product input costs. This included impact from approximately 60 basis points of unfavorable changes in net foreign currency exchange rates. SG&A grew 1% on a reported basis, favorable to our expectations through disciplined expense management and some shifts in timing of spending. Our effective tax rate for the quarter was 17.9% compared to 19.3% for the same period last year. Diluted earnings per share was $1.03, up 21% year-over-year. NIKE inventory dollars are down 14% versus the prior year and down high-single-digits versus the prior quarter. In total, NIKE inventory dollars are down over $1.5 billion from the peak at the end of Q1 in the prior year, with days in inventory continuing to improve. Total footwear and apparel inventory units across the marketplace are down double digits versus the prior year. Now let me turn to our operating segments. In North America, Q2 revenue declined 3% with wholesale down 9% versus the prior year. NIKE Direct grew 3% with NIKE stores up 4% and NIKE Digital up 2%. EBIT grew 2% on a reported basis. This follows extraordinary growth in Q2 of fiscal '23, with North America revenue up 31%, NIKE Direct up 23%, NIKE Digital up 31%, and wholesale up 37%. This quarter, we saw mid-single-digit retail sales growth with key partners including Dick's Sporting Goods, JD Finish Line, and Hibbett. Jordan and Women's led our momentum in the marketplace with Jordan Remix footwear growing double digits, and the AJ 11 Gratitude release delivered the brand's largest shock drop ever. Within Women's, Dunk, Free Metcon, and our $100-plus statement leggings delivered strong growth. In addition, Structure 25 and Vomero 17, our latest updates for everyday runners, drove positive response from consumers and running specialty partners. In EMEA, Q2 revenue declined 3% with wholesale down 8%. NIKE Direct was up 7%, as NIKE stores grew 8% and NIKE Digital grew 7%. EBIT declined 6% on a reported basis. As a reminder, this also compares to tremendous growth in Q2 of fiscal '23 with EMEA revenue up 33%, NIKE Direct up 44%, NIKE Digital up 62%, and wholesale up 28%. Against the backdrop of increased macro headwinds, we saw strong consumer response to newness and premium innovation. Our winterized running products drove positive sell-through along with strong growth from Invincible, Vaporfly, and Ultrafly. Mercurial, Phantom, and Tiempo grew double digits. And our retro running styles including V2K, P-6000, and Shocks continue to energize the marketplace. In Greater China, Q2 revenue grew 8% and wholesale grew 19%. NIKE Direct declined 4% with NIKE stores growing 16% and NIKE Digital declining 22%. EBIT grew 1% on a reported basis with multiple points of impact from foreign exchange. On the whole, we are seeing a highly promotional marketplace with increased macro headwinds, especially on Digital. That said, Q2 was another strong quarter in brick-and-mortar with continued improvement in full-price sales and sales in NIKE owned and partner doors growing mid-teens versus the prior year. We also continue to see strong momentum with key strategic partners, including Topsports and Pou Sheng. And NIKE continues to strengthen its lead as Chinese consumers' number one cool and favorite brand. Turning to our product portfolio, performance outpaced lifestyle this quarter with innovation and hyper-local storytelling resonating with consumers. We saw strong momentum in basketball, fitness, retro running footwear, and winterized apparel. Locally inspired express lane collections, including our street dance-inspired Dunk, and hyper-local Pegasus releases were top choices for consumers. And overall, our inventory remains healthy with units down and improved markdown rates versus the prior year. Looking ahead, we continue to closely monitor the operating environment. However, we remain confident in NIKE's brand strength, our deep consumer connections, and our foundation for long-term growth in China. In APLA, Q2 revenue grew 10% and wholesale grew 7%. NIKE Direct grew 15%, as NIKE stores grew 17%, and NIKE Digital grew 14%. EBIT grew 7% on a reported basis. Southeast Asia and India, Korea, and Mexico grew double digits, leading a record quarter for the geography. Our Flipkart and Myntra platforms drove strong growth in India. Korea led record member days sales in the geography. And Mexico accelerated its digital momentum over the Buen Fin shopping holiday. We saw strong momentum across our portfolio led by Jordan & Kids. Jordan brand delivered strong growth in Remix footwear, AJ1 essentials, and Signature basketball. In kids, lifestyle and global football grew double digits with positive momentum from all kids' Fleece, Court Borough, and the Mercurial. All told, our team executed with tremendous focus and agility to deliver our Q2 results while managing through volatility. Last quarter, as I provided guidance, I highlighted a number of risks in our operating environment, including the effects of a stronger US dollar on foreign currency translation, consumer demand over the holiday season, and our second half wholesale order books. Looking forward, the impact of these risks is becoming clear. And as a result, we are adjusting our full-year financial outlook. Looking through the balance of the year, we expect Q3 reported revenue to be slightly negative as we again compare to double-digit growth in the prior year, and Q4 reported revenue to be up low-single digits with full-year reported revenue now growing approximately 1%. This new outlook reflects increased macro headwinds, particularly in Greater China and EMEA, adjusted digital growth plans based on recent digital traffic softness and higher marketplace promotions, lifecycle management of key product franchises, and a stronger US dollar that has negatively impacted second half reported revenue versus 90 days ago. I will also remind you that there are approximately 400 basis points of headwinds from supply disruptions and accelerated liquidation in the prior year. We expect increased gross margin expansion in our second half, with Q3 margins expanding 160 to 180 basis points and Q4 margins expanding 225 to 250 basis points. We continue to expect full year gross margins to expand 140 to 160 basis points. This reflects benefits from strategic price increases, improved ocean freight rates, and supply chain efficiency, partially offset by higher product input costs and approximately 60 basis points of impact from foreign exchange headwinds. We expect full year SG&A growth to improve to low-single digits, excluding restructuring charges as we continue to tightly manage expenses and improve productivity and efficiency. Specifically, we expect SG&A dollars in both Q3 and Q4 to be modestly above our first half run-rate, excluding the charge. We anticipate a restructuring charge of $400 million to $450 million in our second half, primarily related to severance costs, which will be recognized largely in the third quarter. We expect full year SG&A, including the restructuring charge, to grow mid-single digits. We now expect other income and expense, including net interest income, to be $275 million to $325 million for the full year. We continue to expect our full year effective tax rate to be in the high-teens range. Taken altogether, strong gross margin execution and disciplined cost controls are enabling us to offset softer second half revenue and drive earnings growth. Excluding restructuring charges, we expect to deliver on our prior full-year earnings outlook. While we expect the operating environment to remain dynamic, we have been here before and we know that moments like this are when NIKE operates and executes at its best. We will stay on the offense, manage risk, optimize opportunity, and leverage our strengths to create even further competitive separation. As we move forward, our focus is building a faster, more efficient NIKE and embracing the opportunities in front of us to accelerate sustainable and more profitable growth. So with that, let's open up the call for questions.

Great, thank you. I have a two-part question. John, could you elaborate on the structural changes you mentioned regarding the shift towards innovation? What structural changes are you observing that support this, and how does it impact our product pipeline for next year? Matt, regarding the portion of the press release that discusses the second half, how should we interpret this? Could you also explain the changes in your revenue outlook for the second half, specifically between retail and wholesale?

Sure.

You want to go first, Matt. All right.

Yeah, let me go ahead and start, Matt, talking a bit about the environment that we're operating in right now and what's changed and what we're seeing. We obviously delivered a strong quarter and delivered revenue in line with the guidance we gave 90 days ago and are incredibly pleased with the disciplined execution and management of the marketplace, including our inventory being down 14% and NIKE plus partner inventory being down double digits versus the prior year. But what we saw in the quarter was a bifurcation of performance. And specifically what I mean is that we saw incredibly strong performance for the NIKE brand over the largest consumer moments if you book in from back to school in the prior quarter through Black Friday and Cyber Monday this quarter. But in the periods in between, we saw softer performance in the marketplace. And as a result of that, total retail sales in the quarter were below the expectations that we set for ourselves 90 days ago. As a result of that, and specifically considering the promotional activity we see in the marketplace and some of the softness in digital, we've lowered our guidance for the balance of this year and provided a little bit of sharpness for you on Q3 and Q4, in particular. Q3 really is reflective of the comparisons to the prior year, much like we anniversaried this quarter. But overall, we've taken a more prudent approach to our planning for the balance of the year given the increased macro headwinds we're seeing in China and EMEA, in particular, and the way that we've adjusted our digital growth downward based on the traffic softness that we've seen and the higher marketplace promotions. And so, you know, connected to what John will talk about in a second, our focus is on newness and innovation, particularly because in an environment like this where the consumer is cautious, and we're seeing higher levels of promotional activity, it's newness and innovation which really creates brand distinction in this environment. And we're even seeing it in the context of recent releases and recent product introductions that we've had over the last 60 to 90 days.

Matt, regarding your question about the structural changes, we reorganized our entire team under the leadership of Heidi O'Neill and Craig Williams as co-Presidents six months ago. This has significantly improved our focus and execution. We are fully committed to aligning our team around what NIKE does best: combining innovative products with compelling storytelling and unique marketplace experiences. As Matt mentioned, we have a strong emphasis, from Heidi and Craig to our teams, on introducing new products and driving our upcoming innovation cycle, which will enhance our entire portfolio. This is what NIKE excels at, and we are achieving it consistently and at scale to make a strong impact. For example, look at what's happening in basketball. We are launching fresh, innovative products on a large scale. Over the past six months, we introduced Sabrina 1, LeBron 21, Tatum 1, Luka 2, and Ja 1, with Ja returning to play two nights ago in the Ja 1 on Christmas Day. This is generating significant momentum in basketball through great innovation. In the next three months, we will add to that with GT Cut, one of our most innovative shoes yet, the Book 1, which we believe will appeal both on and off the court, and Kobe, which has significant ongoing potential. This is driving momentum on the court through performance and innovation, as well as off the court, which translates into lifestyle. For instance, LeBron was seen wearing the Lunar Roam before his recent game, and it sold out on our platform within two days of launch. What we are witnessing is that when we concentrate on performance innovation and translate that into lifestyle, we can achieve scale and consistency that sets us apart. Looking ahead, we are looking forward to the 10th anniversary of Air Max Day in March, and the Air Max DN, which is our best Air Max product in years, will be a key focus for us. We believe this will not only be a successful shoe but also help lift the entire Air Max line. For running, we are gearing up for calendar year 2024, which we’re designating as the year of Pegasus with the Peg 41 and the Peg Family Refresh. We are also preparing for the upcoming Olympics in Paris this summer, a time when NIKE truly shines. We will be leveraging Air as a source of innovation in both performance and lifestyle. Rather than a pivot, I view this as an alignment and acceleration of our speed and focus, and we can feel that distinctly.

Thank you for answering our questions and for providing detailed insights today, especially regarding the long-term strategy of the business. The longer-term commentary is quite beneficial. I would like to understand the margin expectations for the coming years better. Is the $2 billion in cost savings mostly going to be reinvested? If I reflect on the longer-term goal of achieving high teens margins, this should significantly contribute. Do you believe these efficiencies will help us reach that multi-year target? Additionally, with the comments about second half revenues being influenced by macro factors in China, could you share your thoughts on whether we have the controllable elements in place to mitigate some of these macro challenges and potentially make 2025 a strong revenue year?

Sure, let me start with the margins. This quarter really demonstrated a strong proof point with significant gross and operating margin expansion. The team’s execution, particularly in gross margin, was impressive. The drivers of this growth include a mix of recovery from the temporary challenges we've discussed for years, along with structural factors like successful price increases and improved supply chain efficiencies, which have lowered our cost per unit as we deliver products. The fundamental drivers supporting our long-term margin ambitions are still intact, and this quarter validates our path forward. Connecting this to our save to invest plan, we see opportunities to foster more profitable growth looking ahead. I’ve previously mentioned the goal of reducing our marginal cost of growth. Reflecting on our long-term objectives, like lowering SG&A as a percentage of revenue to below pre-pandemic levels, we have made significant progress. However, examining our current resources reveals opportunities for greater efficiency and effectiveness, allowing us to reinvest for higher returns, as John pointed out. It’s important to note that the $2 billion save to invest plan spans both upper and lower areas of the profit and loss statement and encompasses our entire value chain. While we will see benefits in SG&A, we are assessing the business comprehensively. Our aim as we look to the future is to enhance profitable growth over the coming years. We maintain confidence in our long-term margin goals, and as we approach 2025, we recognize it's time to provide an update on these goals, but we remain assured about reaching them. Regarding revenue, we are mainly observing adjustments related to increased macro headwinds in China and Europe. What we can manage is how we handle our franchises. We have strong franchises, and we build dimensions around them to promote growth. Our largest franchises continue to demonstrate year-over-year growth and are achieving full price realization above our business goals. However, in a challenging environment with consumer pressure and increased promotional activity, it’s the introduction of new products and innovation that drives consumer engagement. John mentioned several products launched recently that have generated significant consumer interest and resulted in either full sell-outs or high levels of full price sales. This illustrates our understanding that in such environments, we need to enhance our pace of innovation to provide consumers with engaging offerings. We believe we can excel in this area. What you’re hearing is our committed effort to accelerate this pace, manage our larger franchises, and push forward. This will begin with various items we're addressing this year, and the heightened focus on newness will extend into 2025. We recognize that scaling this innovation will take time, which is where our focus lies. Our guidance for the second half reflects our proactive measures in managing our product portfolio as we move forward.

Hi. Thank you so much for taking my question. Sorry about that. I want to dig in a little bit more on the running category, particularly, you know, how is your approach to this category maybe changed over the past year? And then I know you mentioned trail running. Are there any other products with this category? You mentioned scaling moving ahead, but then you've been seeing good customer responses that you're excited about.

We've made running a key priority and identified three areas with significant growth potential: Women's, Jordan, and running. In running, we typically categorize it as road racing, trail, and everyday running. Road racing is our pinnacle, and in the last few months, we’ve excelled with the Alphafly 3, which launched at the Chicago marathon, where Kelvin Kiptum set a world record. This shoe has been dominating the podiums for both men and women and will be available to the public in Q3. As we approach the Olympics, our performance in racing is unmatched. The trail segment is the fastest growing for us, having increased by 20%. Innovations like the Ultrafly trail, the first trail shoe with a carbon fiber plate, represent classic Nike performance innovation. Trail shoes are becoming popular lifestyle options, particularly in Europe and across the globe. We plan to continue investing in great products and our ground game in this area. In the everyday running category, we recognize there's more work to be done. We have solid products with positive responses from consumers and specialty runners, such as the Structure 25 and Vomero 17. However, our focus is on enhancing our presence with everyday runners, engaging with retail partners, and being visible at various races in key cities and running communities. As we push to scale in everyday running, we are particularly focused on the Pegasus franchise, one of the largest in running history. We're excited about the upcoming Peg 41 and updates across the Peg family in 2024. We will continue to make steady progress towards our goals in everyday running, reporting on our advancements each quarter.

I'd just add too that we're excited about the product portfolio we have below $100. And that product offering that's coming to market in the coming quarters will also enable us to get back on our front foot at an important price point in multiple markets across the world.

Thank you. Good afternoon. I wanted to focus on the China margins for a minute and was just curious outside of the FX hit that you're facing, do you see an opportunity to drive margins in China back toward pre-COVID levels or has something changed that makes that market less profitable?

Well, Lorraine, let me first just step back and look at how we see China for a minute and then we'll talk about margin because if you don't have a great business, it's hard to have great margins. And, you know, the fact is we feel very good about our position in China and our ability to compete. And that has not changed from 90 days ago. In China, sport is back. The China consumer is back out on the street with a real focus on active and healthy lifestyles. You see the government encouraging sport and healthy lifestyles, and Gen Z is the most active generation ever. So that's a tailwind for our industry. And so even in the face of macro uncertainty, our brand is continuing to resonate. And we're doing what NIKE does so well, which is taking global products, global innovations, global brand, global athletes, and powerfully combining them and connecting them to local culture and local sport and local consumer moments. A wonderful example last quarter is that Eliud Kipchoge, the world's best marathon runner, did a tour through China right before the Shanghai marathon. As you know, we sponsored the Shanghai marathon. And sure enough, we dominated shoe counts in the top hundred. We swept the women's podium. And that's bringing energy and running and the lifestyle of running. And it's growing the market. I mean, I think we're in a great percent. We, yes, there's some macro headwinds, but we feel very good about our position and our ability to compete.

Yeah. And on the profitability side, what I'd say, Lorraine, is that this quarter, if we exclude the impact of FX, our EBIT grew faster than revenue in Greater China. And so I think it's a great proof point that we can start to expand margins and move back towards where we were prior to the pandemic. I did mention that the marketplace is highly promotional and we're seeing that especially on digital. And so in the near term, the promotional nature of the marketplace is holding us back. But what I would tell you is that our inventory units are down versus the prior year. Our full price realization is continuing to improve in our stores and our partner stores. And, you know, as we look at the environment that we're in right now, we're not going to race to the bottom on digital. We're going to focus on prioritizing brand health and brand strength. And right now, the digital marketplace, in particular, is at the highest of promotional activity. And so an element of us revising our guidance for the balance of this year is an acknowledgment that we don't want to chase that. That's not who NIKE is. We're going to focus on innovation and newness and building a strong business in the marketplace on things like the basketball products that John referenced. We're super excited about bringing Kobe to market in Greater China. The Jordan business continues to have tremendous resonance there, and that's how we're going to grow and continue to compete in that market.

Excellent. Happy holidays and thanks for taking my question. Matt, how should we think about operating overhead and demand creation going forward as we think about the overall SG&A piece of the business? There's obviously some restructuring and some cost savings, but is this a time you need to reinvest given the changes in the competitive environment and the need to reinvigorate the product cycle and the marketing? Curious how we should think about the SG&A algorithm going forward.

When we consider the save to invest plan and the value and capacity it will create for our investments in major growth opportunities, we don’t see this as being about people. Instead, we envision it as focusing on consumer-facing investments that drive product innovation and maximize consumer impact. Our goal is to reallocate resources through this program to direct more funds towards consumer-facing activities that can achieve the impact you've mentioned. Given the market size and our position in the categories you've referenced, as well as consumer demand encouraging us to deliver new and exciting products, we see opportunities for continued business growth. Our focus will be on driving more profitable growth, which should lead to some leverage in SG&A. However, you should also anticipate that we will reinvest some of the resources we're pulling from the business back into consumer-facing initiatives that affect sports and help us amplify the stories we want to share.

That's exactly why we're doing it, because we want to double down on our investments to capitalize on growth.

Hey, good afternoon. Thanks for taking the question. Matt, maybe for you just on the North American market, can you just comment more broadly or specifically on the current state of the inventory situation, maybe both yours and just competitively of what you're seeing out there in holiday? And then just timeline on when you think that the inventory dynamics and at least North America might be more cleaned up or more healthy for the brand to start to, you know, see better price realization and growth? Thanks.

Sure. Well, so in the quarter, we did see growth in retail sales in North America versus the prior year. Remember, it wasn't a lot of growth because we were comping some very significant growth rates in the prior year. The actions that we've taken on inventory are significant. And our inventory units are down strong double-digits in North America. That's the biggest market where we've seen the biggest movement in our inventory. When we look at the level of inventory in our partners relative to their current level of retail sales, we feel good about the weeks of supply that we have there. And what I would tell you in the large majority of our partners, we also are seeing the highest mix of current season inventory that we've seen in many, many seasons. And so we feel great that our partners are positioned to put our newest and most relevant product in front of the consumer. We are watching the marketplace closely because my comments around the big consumer moments and the in-between periods applied to North America as well. And so we are watching cautious consumer behavior there. But at this point, we feel great about our inventory. And that's why we're so focused on newness and innovation because that's what's going to pull us through a promotional marketplace like we have. And so there's definitely a lot of inventory in the market across brands, but we feel great about where we are. And newness and innovation is what will enable us to earn open to buy in our partners and will enable us to re-accelerate the top line.

Hey, thanks guys. I'm curious if you could talk about and quantify the cumulative freight drag that you've seen over the past two years and the timing of how you will recapture that freight drag in F'24 versus F'25 just based on your recent freight contracts? And what are the offsets as we think about potential puts and takes on the gross margin line '24, '25? Thanks.

We've discussed the cumulative impact of 200 basis points from ocean freight over the last two years. We are beginning to see some of those temporary benefits return in the second quarter. The positive results we experienced this quarter came a bit sooner than we expected. Our rates for this year are secured, and we anticipate seeing ongoing recovery in the third and fourth quarters. Another temporary factor we are monitoring closely is markdowns. Currently, we are only anticipating a small recovery from markdowns compared to those we experienced last year, considering the current marketplace conditions. We have chosen to adopt a more cautious approach to our margin guidance for the remainder of the year due to certain uncertainties. Looking ahead, we are optimistic that the growth in the second half of the year will surpass that of the first half. Additionally, we are starting to see our product input costs turn favorable as we evaluate our margins for the fourth quarter. As we consider our long-term margin objectives, our teams are performing well, and we remain positive about the developments we are observing this year.