Nike Inc - Class B (NKE) — Q4 2024 Earnings Call Transcript

Thank you, operator. Hello, everyone, and thank you for joining us today to discuss NIKE Inc.'s fiscal 2024 fourth 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. I want to start by briefly commenting on our financial results. For full year fiscal 2024, revenue grew approximately 1% on a currency neutral basis and earnings per share grew 15%. Q4 revenue was flat. For the quarter, we saw strong gains within Performance products. However, this was more than offset by declines in lifestyle. These declines had a pronounced impact on our digital results. These factors, when combined with increased macro uncertainty and worsening foreign exchange, have caused us to reduce our guidance for fiscal 2025. Matt will provide more detail on our results and outlook later in the call. While fiscal 2025 will be a transition year for our business, we continue to make real progress on our comeback. Over the past year, we've highlighted the strategic shifts we're taking as a company, including leadership and organization changes, kick-starting a multi-year innovation cycle, and creating capacity to invest in consumer-facing activities. As I mentioned in last quarter's call, we're making a series of adjustments to position us to compete and win. We're sharpening our focus on sport, accelerating our pace and scale of newness and innovation, driving bigger, bolder storytelling, and elevating the entire marketplace to fuel brand distinction and be in the path of the consumer. This is our playbook, and we're seeing momentum build in all four areas, particularly on the Performance side of our product portfolio. We have work to do, but we're on it. Our teams are moving with energy and urgency against the opportunity we see in front of us. Now, as we've discussed over the past few quarters, we've been accelerating our innovation pipeline, including pulling forward several innovations, some more than a year. We're moving aggressively to reestablish our innovation edge. We began with a focus on Performance, as NIKE always does. And the early results from newness and innovation are encouraging. Performance grew double digits in the quarter with growth in many of our key sports. And as we kicked off our multi-year innovation cycle, one of our key priorities has been increasing our speed to the consumer. We believe accelerating the pace and consistency of our innovation will allow us to deliver impact at scale, season after season. Now, as you know, for years, NIKE has had an Express Lane, which enables short lead time replenishment and hyper-local design. And we'll continue to leverage Express Lane. But over the past year, we have also built a new way of working across the entire product creation process. We call this Speed Lane, and it's part of a broader company-wide effort to move faster and be more responsive to the consumer. For example, through Speed Lane, we're leveraging our Bowerman Footwear Lab to accelerate design. We're leveraging advanced digital tools to quicken development. And we're leveraging key manufacturing partners to speed up product testing and production. We've already accelerated a half a dozen models through this new capability. In the second half of the fiscal year, you'll see other new innovations come out of Speed Lane, including several exciting new franchises across fitness and lifestyle. As I've mentioned, our sharp focus around newness and innovation starts with Performance, and we're seeing the impact across key sports. Let me give you a few brief examples across three sports: basketball, fitness, and running. First, basketball, which was up double-digit growth in Q4 across men's, women's, kids, and Jordan. This was driven by new innovation from the GT Cut to Kobe's new footwear and apparel to the Sabrina 1, which in itself has taken 2 points of share across the entire US basketball market, including both men's and women's. We recently announced Sabrina's next shoe, as well as A'ja Wilson's signature franchise. We also announced the signing of Caitlin Clark to a roster of athletes that was already the game's best. All this energy will continue to fuel the rapid growth of our women's basketball business as excitement around the WNBA soars to historic highs amidst an expanding fan base. And, of course, this month's Jason versus Luca NBA Finals matchup marked the first time Jordan's signature athletes met on basketball's pinnacle stage. We celebrated Jason's title with one of the Jordan brand's biggest marketing efforts ever. Next, let's look at our fitness business. Fitness represents one of the largest market share opportunities we see as a company, particularly for our female consumer. We've made intentional decisions to make meaningful investments in fitness, and these actions are paying off. Over the past quarter, we saw broad-based growth for fitness led by double-digit growth in apparel. For example, statement leggings, which is a key focus for us, were up high double digits in Q4, led by innovations we've introduced over the past few quarters with Universa, Zenvy, and Go. Women's fitness footwear also had a strong quarter, driven by Motiva and the latest version of Free Metcon, which came out last summer. Free Metcon is now NIKE's number one women's fitness shoe, having expanded from the gym to the street. Next, let's look at road running, which remains a competitive battlefield, but we are playing to win. In past calls, we've discussed that we're now aligned, resourced, and taking this challenge head-on with confidence. We've been hustling to accelerate our running innovations and amplify our ground game. While our overall running business was impacted in Q4 by our proactive actions to manage the Pegasus portfolio transition, we're pleased that recent new releases in Vomero, Invincible, Infinity, and Structure all grew high double digits over the quarter. We're making it easier for consumers to discover these styles by simplifying our running construct at retail as we highlight our best-in-class cushioning technologies. Now, as you know, a few weeks ago, we launched the Pegasus 41, a new chapter for NIKE's biggest performance franchise. Peg 41 pairs Zoom Air with full-length React X foam for a ride that's more comfortable, durable, and responsive than ever. It's received strong reviews from industry experts. We supported the 41 with our full playbook, backed by NIKE's most comprehensive running campaign in years, which will last for several seasons. It was also fueled by a refreshed ground game. This included neighborhood activations to drive consumer trialing at scale and building energy across the full marketplace, including NIKE Direct, our strategic partners, and our performance authenticators such as running specialty doors. This energy drove Peg 41 to a strong start, led by better than expected sell-through in both wholesale and NIKE Direct. And our full running journey for Fiscal 2025 goes beyond the Peg 41 launch. We'll be adding several dimensions for Peg in holiday before introducing additional exciting innovations in the second half of the year, including Pegasus Premium and Vomero 18. We're already seeing strong wholesale order book for running across the next few seasons as we continue to take meaningful strides to assert our leadership in this key sport. Now, let's talk about lifestyle, where we're focused on building a more diversified lifestyle footwear portfolio that complements the industry's three largest franchises. We're excited about our pipeline of new lifestyle products. A key example was last quarter's introduction of Dynamic Air, our newest breakthrough innovation platform. We launched the Air Max DN globally, and within just a few months, DN has become a top 10 lifestyle franchise in our men's business and is resonating particularly well with sneaker-engaged consumers in major cities. And importantly, Dynamic Air is an innovation platform. We're already working on the next two iterations of Dynamic Air. We will continue to innovate on this platform, including customizing air cushioning to create unique consumer benefits. Another component of fueling a more diversified lifestyle portfolio is taking advantage of NIKE's unmatched vault. One example is retro running. We saw an opportunity in the marketplace for retro and moved quickly and nimbly to fill it with our Y2K portfolio, and consumers are responding. We experienced significant quarter-over-quarter retail sales growth for Y2K and now expect to nearly triple our retro-running business by the end of fiscal 2025 compared with the start of fiscal 2024. Now while we are growing new lifestyle offerings, we're also accelerating planned reductions for our three largest franchises. This will have a meaningful impact near-term on our overall lifestyle growth rate. Now while we have work to do, we are very focused on scaling the newness to offset this planned reduction. We are excited about the pipeline with exciting footwear concepts coming in the second half of fiscal 2025. Finally, the Paris Olympics offers us a pinnacle moment to communicate our vision of sport to the world. This is led by breakthrough innovation and announced by a brand campaign that you won't be able to miss. We recently unveiled our Air for Athletes innovation at our NIKE On Air event in Paris. We can't wait to bring all this Olympics product to life across the games and in more than 8,000 doors worldwide. Throughout, our brand storytelling will be bold and clear, with sport and athletes at the very center of it all, from brand voice to retail activations. This summer, we will cut through the clutter to create powerful energy for the NIKE brand. We're back doing what we do best, creating impactful storytelling and ultimately brand distinction in sport. In the end, we're taking our challenges head-on and we're regaining our edge. Thanks to the heart and hustle of our global team, we're aggressively asserting the future of NIKE. With passion, clarity, and grit, we're driving this business forward. We're excited about the opportunity in front of us, and we're eager to prove what NIKE can do. And with that, I'll turn the call over to Matt.

Thanks, John. And hello to everyone on the call. For NIKE, fiscal 2024 was a pivotal year to get back on the offense in sport with consumers, led by an urgency to accelerate our pace of innovation and scale newness across our product line. Today, our playbook is in motion. Our teams are focused and hustling to deliver, and we're seeing positive signals from consumers and retail partners across the world. That said, this quarter we have been navigating several headwinds, which we now expect to have a more pronounced impact on fiscal 2025. Although the next few quarters will be challenging, we are confident that we are repositioning NIKE to be more competitive, with a more balanced portfolio to drive sustainable, profitable long-term growth. Let me provide some deeper insights into the fourth quarter and the implications we see as we look forward before reviewing our financial results and our outlook. First, after double-digit growth over the past several years, our lifestyle business declined in Q4 across men's, women's, and Jordan, more than offsetting strong growth in our Sport Performance business. Second, NIKE Digital declined 10% in the quarter. Although our digital business has grown at an approximately 26% CAGR since fiscal 2019, we missed our Q4 plan on softer traffic, higher promotions, and lower sales of certain classic footwear franchises. More specifically, these franchises underperformed our overall digital business results in the quarter, especially in April and May, and continuing on into early June. This is even as these franchises continue to drive retail sales growth at high full-price realization in multi-brand retail. Third, we experience meaningful shifts in consumer traffic in key markets, particularly in Greater China, where brick-and-mortar traffic declined as much as double digits versus the prior year. We also continue to see uneven trends in EMEA and other markets around the world. Last, foreign exchange headwinds worsened, creating an additional one-point headwind on revenue in the quarter. In the midst of these dynamics, our goals to return to strong growth remain the same: read and react to the consumer, maximize full-price sales across all channels, protect long-term franchise health, prioritize a healthy pull market, and create marketplace capacity for new products and new stories coming in fiscal 2025. Therefore, despite continued marketplace demand, we are advancing our timelines to tighten the total supply of certain classic footwear franchises at different paces, across different channels around the world. In particular, we are aggressively adjusting our forward-looking plans for these franchises on NIKE Digital, where they have their highest share of business. All told, we expect these actions to create several points of short-term headwinds on revenue in fiscal 2025. However, our past experience gives us confidence that proactively rebalancing our portfolio will strengthen our competitive position and fuel brand momentum as we take the consumer somewhere new. Let me share a few recent examples. Back in fiscal 2018, we recalibrated the supply of select Jordan brand franchises, resetting our launch business and bringing more dimension to our portfolio. Over the subsequent quarters, we turned the page from double-digit declines in the brand to the start of multiple consecutive years of strong double-digit growth. Earlier this year, we moved quickly to reshape our lifestyle footwear portfolio in Japan and Korea, two of our most trend-forward markets, where our teams read and reacted to consumer signals. We reduced the supply of some classic franchises while scaling and creating new energy around other models in our vault. In the fourth quarter, we regained our number one position in Korea in women's lifestyle footwear and extended our lead in Japan with new momentum heading into fiscal 2025. Now, as we accelerate our pace of newness and innovation, the early response from consumers and partners is reinforcing our optimism in NIKE's path forward. First, the sharper focus on sport is creating impact. This quarter, performance grew across men's, women's, kids, and Jordan, across all channels and geographies. We expect to build on that momentum, leading with Performance in fiscal 2025. We are seeing favorable indicators in key focus areas, including strong double-digit growth in order books with North American running specialty partners in both holiday 2024 and spring 2025. In lifestyle, fresh releases are resonating positively with consumers. For instance, new executions around retro running and field franchises such as Cortez, Killshot, and the Field General are driving strong retail sales growth as we prepare to scale these franchises in fiscal 2025. Our teams are also attacking opportunities across price points, including a refreshed lineup of new footwear products below $100. Building on this quarter's double-digit growth, we plan to scale new performance and lifestyle models in spring 2025. Added up, we expect the business contribution from new products to more than double from the start of fiscal 2024 to where we end the year in fiscal 2025. Last, we are managing expenses tightly through this product cycle transition while reallocating resources to maximize consumer impact. This is enabled by our Safe to Invest initiative, which is creating investment capacity to fuel our next phase of growth. At the end of fiscal 2024, we have unlocked savings from initiatives up and down our P&L and across our value chain, from reducing small parcel fulfillment costs to consolidating suppliers, optimizing technology spend, and restructuring our organization to streamline layers and support functions. In turn, we are reinvesting nearly $1 billion in consumer-facing activities in fiscal 2025, which we expect to accelerate our return to strong growth. This includes ramping up our ground game offense in running in key cities, increasing resources in design, product creation, and merchandising for our key sport dimensions, deepening our sports marketing portfolio, elevating the distinction of our brand in physical retail, and driving bigger, bolder brand campaigns, starting with EC ‘24 and the Paris Olympics. Now let me turn to our NIKE Inc. Fourth quarter results. In Q4, NIKE Inc. revenue was down 2% on a reported basis and flat on a currency-neutral basis. NIKE Direct was down 7%. NIKE stores were down 2%, and NIKE Digital was down 10%. Wholesale grew 8%. Gross margins expanded 110 basis points to 44.7% on a reported basis, primarily due to strategic pricing actions, lower ocean freight rates, and improved supply chain efficiency, partially offset by lower margins in NIKE Direct, unfavorable channel mix, and net foreign exchange impact. SG&A was down 7% on a reported basis as increased investment and demand creation was more than offset by reductions in operational overhead. This includes the impact from approximately $40 million in restructuring charges. Our effective tax rate was 13.1%, compared to 17.3% for the same period last year, due to changes in earnings mix, partially offset by decreased benefits from one-time items, such as stock-based compensation. Diluted earnings per share was $0.99, up 50% versus the prior year. This includes non-material impact from restructuring charges. For the full year, revenue was flat on a reported basis and up 1% on a currency-neutral basis. Diluted earnings per share grew 15%. Cash flow from operations was $7.4 billion, up 27% versus the prior year on significant improvements in working capital. Inventory declined 11% versus the prior year with continued improvement in days in inventory. Now let me turn to the operating segments. In North America, Q4 revenue declined 1%. NIKE Direct was down 9%, with NIKE Digital down 11%, and NIKE stores down 5%. Wholesale grew 6% due to accelerated shipping timing from Q1 of fiscal 2025, and EBIT grew 5% on a reported basis. This quarter, we saw softer traffic in our factory stores, highlighting increasing pressure being felt by the value consumer. However, we saw bright spots as well, including strong growth in basketball, fitness, and kids, offset by declines in lifestyle and Jordan. Kids led our results in the geography with performance dimensions of strong double digits. In women's fitness, we gained market share in footwear. In men's and women's running, fall footwear bookings are up double digits, led by the Pegasus 41. In EMEA, Q4 revenue grew 1%. NIKE Direct was down 8%, as NIKE stores grew 1% and NIKE Digital declined 14%. Wholesale grew 7%. EBIT grew 2% on a reported basis. In a cautious macro environment, we are seeing performance innovation drive strong sell-through. This is partially offset by overall declines in lifestyle, with new product releases working well. Global football grew double digits across men's and kids. In women's fitness, we drove strong momentum in footwear and new apparel releases such as our Refresh NIKE Pro line. In lifestyle, our retro running franchises continue to scale and our Air Max DM launch drove energy with a full marketplace takeover. In Greater China, Q4 revenue grew 7%, including several points of contribution from Tmall's earlier start to the 6/18 shopping holiday. Excluding this timing benefit, we fell short of our plan, with traffic softness persisting across all marketplace channels. NIKE Direct declined 2%, with NIKE stores down 6% and NIKE Digital up 8%. Wholesale grew 15%. EBIT grew 4% on a reported basis with continued impacts from foreign exchange. Our kids business set the pace in the geography this quarter, led by running and basketball. Within men's and women's lifestyle, retro running styles and our latest Express Lane releases drove positive consumer response. In men's and women's running, retail sales for our new releases, Structure, Vomero, and Invincible grew double digits. The China marketplace remains highly promotional, and we continue to manage both NIKE and partner inventory carefully. While our outlook for the near term has softened, we remain confident in NIKE's competitive position in China in the long term. In APLA, Q4 revenue grew 4%. NIKE Direct declined 3%, with NIKE stores up 11% and NIKE Digital down 12%. Wholesale grew 9%, and EBIT grew 4% on a reported basis. Mexico, Southeast Asia, and India led our growth in this geography. Across APLA, we drove strong momentum in performance with men's basketball, men's global football, and women's fitness up double digits. Jordan Brand drove energy with streetball activations in Tokyo and Manila, and market share gains in basketball footwear. Now let me turn to our fiscal 2025 financial outlook. We are managing a product cycle transition with complexity amplified by shifting channel mix dynamics. A comeback at this scale takes time. With this in mind, we've considered a number of factors and scenarios in revising our outlook for fiscal 2025. Most importantly, this includes timelines and pacing to manage marketplace supply of our classic footwear franchises, lower NIKE Digital growth, especially in the first half of the year due to lower traffic on fewer launches, plan declines of classic footwear franchises given Q4 trends, as well as reduced promotional activity, increased macro uncertainty, particularly in greater China, with uneven consumer trends continuing in EMEA and other markets around the world, and selling into wholesale partners as we scale product innovation and newness across the marketplace and finalize second-half order books. Taking all of this into consideration, we now expect fiscal 2025 reported revenue to be down mid-single digits, with the first half down high single digits. Foreign exchange headwinds have also worsened and will now have a one-point translational impact on revenue in fiscal 2025. Turning to gross margin, we expect full-year expansion of approximately 10 basis points to 30 basis points on a reported basis. This reflects benefits from strategic pricing actions and lower product input costs, partially offset by supply chain deleverage, channel mix shifts, and net foreign exchange impact. We expect full-year SG&A growth to be up slightly versus the prior year as we increase investments in demand creation to ignite brand momentum and maximize reach and impact while holding operating overhead largely flat. Other income and expense, including net interest income, is expected to be approximately $250 million to $300 million for the year. We expect our full-year effective tax rate to be in the high teens range. Now turning to our first quarter, we expect first-quarter revenue to be down approximately 10%. This reflects more aggressive actions in managing our classic footwear franchises, continuing challenges on NIKE Digital, muted wholesale order books with newness not yet at scale, a softer outlook in greater China, and a number of quarter-specific timing factors. We expect first-quarter gross margins to be in line with the full-year guidance. We expect first-quarter SG&A to be at mid-single digits as we hold operating overhead flat while investing in key brand moments, including EC ‘24 and the Paris Olympics games. For NIKE, inspiration starts with the athletes we serve. Their dreams motivate us to create the most innovative products in sport and tell stories that reach millions of people around the world. Above all, they remind us of the hard work and the hustle that is required to win. Before I close, I'd like to thank our NIKE teammates whose passion and drive are the fuel for our comeback. The heart, the focus, and the collaboration that I'm seeing from our teams today are my greatest reasons for confidence as we move forward. With that, let's open up the call for questions.

Great, thanks. Maybe John, just to summarize and think about relative to three months back. I guess, how would you rank changes on the macro front and similarly on NIKE execution that impacted the change in your 2025 outlook today relative to three months ago? And then Matt, just on the gross margin, could you just help break apart maybe the puts and takes to consider over the course of 2025 and how best to model the cadence from a gross margin perspective?

Thank you, Matthew. We outlined our comeback plan a year ago, and I believe our execution has remained on track over the last 90 days. Matt can elaborate on the macro factors and franchise management that are influencing the figures, but we are actively progressing on the four fundamental objectives we set. First, we are putting sports at the core of our operations, serving athletes. In the past 90 days, we have aligned our organization around sports, co-locating teams and establishing clear, sport-based teams that are streamlining our processes and enhancing our execution. As we have mentioned in previous quarters, we have revitalized our innovation pipeline, advancing several initiatives. Alongside launching DN and Peg 41 this quarter, we will be introducing key innovations like the Peg Premium and Vomero 18 earlier than planned, which are just a couple of examples of what will be available in spring 2025. Additionally, we are building our speed capability, which we feel increasingly confident about. The brand is strengthening, as seen with our 'Awaken Your Madness' campaign during the Eurochamps, which marks the beginning of a more confident brand voice, and we are also looking forward to the upcoming Olympics. Much of the groundwork for the Olympics was done in Q4, and you will see the results in the coming weeks. Regarding the marketplace, we have been actively collaborating with our wholesale partners through several summits and engagement sessions, revealing our three-year product innovation pipeline to them. The feedback has been very positive, and our order book for the upcoming holiday and spring seasons is strong. Our confidence is growing, and we believe we are making significant progress in executing our comeback strategy, which will take time.

And just hitting the financial implications relative to 90 days ago. Last quarter we said that we thought revenue was going to be down low single digits in the first half, and that included a more pronounced impact in the first quarter. We also said that we expected revenue to grow. What we saw in the fourth quarter were really two things. One, lifestyle, our lifestyle business declined more pronounced on NIKE Digital, specifically in April and in May, and those trends continuing into June. What I highlighted in my prepared remarks is that those specific classic franchises that we were talking about underperformed our overall digital business results in the fourth quarter. When we look at our updated guidance of down mid-single digits for the full year, there's really three things that are driving the change. One, I'll start with FX; our outlook on foreign exchange and the strength of the US dollar had a one-point impact relative to 90 days ago. We've softened our outlook for greater China, and that also similarly had a level of impact for the full-year guidance. The majority of the remainder of the change is related to the more aggressive actions that we're taking on our key franchises across the total marketplace, but really with the compounded impact on total digital. The bigger impact of this will be in the first half of this year, but we are planning for meaningful sequential improvement in the second half of the year. That's how I think about the revenue differences relative to what we said 90 days ago. On the first quarter, the other impact was timing. We saw the 6/18 period come earlier into May than we had in the prior year, and that had an impact on Q4's results, but also an impact on Q1's results. We saw some favorable shipment timing in North America as we prepare to go live with our ERP and also just better general product availability. So that also had an impact on the first-quarter numbers.

And I just want to add one more thing that you, Matthew, you've heard Matt and I both talk about it. It's an intangible thing, but I think it's just so important, which is the heart and hustle of our team, which has just been extraordinary over the last year, but also in the last 90 days just accelerating both Heidi's and Craig's teams, the teamwork of how they're working together end-to-end the focus on the consumer, the increasing speed, pulling things forward. There's a palpable shift in the confidence and forward-looking nature of our team. So I want to give huge credit to them and also just recognize that is so important in NIKE, and our teams are, I think, feeling more confident as each day comes along.

Thank you. Good afternoon. Can you provide some numbers that might help us have confidence in the meaningful second-half improvements? How much less of a headwind is there from the sun setting some of these franchises? How do the total order books look? And anything you can provide numerically that helps you to get to that back half improvement.

Well, Lorraine, as I mentioned, we've looked at a number of different factors and scenarios as we've updated our guidance for the year. That ranges from looking at different slopes of different curves of different products over time and developing a perspective on how we think the trends are going to play out as it relates to some of our largest franchises. But those franchises continue to drive retail sales growth and high levels of full-price realization in the marketplace. The bigger impact on the first half are the adjustments that we're taking to manage the health of those franchises starting first with NIKE Digital. That has a pronounced impact on revenue, which is creating a more meaningful first-half impact. We want to continue to let those franchises in the multi-brand environment continue to have the impact that they're having for our partners. One of the ways we maintain the health of those is by reducing what we're offering to consumers through our digital channel. As it relates to the second half, we highlighted a couple of things, but we are planning for meaningful sequential improvement in the second half versus the first half. It starts with the confidence that we have around the new products that we're bringing to market: the Peg 41, the Peg Premium, the Vomero 18, the order book for Air Max DN, plus the next Air Max iteration that's going to be coming to market, plus our plans to scale the innovation and the newness that we've been discussing. When we look at where we are today and the ways in which we're working to drive this plan through the balance of the fiscal year, our scaling of newness is on track. Our teams are hustling to see whether there's even opportunities to accelerate the scaling of that newness in the second half. We are confident in the indicators that we're seeing in the marketplace right now. We gave you a couple of specific numbers as it relates to running and running specialty. Our initial read of our spring order book is in line with the guidance that we're providing. We feel confident that we're creating better balance across our portfolio and also building momentum with our wholesale partners.

Hi. Just two questions for me. I guess the first one is, when you look at the visibility of the business, I think in some of your answers to Lorraine's questions. When you look at the visibility of the business today, with the shifts that are occurring, can you just talk about how you feel looking at that versus what you saw over the last 12 and 24 months, just in terms of your ability to predict? And then, just the second piece of this is, when you look at the channel shift that is going on wholesale to direct or bricks-and-mortar, the digital pieces of the business, can you just give us any more framework around how to think about the P&L impacts at a higher level?

Sure, Bob. Regarding visibility with the shifts, we were surprised by the results from our larger franchises as we navigate through the fourth quarter, which has led us to revise our guidance. Overall, we've seen tremendous growth in our digital business over the last four years, and we remain confident in our ability to capitalize on the consumer opportunities in the market. Recently, while managing our franchises, we noticed an increase in the supply of these franchises in the wholesale market compared to the digital supply, contributing to the volatility this quarter. We've adjusted our forward-looking guidance based on trends in retail sales and our franchise management experience. We've taken a more aggressive stance with NIKE Digital and are enhancing our capabilities in demand sensing by leveraging data and insights for better predictability in our owned business. I'm optimistic about the adjustments we're making and our proactive management approach. Regarding our digital business, we anticipated fewer launches in Q4 due to an exceptional number of launches in the same quarter last year. Excluding the impact of our largest franchises, the rest of our digital sector performed well and contributed positively to growth. We are comfortable with our current perspective. Looking ahead, the channel shift will indeed present challenges in fiscal year 2025, affecting both revenue and margins, especially since these products have a significant margin impact due to high full-price realization. We expect the channel mix to pose a headwind in 2025, but I'm pleased that we still managed to expand margins by 10 to 30 basis points this year, despite about 15 basis points of foreign exchange headwinds. As we move into fiscal year 2025, we believe channel mix may be a lesser driver, and we have various opportunities to build a more profitable business long-term, starting with a strong brand and creating desirable products for consumers.

And I'd add to that a healthy marketplace, where the channel mix is driven by consumer demand. We said we want to be where the consumer is, whether that's digital or outdoor or wholesale. We're embracing a more balanced approach to growing the whole marketplace. A couple of nice evidence points of what I think health looks like is, we've mentioned that performance grew double digits in the quarter. It grew double digits in wholesale and it grew double digits on digital. The first couple of weeks of Peg 41 sold through well in wholesale and it sold well in NIKE Direct, both digital and outdoors. Over time, our channel mix should be driven by the consumer being at the right time and given the shopping occasion. We think it'll settle out in a consumer-friendly way.

Great. Thank you very much. I was wondering if you can talk about the amount of newness that is coming down the pipeline, kind of over the next six to 12 months. Has there been another time when NIKE has historically launched this magnitude of newness? And how do you read sort of the second degree of the consumer rates as going into the wholesale channel first? How do you read the success of that at the end consumer as it goes through the wholesale pipeline? Thank you.

We are very excited about our multi-year innovation pipeline and cycle. In the past quarter, you may have seen early examples with DN and Peg 41. As we approach the second half of the fiscal year, the amount and variety of our innovations are significantly accelerating. Given our size and scale, we recognize the need to innovate broadly and deeply, while also ensuring that innovations can scale. We have set a goal to double the growth of our new innovations by the end of 2025 compared to the beginning of 2024, and we are on track to meet that goal. The feedback from our wholesale partners about what they observe for the second half of this year and into 2026 has been strong, especially as we present them with three-year roadmaps in areas like running, basketball, and lifestyle. This positive feedback is reflected in their order books. Our objective is to deliver strong innovations and the capability to scale them over time, which will delight consumers and lead to healthy, sustainable growth. We feel optimistic about our current trajectory and expect it to accelerate throughout the year.

Adrienne, I would just add that one element of newness is also in the lifestyle side of the business. Over the last four years, we have driven double-digit growth and created an extraordinary amount of energy. We've created iterations and dimensions to Air Force 1, to Air Jordan 1, to the Dunk business. As a result, we've created extraordinary consumer demand. One element of us bringing newness to the market is actually going into NIKE's vaults, what no one else has, and being able to create energy the way that we've done over the last four years to be able to move consumers on to a new place. It's something that we can do; we have a proven track record doing. In fiscal year 2019, the Dunk represented 0% of NIKE's business. We’ve scaled that dramatically with strong consumer appeal and response over the last three years. Now we're managing that franchise back to ensure that demand in the marketplace is greater than the supply we're offering. That's how we're managing these franchises. On the one hand, there's certainly a performance innovation side. What we showed in Paris and what John was highlighting in terms of what's coming, we feel great about. There's also an element of NIKE taking advantage of its vault of assets and bringing new innovation, new stories, and new partnerships to bring new products to market to capture an incredible amount of sneaker demand out in the marketplace.

Good afternoon, and thank you for taking our question. I wanted to follow up on Adrienne's question and your comment about the franchise management that you're focused on for FY 2025. Can you contextualize the importance of these larger classic franchises in relation to NIKE's current sales in comparison to historical averages? Do you expect to be remixed to typical franchise penetration rates by the end of the year as you scale these new innovations? And then perhaps a follow-up for Matt. Can you provide some additional color on how you're thinking about the gross margin bridge and the tailwinds that you expect from input cost, and pricing relative to some of the headwinds that you see? Thank you.

These franchises are the largest franchises in industry history. They have gotten that way based on consumer demand. We certainly started managing these franchises a couple of years ago. What we were most focused on was that we needed to restrict supply of these franchises in the marketplace because we had a gap in innovation in our pipeline, which we've talked about over the last couple of calls. The intentionality around managing these franchises is that newness is what's moving the consumer, and we wanted to move to more newness. The significance of it is the impact that it's going to take in fiscal year 2025 on our financial outlook as we're pulling the amount of supply down and creating better balance in our portfolio. When I say that, I don't mean that lightly. It means better balance between performance and lifestyle, better balance between high price points and lower price points, and better balance between wholesale and direct, even within wholesale, between sporting goods and athletic specialty or other channels. That is where our focus is. The actions that we're taking and the guidance we've provided is to follow through on those actions. I've been at NIKE for over 15 years, and we've gone through these product cycle transitions before. While this is challenging, and it's going to be challenging over the next couple of quarters, our history has demonstrated that when we take action and we do it aggressively, and we get behind the things that are new and build marketing and storytelling around it, we move the consumer fairly quickly to a new place. What we're doing here is nothing different than that.

Thank you for taking our question. I appreciate all the insights as we look towards 2025. As we consider the future beyond 2025, you've mentioned that there will be significant work ahead. With classics being cleaner, a more stable channel mix, and innovation progressing, can you help us understand this in a historical context? I recall you mentioned that NIKE could achieve high single-digit growth, but it seems like future wholesale might play a larger role, and China may not grow as it once did. There are several factors at play that differ from the past. Can you share your perspective on the long-term opportunities for the business as channels, geographies, and franchises realign? Additionally, it appears the lab is actively working on new performance technologies. Could you explain how you plan to leverage innovation and performance to influence lifestyle products, which tend to be more cyclical? I'm interested in how you view the catalog and your approach to using innovation to revitalize growth in the lifestyle segment.

As we navigate through some of this portfolio adjustment, we still have significant advantages in our industry. Sports are growing, and the definition of sports is expanding. Healthy lifestyles are being embraced worldwide. During a recent visit to China, I noticed a strong emphasis on healthy living. I believe there is a structural advantage for the industry. Sports are happening differently now, influenced by the post-COVID environment; you don’t need to go to the gym or the field. People are exercising in their backyards or taking walks. Sports have found their way into many more settings. The distinction between sport and lifestyle is becoming less clear, as people want to look stylish while engaging in sports and desire sport-inspired fashion even during leisure time. We see all of these shifts as beneficial. Regarding lifestyle innovation, we aim to base it on sports, applicable to both footwear and apparel. We believe there is a significant opportunity to explore this across men's, women's, kids', and Jordan products. Jordan Streetwear exemplifies this.

Yes, I'll just finish up this question, and then I'll come back to the start, Michael, where you asked. I would also say that the lines that blur between performance and lifestyle are really as much about how consumers are using products. The one thing that's undoubtable is that the consumer wants more comfort. You can see that across the marketplace. Our teams are absolutely focused on fit and comfort as we bring these new iterations to market. I think that when you look at products like Peg Premium or even the Peg 41 or the Vomero 18, I think you're going to start to see consumers carrying those over into lifestyle because they're new, they're fresh, they've got a particular look. We're balancing the fact that the consumer is voting for performance and innovation. We need to ensure that we've got performance and innovation that they can wear every day, in addition to leveraging the vault, as I said before, leveraging the vault to bring classics back, because there will always be a classics business. There will always be an energy business around classic lifestyle products. We've got a great vault to be able to leverage doing that. As it relates to your question about the long-term model, we're focused on driving unit growth. I think I said that a couple of quarters ago and the importance of that point was that it wasn't about one particular channel or the other, but growing the overall marketplace. We're focused on driving unit growth where the consumer is. Given the dynamics in the marketplace right now, we're also focused on taking back market share. We see opportunity in the performance dimensions in particular to come strong with a strong pipeline of innovation to come back and take market share. This product transition is going to take a little bit of time for us to work through. Over the next couple of quarters, we're going to execute the plan we laid out here for fiscal 2025. At Investor Day in November, we will provide an updated outlook on growth and profitability, taking into consideration the marketplace dynamics we're dealing with across the portfolio, where we are in the product transition, and also some of the strategic shifts that we've put into place over the last year.

Thank you. I would like to follow up quickly. Matt, you mentioned the challenges we face over the next couple of quarters related to private lifecycle management. Can you clarify whether you expect this reset to be completed by the end of the fiscal year? Are you anticipating that we will finish FY 2025 with a normalized run rate on revenue without the current headwinds? Additionally, I'm interested in the status of the organizational reset and the adjustment to the cost base. How much of the $2 billion in cost reallocation do you anticipate will be completed by the end of the fiscal year? Will this be front-loaded or spread out over the next few years? Thank you.

Yes, no problem. The actions we're taking on NIKE Direct and Digital are more aggressive. The adjustments we're making to our plan, specifically as it relates to our own channels, are going to be largely taken into consideration in the first half of this year. We will continue to manage franchises because you can picture a curve that goes up and another that comes down. As the curve comes down, it doesn't happen in a moment; it happens naturally over time as consumers react to supply coming out of the marketplace. The actions we take are also causing us to look at the broader marketplace in the second half of the year and ensure that we're reducing supply there as well to maintain a healthy marketplace and also ensure we've got capacity in the market for bringing newness in. I mentioned that we're planning on scaling newness that is scaling as we make our way up through the year from minus 10 in the first quarter to down high single digits in the first half, to finishing the year at down mid-single digits. The largest driver is the full-year basis, the scaling of newness that we're bringing to market. We expect to exit the year with momentum. That means the new things we're bringing to market will begin to outweigh the franchise management we're navigating through this year. We'll continue to manage these franchises in line with consumer demand. But what's going to make it possible is the fact that we've got more new things coming that we're driving energy around, that will ultimately offset the way we're managing those franchises.

On your second question, I want to distinguish one thing. You mentioned the organizational reset. That's behind us. As I mentioned earlier, we are now completely aligned across the organization around sport, field of play. Our teams are focused, they're excited; there's just tremendous hustle throughout the organization, and you can feel it. The headcount dimension of 'Save to Invest' is behind us, and now those teams are focused on driving the consumer innovation and execution. We'll look to other areas to provide savings, non-labor areas. Matt, you can describe some of these, but the organization is now 100% focused on driving the growth and innovation we've been discussing through our call. I can reassure you that everyone's got energy, hustle, and excitement about the future.

We've been focused on building an operating model that enables greater speed and cost productivity as we grow. The actions we've taken over the past year have enabled us the opportunity to make some bold swings in fiscal year 2025. We've reallocated a billion dollars into consumer-facing activities. That includes teammates we've invested in and product design, building out the merchandising function. To John's point, we have sport-focused teams now at global and in the geographies to execute this new offense. We're putting more of our investment dollars in demand creation while managing operating overhead tightly. We did that in fiscal year 2024. You saw even with the restructuring charge, some significant effort to manage operating overhead so that we could reallocate resources. These investments will take time to drive a return, but they're absolutely the right thing for us to do to reignite brand momentum and get us back on the offense with consumers.

As we conclude, I want to make one final comment aimed at NIKE's global team. This past year has presented many challenges, and a tremendous amount of hard work and dedication has gone into navigating it. I want to express my gratitude to everyone on NIKE's team worldwide for your leadership and effort during this time. It is evident to me, and I speak on behalf of Matt, Heidi, Craig, and our entire leadership team, that NIKE's greatest strength lies in its people and culture. Our team and culture are vibrant and prepared to compete, eager to drive the execution and growth we have discussed throughout this call. I want to finish by thanking everyone on NIKE's global team.

Thank you for joining our fourth quarter fiscal 2024 call. We look forward to hosting many of you here at the headquarters for our Investor Day in late November. More details to come. This concludes our call. Good evening.