NIKE, Inc. (NKE) Earnings Call Transcript

Good afternoon, everyone. I'm Kimberly Greenberger, Morgan Stanley's branded apparel and footwear and soft lines retail analyst. We're very pleased to host NIKE at our Life After COVID Conference. As many of you know, NIKE is the largest seller of athletic footwear and apparel in the world, with nearly $40 billion in sales in the latest year and over $200 billion in market cap. Today, we're joined by Matt Friend, Executive Vice President and Chief Financial Officer; and Heidi O'Neill, President of Consumer and Marketplace. Matt joined NIKE in 2009 after a career in the finance industry, including roles as VP of Investment Banking and mergers and acquisition at Goldman Sachs and Morgan Stanley. Prior to his current role, Matt held a number of positions across the NIKE organization in finance, strategy and corporate development, including the Chief Financial Officer of Emerging Markets and CFO of global categories, product and functions, where he was responsible for the creation of NIKE's strategic and financial growth plans through the lens of category and from the product. Most recently, he served as CFO of the NIKE Brand, NIKE's largest operating division, and VP of Investor Relations. Heidi is responsible for NIKE's Direct business, including all stores, e-commerce and apps globally. And she oversees a workforce of 40,000 employees worldwide. She also leads the NIKE Brand's 4 geographic operating regions and is entrusted with leadership over NIKE's global sales organization. With more than 20 years at the company, O'Neill has held a variety of leadership roles, including President of NIKE Direct, where she was responsible for NIKE's connection to its consumer globally through the company's retail and digital commerce business as well as leading NIKE's women's business for 7 years, growing the category into a multibillion-dollar business and leading the company's North American apparel business as VP and General Manager. Matt and Heidi, welcome to you both, and thank you so much for being here. Today, we plan to discuss NIKE's broader direct-to-consumer e-commerce strategy as well as how COVID may change NIKE's business and its strategies. We'll spend the majority of today's session in a question-and-answer style fireside chat, where we will explore some of the questions I've heard most often from investors in recent months. We've also reserved some time toward the end of the session to answer your questions. [Operator Instructions] Before we dive in, I need to remind everyone that for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. Additionally, NIKE does not intend to disclose any material nonpublic information in this discussion. However, information shared could contain forward-looking statements that involve risks and uncertainties where actual results could differ materially. These risks and uncertainties are detailed in NIKE's financial report filings in quarterly and annual reporting statements. With that, I'm delighted to kick off the fireside chat.

Let me start with you, Heidi. As we heard in your bio, you're a 20-year veteran at NIKE, who has led crucial growth areas for NIKE, including its women's, digital and direct-to-consumer businesses. But I can imagine the last 9 months have been some of the most challenging, given your new role leading every geographic business unit during this global pandemic. Can you tell us what your transition has been like?

Thanks, Kimberly, and thanks for that warm welcome. It baits me a bit, but that's okay. And let me be the first to say thank you on behalf of Matt and myself to be here. Socially distanced, of course, he's down the hall in his office, and I'm in mine. And -- but we're honored to be joining this COVID-style fireside chat. On the transition, I don't ever think I'll forget that day. At least, for us that day was March 11, 2020, when Matt and I both assumed our roles. And we actually assumed them a few weeks early because we connected, and we said we need to be in this together. We know we need to be in this together, and we need to take on this transition immediately. And you'll hear, hopefully, a lot of teamwork in what you hear today and how we did that together. But on that day, I pulled our global and our market teams -- placed teams together on Zoom, of course. And it's not exactly how you picture your first day on a big job. And what I saw and what I experienced that day is what I continue to see as we power through these times together. I saw an incredibly strong leadership team actually from all corners of the world. And I could see that we were prepared. We trained into kind of NIKE style. We were ready for a moment like this. And I saw an optimism and the resilience that, especially as I could see our China team on that call and knowing what they could teach us and how they could bring us along, that was really inspiring. And then I'd also just say some early moments in the pandemic, and I'm a believer of moments for teaching, learning, growing, catalyzing. And some early moments in the COVID really taught us a lot. It remind us who we are as a brand and the power of what we can do if we come together as a team. And one of the first moments that I can remember so clearly is when sport went dark. And I'm sure you can imagine a little bit how it feels like for NIKE for sport to go dark. I've never seen anything like it. But that didn't stop us. We watched how -- I guess, as you could say, consumers were moving from stadiums to living rooms for sport. We had our runners that have been running on tracks to have to trails, and I feel so bad for the kids around the world that had to go from pitch to backyard. But we realized that more than ever we needed to not just be a retailer, but to be their coach, to be their hype man, to be their running partner along the way. And that was a really proud moment for us. We -- it was a focus we started then and just the time since that moment, and 375 million workouts later. I mean think about that, just in this COVID period, 375 million. We're reminded and inspired and kind of rallied ourselves about the importance of always listening to the athlete and starting there. And the workouts over this period of time have been up 83% since last year. So we're railing the world around sport. The second moment, I'll never forget this. And this moment went into night and weekend is when our stores just like sport also went dark, and we witnessed and we, of course, supported the closing of all nonessential businesses around the world. And at that time, we knew we still needed to serve consumers. So we leaned on and we fired up our digital ecosystem in a way that we never have before. And again, just in that 9 or so months since that moment of stores closing, we've grown our business incredibly, and we welcomed 55 million new members to join that NIKE ecosystem. And so in that moment, we realized how fast, agile and responsive this team and this brand can be. And I think you see that throughout the course of the pandemic. So I mean I could share tons of moments with you. I'll hold back. Hopefully, we'll have a time for a few more moments. But what I'd say is through these moments, we're learning and we're getting stronger. We've learned that our purpose, which, as we said many times, is to unite the world around power of sport, stronger than ever. I'd say that this time has pressure-tested the heck out of this team. It's pressure-tested our strategy, and it's pressure-tested our growth agenda. But these 2 is, I think, Matt and I sit at this moment, proud to represent the work that we're doing, we think they're all stronger than ever. I hope that answers your question.

That is fantastic. And wow, what an interesting start to your new position. And Matt, you were in a similar position, as Heidi mentioned, starting a new job really at a very pivotal moment this year. You formally assumed the CFO role at the height of the pandemic and the retail store closures that Heidi mentioned. What was your transition like? And what were your top priorities, given what was a very different world that we all woke up to?

Sure. Thanks, Kimberly, and thank you for having us here today. Appreciate it. And before I jump in with it being Veterans Day, I just want to acknowledge and thank those who have served in the military. Appreciate your service, and I just want to recognize it on this special day. As you said, COVID has been a defining moment for all of us. And I transitioned to become the CFO of this company in the middle of March, as Heidi mentioned, my memory was retail closed or we made the decision to close our stores around the world on a Friday. And on Saturday morning, we were on the phone as a leadership team, and we were all transitioning into our new roles because we knew that this wasn't just going to be a 2-week period. And so it wasn't exactly the transition that I dreamt of when I thought of what it would be like to become NIKE's CFO, but I also know that these were the moments that shape you as a leader. As a leadership team, like Heidi said, we immediately banded it together. We created a shared vision, focusing first on the safety of our employees and consumers. And that really was the starting point for all of the work that we did, and we led with our values. And as the new CFO of NIKE in the midst of the pandemic, my focus was on giving our team confidence that we could navigate through this situation. And so I wanted them to see a leader who was calm and clear. So I felt it was critical to set priorities for the enterprise, which would guide our decision-making, supported by metrics that we could use to consistently measure our progress throughout the pandemic. Once we've taken the appropriate steps to protect our teammates, my primary areas of focus were really two: operational execution and resource allocation. And I can go a little deeper on what I mean by both of those focus areas. From an operational perspective or operational execution perspective, we developed and quickly implemented an enterprise-wide operational plan. I talked about that on the last couple of earnings calls, where we recalibrated supply and demand. We increased our digital distribution capacity because we watched the consumer shift to digital pretty quickly. And I know Heidi will talk about that a little bit more later. We wanted to optimize our liquidity so that we had the cash that we need to work through an environment where our stores were closed. And we had to prudently manage costs so we could continue investing where we needed to, to support our employees and/or rapidly shifting business and slower stop investment in areas of our business where it was no longer relevant. We knew that returning to a normalized inventory position was important to sustaining the health of our brand, our premium brand position and the health of our product franchises. And so our first commitment was to make the tough decisions on supply and demand based on our views of market recovery trends around the world. We didn't take a one-size-fits-all approach. We developed a perspective on what we thought recovery was going to look like in China and then looking to the rest of the world. And then we basically drove that direction down from the top of the enterprise to our teams. And we've seen significant progress against those goals as our teams have executed flawlessly. It's pretty fun actually to be here and be able to share and celebrate the work that our teams have accomplished. Our inventories were up 15% versus prior year at the end of August and down almost 10% versus where we were in Q4. And as I've said a couple of times, we expect to see our inventories normalize by the end of Q2. We sharply accelerated revenue from Q4 to over $10 billion in Q1, flat to prior year on a currency-neutral basis. And we were able to deliver 13% EBIT growth versus prior year based on that operational discipline. And so Heidi and I have continued to keep our teams focused on the plan. Literally, we're in meetings every week. The met same metrics measuring against the same goals. And it's been incredibly clarifying for our teams at a time when there's so much that could distract us. As I mentioned about each market being different, we know -- and I think I even read this morning somewhere else, market recoveries are not going to be linear. We're going to take steps forward, and we're going to take steps back. We're seeing that in Europe right now. And however, we just remain focused on the playbook that's been successful for us, and we're just focused on keeping our teams focused as well. And the second area of my priority was resource allocation and prioritization of investment. And to do this correctly, we look deeply at what we believe would change as a result of the pandemic and how NIKE could shift quickly and lead to serve consumers in new ways. This resulted in our declaration in June of a shift from the consumer-direct offense to the consumer-direct acceleration strategy. And then we used that to refine and filter our investment priorities and also to look at the opportunity to shift resources from old ways of business to the things that were going to matter most to consumers as we look forward. And so that's what we did. And we simultaneously accelerated investment in capabilities like online to offline for our stores, so O2O capabilities for our stores, expanding digital fulfillment capacity and scale, continuing to prioritize our end-to-end tech transformation because to be able to serve consumers in this way, we needed a tech platform that was consistent across the enterprise. And then building a more agile, predictive and responsive supply chain. And while we continue to accelerate investment against these key areas in order to serve the consumer better, we're also shifting resources that have historically been invested in old ways of operating or in ways that are just not as important anymore, in light of what the consumer is doing in this moment. We've simplified our organizational structure. We've had a couple of public announcements on that, which is creating capacity for investment in our biggest growth and profitability opportunities. Let me give you an example of one. Prior to the pandemic, we had less than 10% of our product creation resources focused on women. Less than 10%. And this organizational restructuring provided us with the opportunity to shift talented people to support one of our biggest growth opportunities in a much more meaningful and intentional way. And so NIKE's ability to accelerate investment and earnings growth potential during this environment, I think, is a distinct competitive advantage of our brand, our brand's strength and our business model. And I can confidently say that the actions that we've taken here at NIKE will position us to be stronger and drive even more separation than prior to the pandemic. So while this year has been challenging, and it's been challenging for all of us, it's actually made our strategy and where we need to go, even more clarifying for our enterprise and for our teams. And so in hindsight, going back to where you started the question, it couldn't have been a better moment for me to become CFO of this company.

That's excellent. And obviously, the agility of the organization and the ability to respond real time is just such a standout. I'm hearing from both of you what you're learning and what you're taking away from these really formative moments in your new position. And Heidi, it sounded like you had a few other things in mind. I'm wondering if you can expand on some of those additional learnings and how are you and your organization responding?

Sure. We've got tons of insights, and we're checking them along the way. And I would say that one of our biggest insights is that consumer expectations and behaviors have, we think, fundamentally shifted. And I think all of us in the beginning. All of us together were wondering what will stick, what is sticky. And it's our belief, and now we've got some proof points to say that many of these shifts in consumer expectations and behaviors are sticking. It's no surprise that we see one of the biggest shifts is the shift to digital. Consumer of February 2020, consumer patterns of 2020 are just different patterns in November 2020. And we have seen -- many others have seen this, but we've seen 10 years in our category of digital penetration adoption, which was -- happened in 3 months and just 3 months in some of the early months of COVID. And what we're able to see because we're a global brand is that the shift and this penetration is consistent globally. It's not an isolated geography, city or marketplace pattern. And we're shifting, we're responding, and we're benefiting definitely from the strength of this brand and the strength of our digital strategy that was already in play. If you look at some of our results just over this time, especially, I guess I'll focus on Q1. We saw our NIKE Digital commerce, as we've reported, grow 83% in Q1. We had targeted a goal of digital penetration for NIKE in 2023 of 30%. We've shattered that, and we're now on a path to 50% penetration. We're seeing some -- we're seeing that our most engaged experiences and apps are what are growing most are NIKE App, our NIKE shopping app is -- was up 200% just in Q1. And we're really lighting up our services, our online and off-line services, BOPUS, buy online, pick up in store was up a staggering 800% over the quarter. And we're seeing other great numbers with ship from store and reserve in store. And we think -- we know actually, we're just scratching the surface with our potential as it relates to this digital insight as well. When you look at the fact that we, just in Q1, acquired 16 million new members. And you think about those 16 million new members who are ready to train, be inspired and gear up with NIKE, you can start just doing a little bit of math behind the potential we see in digital. A second learning, and I was -- I've talked a lot about this with our team is that we're practicing, and we're seeing the benefit of staying consumer obsessed. And I've got to tell you, there's a lot to be distracted right now, and I would -- I bet a lot of my peers and business find it hard to make sure you keep an eye on staying and keeping the consumer at the center with everything we're tackling as leaders right now. But consumer obsession is our superpower. And we're just continuing to double down on our consumer opportunities. You mentioned in the intro, I go -- I was on the women's business a while back, and I couldn't be prouder of what we're doing in the women's business right now. How we're serving her from performance to lifestyle, and yet there is still so much potential there. But there are proof points and the work that we're doing even through COVID as well. In Q1, our women's business grew 120%, outpacing our men's business. In North America, EMEA and Greater China, we grew double-digit with women's across the board. I feel like we're serving her from lifestyle to sport in ways that we haven't before. We're opening that aperture and making sure we define sport with her kind of sport on her teams. And we're bringing great new innovations for her. Hopefully, some of you saw the launch of our NIKE Maternity line, the NIKE Collection. And that was a big win and a big innovation for her. And I was just in a meeting this week where we've agreed to be on a really accelerated path to make sure we're offering her our entire women's apparel line in extended sizes. So just really, really great work that's in play for us to serve women. And one of the things that I just saw recently. Hopefully, you guys know we have our audio-guided runs on NIKE Training Cub. And for the first time ever, we're finding that she's super engaged with us too and engaged in doing sport with us. We had more women do an audio-guided run with us this last quarter than men. And there are a few of us here in that on and want to keep it in the same trend. We've talked a lot from a consumer focus, too, that apparel is just a massive opportunity for us. And when you think about that right now, I just talked about the definition of sport. And that's a changing, and that's an opportunity. There's a big spotlight on athlete during COVID right now, and that's an opportunity for us. And when you just think about working out from home, working from home, from a Zoom to NIKE Training Club and back, that's an opportunity for us. We've also got some great proof points in Q1 from an apparel perspective. We grew our apparel business 100% on digital commerce in Q1. And we're also proud to share that with the combination of NIKE Jordan -- the Jordan brand, rather, that team is very focused on apparel growth. And NIKE apparel, together, we assumed the #1 position in market share in apparel and the super competitive, as we all know, in U.S. And then speaking of Jordan, I would just say another consumer-focused obsession of growth for us. And that business is rapidly growing. The growth is actually skyrocketing, even over the COVID period in Q1, all 4 geographies grew AJ1, our Air Jordan 1, which is one of our top franchises, grew 53%. And as our SNKRS App and the Jordan team together delivered even in this time 2 record-breaking product launches. So I guess the way I look at it from a consumer perspective is COVID-19 hasn't stopped us from doing what we do best. We're hyper-focused on the consumers and opportunities. We've got a sharp point of view to offer them. And what we're doing still continues to resonate with consumers.

That's excellent. And I want to stay with you, Heidi, and to just look ahead here. You heard Matt talk about how the organization had individual geography recovery curves that -- and they vary by geography, and they're not expected to be linear in each business segment because they have their own unique cycles and ups and downs as a result of COVID. So I'm wondering if you can just remind us about NIKE's initial COVID playbook and walk us through how your playbook has evolved and changed over maybe the last 7, 8, 9 months.

That's a great question. Maybe I'll write a book one day, COVID playbook. But when we first started to see what was happening in China, and honestly, the incredibly impressive response from that team. We knew it was clear that we needed to build a playbook. And so that was conscious and active from the very beginning. And sure enough, we saw similar circumstances unfold across every geography and big city across the world. And what our teams in Great China showed us is our teams first started channeling the consumer. As we are -- as our own NIKE teams in China, we're struggling to stay fit, to maintain mental health, and we're trying to work out in small homes and small spaces. And we learned that we needed to pivot to what consumers needed most at that time. So kind of the first play in the playbook from China is we pivoted immediately. We pivoted to providing inspiration, motivation and tools to keep our teams and then eventually, our consumers healthy. And to make sport a daily habit, which hopefully you know is our vision at NIKE, but to make sport a daily habit at home, which is a whole new challenge. So we did things like we made our NIKE Training Club subscription service free or all that amazing premium workout content. And then we started developing new programming and new content for what consumers needed now. We built content, we're working out in small spaces. We built family workouts. We took our audio-guided runs from the trails to treadmills and something that's helped me quite a bit is our Zoom kind of bite-sized workouts where you can take a quick break and come back to the meeting. And we also delivered new ways of working out on digital, which's building a really good live streaming muscle right now. We're seeing a lot of energy around that. And as it relates to that kind of first play in our playbook, our net out is that -- and we've never seen anything like this. 50% of our worldwide members over the course of this period have actually done a workout with us. So that's made a difference. I'd say the second play, the best way I would characterize it is a shift from defense to offense, really easy to be on defense in a time like this. And as you mentioned, I'd run NIKE Digital for years before this role. And the way we run the NIKE Digital business is on a live ops offense. What that means is a digital business is fast, it's agile, it has to be always on. And essentially, what Matt and I did is we took that digital live ops offense and we turned it into a global enterprise live ops offense. And this enterprise approach was definitely COVID built. But now we have some more muscles. We've got a lot of work steps, and we're building new muscle, I would say, in the whole company. And I think that muscle is here to stay. And I've been here 22 years, and I've never really seen our business rally like this and stand out in a moment like we have. A few examples of some of the live ops decisions and actions we made is we took immediate supply reductions. We knew that we needed to engineer the supply in the marketplace, and we essentially created a seasonless flow. We also -- to get there, one of the things we did is we really leveraged our new acquisition of Celect, and they helped us build the models and the algorithms that we needed to make sure in the most dynamic times we've ever seen that we had the right supply to match consumer demand, which is one of the biggest operational challenges at this time. Proud of our product teams, we edited our product line. We essentially took an entire season out, and we made sure that we had -- we were serving up for consumers what they needed now. We built in thoughtful promotional plans. So we were serving consumers in the moment. And one of the things that Matt and Andy and I worked on together was to really power up the flexibility and the agility of our supply chain. And just in this time, in some of our key regional markets, we have 2 and 3x our supply chain capacity to serve digital specifically. And we've invested in online to off-line services. And this is paying out for us because when we're up and running and buy online, pick up, ship from store, we're seeing less and less stranded product, which is a big benefit to NIKE. But we're seeing fewer and fewer stranded consumers as well. Consumers are not stranded without their NIKE or their slush. So that's been a positive. And then hopefully, we'll see more of this, but I would say third chapter to a COVID playbook is obviously being ready for that recovery period. We had our eyes on that the entire time through. And so we kind of know the actions, and we're starting to see it through China, what recovery looks like in results, too. So our playbook included, of course, what opening door safely looks like. We've embedded new digital technology for touchless services and doors. We're digital queuing to make sure we can manage our customers safely. We are, of course, still focusing and driving and accelerating momentum on digital in the recovery period, and we'll never take our foot off that. And we're scaling convenience because, obviously, consumers voted for convenience, and that is sticky. We know that's sticky. So we're continuing to scale and invest, buy online, pick up in store. And Matt and I were just texting this morning. Double 11 is today, yesterday, if you're in China and some of the convenience we scaled in that market is incredible. Some of our deliveries were from click to an hour at your house. And then in some cases, even 5 and 10 minutes. So -- and then that growth from a result perspective is really inspiring and gives us reason to believe and be optimistic as well. We're back to growth in Mainland China. Our digital commerce is still at a significant penetration and not going back to pre-COVID penetration levels. Our stores have returned to growth in China, which was a really important moment for us to see and watch. Matt mentioned, we normalized inventories. And we did that with just a real planned and near heavy lift. And so this playbook, what I would say about it is we've already mentioned how nonlinear of the world we're in. We're in a very -- the world is dynamic, the marketplace is dynamic. But I think what we're most proud of is we build this playbook with these chapters, and we build it for the long risk gain. And I think it will make us better for the long run.

Heidi, I'll just jump in here. I agree with what you said, and I want to emphasize one thing, which is, Kimberly, the playbook is, it's really a different operating model for NIKE. And that's what the pandemic forced us to evaluate was the way we operate at end-to-end. And we've always been very focused on the consumer and what the consumer is doing. But we're far from the days of 6-month futures orders and putting the product in and then kind of hoping that sales happen. And this pandemic just forced another level of operational discipline and rigor with far greater speed and agility. And what Heidi is kind of referencing there is that this isn't a playbook that will end up on a shelf or in a drawer once knock wood, there's a vaccine for the virus. But it's really a new way we're operating and a way that we need to operate as a more direct company. And so I think this will pay dividends for us long term in terms of recognizing what's required in order to be nimble, to have a real close read on the marketplace and to leverage the data and the insights that we have in order to make faster decisions.