Nike misses on revenue for first time in two years, but stock pops as earnings, margins beat

Nike reported revenue Thursday that fell short of Wall Street’s sales expectations for the first time in two years, but it beat on earnings and gross margin estimates, sending its stock soaring in after-hours trading.

Here’s how the sneaker giant performed during its fiscal first quarter compared with what Wall Street was anticipating, based on a survey of analysts by LSEG, formerly known as Refinitiv:

  • Earnings per share: 94 cents vs. 75 cents expected
  • Revenue: $12.94 billion vs. $12.98 billion expected

The company’s reported net income for the three-month period that ended August 31 was $1.45 billion, or 94 cents per share, compared with $1.47 billion, or 93 cents per share, a year earlier.

Sales rose to $12.94 billion, up about 2% from $12.69 billion a year earlier. Revenue for the quarter was just shy of the $12.98 billion analysts had expected, according to LSEG.

Nike shares rose about 8% in extended trading Thursday.

The retailer maintained its full-year guidance of revenue growth in the mid-single digits and gross margin expansion of 1.4 to 1.6 percentage points.

“We’re closely monitoring the operating environment, including foreign currency exchange rates, consumer demand over the holiday season, and our second half wholesale order book,” said finance chief Matthew Friend on a call with analysts.

“We are cautiously planning for modest markdown improvements for the balance of the year, given the promotional environment,” he added.

For the second quarter, Nike expects revenue growth to be up slightly versus the prior year and gross margins to grow by about 1 percentage point versus the prior year.

Investors have been laser focused on Nike’s recovery in China, its relationship with its wholesale partners and how the resumption of student loan payments will impact sales. 

They’re also keen to see Nike’s margins recover after bloated inventories, high promotions and supply chain woes contributed to lower profits over the last few quarters. 

During the quarter, Nike’s gross margin fell about 0.1 percentage points to 44.2%, but it was higher than the 43.7% analysts had expected, according to StreetAccount. The company attributed the gross margin drop to higher product costs and currency exchange rates, but those trends were offset by price increases, which contributed to the earnings beat.

Sales in China grew by 5% compared to the year-ago period to $1.7 billion, which fell short of the $1.8 billion analysts had expected, according to StreetAccount.

During the previous quarter ended May 31, Nike saw China sales jump 16% compared to the year-ago period. But the numbers were against easy comparisons because the region was still under Covid-related lockdown orders during the prior year. 

While Nike remains bullish on China, the region’s economic recovery has so far been a mixed bag. Following a sluggish July, retail sales picked up during the month of August to rise 4.6% compared to the prior year, beating expectations of a 3% growth forecast by Reuters. 

“We feel good about the market there and our position,” said CEO John Donahoe, adding he’s traveled to China twice in the last four months. “Frankly, a couple things stand out. One, sport is back in China, you can just feel it, and that gives us great confidence about the future and the Chinese consumer in our segment, regardless of the macroeconomic outlook there.”

Nike saw sales jumps in every region besides North America, its largest market by revenue. Sales in North America fell 2% from the year-ago period to $5.42 billion, just above the $5.39 billion analysts had expected, according to StreetAccount.

In Europe, the Middle East and Africa, sales were up 8% at $3.61 billion. That compared with the $3.51 billion analysts had expected. Sales in its Latin America and Asia Pacific unit came in 2% higher at $1.57 billion, just shy of the $1.59 billion analysts had expected, according to StreetAccount.

The Converse brand, on the other hand, fell well short of expectations for a second quarter in a row. Sales came in at $588 million, down 9% compared to the year-ago period. Analysts had expected sales to be about $660 million, according to StreetAccount.

Nike’s direct channel, which includes its owned stores and its digital channel, led the retailer’s growth during the quarter and was up 6% compared to the prior year. In June, the company noticed that shoppers were shifting towards its stores over its digital channels, signaling consumers are getting closer to pre-pandemic shopping habits.

“We continue to see that consumers want to connect directly and personally with our brands and in fact, member engagement within our direct business is up double digits versus the prior year with increasing average order values,” said Friend.

“Our stores delivered an especially strong quarter with traffic up double digits from last year, and members driving an increasing share of our business as consumers shifted from our digital to physical channels… Our team was nimble in transitioning inventory to capture higher full-price sales across our entire store fleet,” he said.

When it comes to its wholesale revenues, Nike’s relationship with those partners have been rocky. As the company has pivoted to a direct-to-consumer model, it has focused on driving sales online and in its stores at the expense of its wholesale accounts. 

However, as Nike grappled with excess inventories throughout 2023, it relied on those partners to move through that merchandise. It has now restored its relationship with both Macy’s and DSW – accounts that it previously cut in favor of its DTC strategy. 

Some analysts expected Nike’s wholesale revenue to be sluggish during the quarter because excess inventories have been a problem throughout the retail industry – and some wholesalers are being more particular in what they order to avoid another backlog. 

Wholesale revenue during the quarter was flat compared to the year-ago period at $7 billion.

Both Donahoe and Friend made it clear to analysts that Nike is ready to meet customers in all channels — including through wholesalers and directly. The retailer shouted out Dick’s Sporting Goods as one of its key partners and noted that it’s still in the process of resetting its business with Footlocker, which has seen two quarters in a row of plunging sales and profits.

Despite the shift in how it’s working with wholesalers, Nike insisted that direct sales will pave the way to its future growth.

“Ultimately, we have a segmented portfolio of strong partners across price points and channels. With no single partner representing more than a mid-single digit of Nike’s total business,” said Friend.

“While the ultimate landing spot of digital and direct isn’t as clear, we do believe we’re going to be a more direct and a more digital company, and a more profitable company,” he said. “And there’s a channel mix and channel profitability opportunity that comes with that as well.”

Meanwhile, inventories fell 10% to $8.7 billion. The drop was driven by a decrease in units but offset by product mix and higher manufacturing and production costs.

“On the whole, we’re very comfortable with the level of inventory in the marketplace in relation to the retail sales that we’re seeing as we begin increasing levels of wholesale sell in our second half,” said Friend.

Amid decades-high inflation rates, consumers have been pulling back on apparel and footwear. With the resumption of student loan payments looming ahead, some analysts expect those sectors to take an even greater hit. 

Jefferies conducted a survey on U.S. consumer spending and found 54% of respondents plan to spend less on apparel and accessories. Meanwhile, 46% plan to spend less on footwear, which doesn’t bode well for Nike. 

It’s still too early to gauge the impact of student loan payments on Nike. Its first quarter ended in late August, and payments aren’t set to resume until October.

During the quarter, footwear sales rose 4% to $8.4 billion, making up about 68% of Nike’s total sales. Apparel was down 1% at $3.4 billion.

Correction: Nike’s gross margin fell 0.1 percentage points. An earlier version of this story misstated that figure.

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Peloton shares plunge after company reports wider-than-expected loss

Peloton‘s shares plummeted Thursday after the company reported a wider-than-expected loss for the fiscal third quarter and acknowledged an uncertain economic backdrop.

The company’s shares were down 14% in afternoon trading.

Yet Peloton pointed to signs of progress with its turnaround plan. It said connected fitness subscriptions grew and free cash flow losses declined. It also said new initiatives have resonated with customers, including a push to sell lower-priced, pre-owned bikes and a rent-to-buy program for fitness equipment. 

Here’s how the connected fitness equipment company did in the three months ended March 31 compared with what Wall Street was anticipating, based on a survey of analysts by Refinitiv:

  • Loss per share: 79 cents vs. 46 cents expected
  • Revenue: $749 million vs. $708 million expected

Peloton’s net loss for the period was $275.9 million, or 79 cents per share, compared with a loss of $757.1 million, or $2.27 per share, a year earlier. It marked the ninth quarter in a row of the company reporting losses.

Revenue declined 22% from a year ago, dropping from $964.3 million.

The fitness company has sought to stabilize its business and find a path to profitability again, after seeing a sharp reversal of fortunes. Sales of its bikes and treadmills slowed dramatically after a Covid pandemic-related surge, forcing Peloton to lean into other revenue sources like subscriptions.

The company ended its third quarter with about 3.1 million connected fitness subscriptions, up 5% from the year-ago period. Connected fitness subscribers are people who own a Peloton product, such as its Bike or Tread, and pay a monthly fee for access to live and on-demand workout classes.

Average net monthly connected fitness churn ticked up slightly from a year ago, too. It came in at 1.1% for the quarter, consistent with the prior quarter, but above the year-ago churn level of 0.8%.

Peloton’s overall membership, however, did not grow. It ended the quarter with 6.7 million total members, the same as the end of the prior quarter and down from 7 million in the year-ago period.

In a letter to shareholders, CEO Barry McCarthy said Peloton is looking toward the future. The company later this month will relaunch the brand and introduce a new version of the Peloton app with a tiered membership structure, he said.

McCarthy added the relaunch aims to shake up how people view Peloton, so they think of its wide variety of fitness offerings — not just its well-recognized bikes.

Yet he warned of challenges ahead. He said the company typically experiences a seasonal decline in subscriber growth in the fourth quarter, which stretches across summer months. He said he expects one this year, too.

“Notwithstanding the relaunch, Q4 will be among our most challenging from a growth perspective,” he said.

In the fiscal fourth quarter, Peloton expects connected fitness subscriptions to rise, but revenue to drop. It said it anticipates revenue to decline by about 6% year over year to a range of between $630 million and $650 million, compared with $678.7 million the year-ago period.

It expects to end the fourth quarter with 3.08 million to 3.09 million subscribers, up from 2.97 million in the year-ago period.

On an earnings call, McCarthy said consumers have continued to spend, but he said it’s hard to predict their behavior as economists debate the likelihood of a recession or “soft landing.” He said the debate in Congress over whether to raise the debt ceiling, or risk a first-ever default on U.S. debt, adds to the uncertainty.

Separately, Peloton announced Thursday that it had reached an agreement with Dish Technologies over a patent dispute. The company said it will pay Dish $75 million to settle a U.S. International Trade Commission complaint.

The company had previously said it aimed to reach break-even cash flow on a quarterly basis in the second half of its fiscal 2023. McCarthy said in the letter Thursday that the settlement will significantly pressure free cash flow in the current fiscal quarter.

He added that the temporary hit is worthwhile because it “eliminates a cloud of uncertainty and an enormous distraction to the day-to-day operation of our business.”

McCarthy’s focus on a turnaround follows a tumultuous stretch after the company’s post-pandemic surge.

The struggles forced the company to cut costs last year by laying off thousands of employees, shuttering many of its stores, and outsourcing its last-mile delivery and manufacturing. Its co-founder and former CEO, John Foley, also stepped down last year and later resigned as executive chairman.

As fitness equipment sales continue to lag, Peloton has focused on other ways to drive growth and attract new customers. Under McCarthy, a former Spotify and Netflix executive, the company has emphasized increasing subscriptions.

Subscriptions have become the company’s biggest business driver – accounting for nearly 60% of overall revenue in the three-month period. It was the fourth quarter in a row that subscription revenue surpassed hardware revenue.

The company has tried to nudge sales of equipment by tinkering with prices, offering a rental option and adding rowing machines to its lineup. It got into wholesale by allowing Amazon and Dick’s Sporting Goods to carry its equipment. Peloton also struck a deal with Hilton to put bikes in all of its U.S. hotels.

In the shareholder letter Thursday, McCarthy said those efforts are working.

Since the company began testing its rent-to-buy program in March 2022, it has grown to 47,000 subscribers, he said. It has an average monthly churn rate of 5%, which is higher than Peloton’s overall churn rate.

Yet McCarthy said the option, which allows customers to make rental payments and chip away at the equipment’s purchase price, reduces a barrier to sign-ups. He cited an internal survey, which found that 62% of respondents would not have subscribed if it weren’t for the flexibility of the rental program.

Peloton’s sales of pre-owned bikes have also resonated, he said. The company launched that offering in December and is considering adding its treadmills and rowers to the program later this year.

Together, the two programs accounted for 24% of connected fitness hardware sales in the fiscal third quarter, he said.

He said third-party sales have also gained traction, and the company plans to expand its assortment with Amazon and participate in its promotional events like Prime Day.

Peloton’s stock has risen about 11% so far this year. Yet its shares are still less than half of its 52-week high of $18.86 — and just a tiny fraction of their over $100 highs during the early years of the pandemic.

Peloton’s market cap is $3.06 billion, after reaching as high as almost $50 billion in early 2021.

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Target shoppers can now make a return without leaving the car

Target is dangling a new perk to get shoppers to swing by its stores: customers can make returns without leaving their car.

The curbside-returns service, which began last week at roughly a quarter of Target’s nearly 2,000 stores nationwide, will be available across the chain by the end of summer. 

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Target is sweetening its curbside-pickup service, Drive Up, to attract and retain customers as the retailer braces for a potential sales slowdown and tries to hang on to pandemic-fueled gains. Total annual revenue grew by about $31 billion – or nearly 40% – from fiscal 2019 to 2022.

Now, as shoppers become more budget conscious and buy fewer discretionary items, Target said it expects comparable sales to range from a low single-digit decline to a low single-digit increase this fiscal year. At an investor day in February, it projected full-year earnings per share of between $7.75 and $8.75, below Wall Street’s expectations of $9.23 per share, according to StreetAccount estimates.

The company hopes convenient perks like curbside returns will boost customer loyalty and jolt sales.

“Any time we remove friction from our guest experience it benefits the guests and benefits Target because they deepen their relationship with us,” Chief Stores Officer Mark Schindele said. “We’ve shown that with Drive Up overall. Guests try that service, they love it and then they shop our stores more often.”

Curbside pickup became a bigger sales driver for retailers’ e-commerce businesses, especially as shoppers tried to avoid crowds during the Covid pandemic. For some shoppers, the habit has stuck as work and home schedules are fuller and commutes are back — and retailers including Target and rival Walmart now aim to capitalize on that.

Click-and-collect, a term used to describe buying online and picking up purchases curbside or in store, grew from 6% of overall e-commerce sales in the U.S. in 2019 to 11% in 2022, according to data from Euromonitor, a market research firm.

Delivery still accounts for the majority of online sales, but click-and-collect drove about $114 billion of sales in 2022 — a jump from $36 billion in 2019, according to Euromonitor.

In the U.S., the vast majority of click-and-collect comes from curbside pickups, said Bob Hoyler, industry manager for retail research at Euromonitor. 

The market research firm anticipates click-and-collect sales in dollars will grow by 8% this year, compared with 2% for delivery. The growth will be fueled by consumers who opt for curbside pickup to avoid delivery fees or shipping minimums at a time of heightened price sensitivity, Hoyler said.

Target debuted Drive Up in 2017 as a test in Minneapolis, where the company is based. It expanded the service to stores across all 50 states in 2019. It added fresh and frozen groceries in 2020, and tacked on wine and beer the following year. 

Last year, the retailer expanded the service to allow shoppers to order a Starbucks drink to retrieve when they pick up their curbside order. The service is available at about 240 stores.

Sales fulfilled through Drive Up grew more than 70% in the fiscal year that ended in late January 2022, on top of a more than 600% boom during the prior fiscal year, the company said. Drive Up sales grew more than 10% in the most recent fiscal year.

Target’s same-day services, which include Drive Up, accounted for more than half of digital sales as of late January as consumers embrace convenience. Same-day services also include Target-owned delivery service Shipt and Order Pickup, which allows shoppers to retrieve an online purchase inside of a store.

The retailer’s average fulfillment cost per unit has fallen by 40% over the past four years as those services grow, Chief Operating Officer John Mulligan said at an investor day in February. More than 95% of Target’s total sales, including digital, are fulfilled in stores.

Other retailers have added to curbside pickup. Walmart rolled out curbside returns at all of its stores ahead of the 2022 holiday season. Dick’s Sporting Goods added curbside returns to its services in 2020 and offers it across all of its stores.

Neither company would quantify the use of curbside pickup or returns, but Walmart said it has seen nearly double the volume of customers using curbside returns from its launch across the chain last fall compared with this month.

At an investor event earlier this month, Walmart CEO Doug McMillon said the retailer is competing on convenience, too. He credited pickup and delivery for driving growth in recent years, and said the company’s recent survey results show customers are choosing the big-box retail giant to save time along with money.

Yet other retailers such as Kohl’s have eliminated curbside pickup. It ended the service last summer, swapping it out for a self-pickup service inside of stores.

The company’s shift to self pickup is part of efforts to cut costs, including by reducing its payroll, Chief Financial Officer Jill Timm said in September at a Goldman Sachs conference. She said Kohl’s is also testing self checkout and self returns.

For some retailers, the time and labor of curbside pickup can be hard to justify — especially since it encourages shoppers to stay in their cars rather than step into stores where they may fill up their carts with more purchases, Euromonitor’s Hoyler said.

Those concerns fueled skepticism of curbside returns within Target, too.

Most Target returns are made at the store, according to the company. Inside of a store, a shopper may swap out a returned product for another or grab an impulse item.

At Target’s investor day in late February, Citibank analyst Paul Lejuez asked if the retailer would ultimately miss out on purchases by adding curbside returns.

Schindele, the chief stores officer, said Target is focused on the lifetime value of a customer, not just the economics of a single transaction. He said allowing curbside returns also helps the retailer get unwanted items back on the sales floor faster and lowers the cost of mail-in returns.

He added that curbside pickup still inspires browsing and other purchases. On average, about 20% of customers who pick up Drive Up orders also make an in-store purchase on the same day, he said.

“What we find is when a guest uses Drive Up — and it could be Drive Up returns, it could be Drive Up purchase — we find that they spend more money in store over the course of the year.”

During tests of curbside returns, some shoppers have stopped by just to return an item, Schindele said. Others have picked up purchases while making a return. Still others have retrieved items they bought, made a return and gotten a Starbucks drink.

For Target, curbside returns could serve as a differentiator and a complement to the merchandise mix it sells, Hoyler said. Target’s sales focus is on general merchandise, such as apparel and beauty products, with only roughly 20% of its annual sales coming from grocery items. That’s much less than Walmart, which draws nearly 60% of its annual U.S. sales from grocery.

That general merchandise tends to be returned much more often than items like milk and bananas, he said.

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