A Nike store in the Central Business District in Beijing. Image via Getty
Nike hosted an earnings call for investors on Monday afternoon, in it breaking down its results for the second quarter of the 2022 fiscal year.
The call came after Nike posted earnings an hour earlier reporting second quarter revenue up just 1 percent versus the year prior to $11.4 billion, with direct-to-consumer sales increasing 8 percent to $4.7 billion and Nike brand digital sales up 11 percent.
In a press release, Nike attributed the flat revenue to ongoing supply chain challenges. It pointed to revenue declines in Asia and its Asia Pacific Latin America regions caused by “lower levels of available inventory resulting from COVID-19 related factory closures.”
On the earnings call, Nike CEO and president John Donahoe and CFO Matt Friend went into more detail on Nike’s challenges, successes, and focuses going forward. Though the quarterly calls are stuffed with brand platitudes about how generally incredible Nike is in all regards, they are also a rare source of publicly available insight from the company’s leadership about its performance. Here are some of the more interesting takeaways from the Nike Q2 2022 earnings call.
A Tribute to Virgil Abloh
Donahoe opened his statements by memorializing Off-White designer Virgil Abloh, a top Nike collaborator who helped the company retain its cool in the second half of the 2010s.
“I want to take a moment to acknowledge the recent passing of Virgil Abloh,” Donahoe said before addressing Nike’s performance. “Since 2016, Virgil’s been a beloved member of the Nike, Jordan, and Converse family. He was a brilliant creative force who shared a passion for challenging the status quo and pushing forward a new vision while inspiring multiple generations along the way. But what stood out to me personally about Virgil was his humility and his humanity.”
Abloh, who died in November from a rare form of cancer, released over 50 pairs of shoes with Nike this year alone. His work with the brand is unfinished—there are still multiple Off-White x Nike projects designed before his passing that have yet to release.
Donahoe gave no update on what will become of the unreleased sneakers, but extended his sympathy to those affected by Abloh’s death.
“We offer our condolences to the many who shared a connection with Virgil. He will be missed greatly,” Donahoe said on the call.
What is the Dedication Score?
Donahoe said that during a launch for the “Cool Grey” Air Jordan 11, invites to buy the product were sent out to women users on the SNKRS app. He said the members of the group were selected using Nike’s new “dedication score,” which is designed to reward member groups with high product affinity. Donahoe next mentioned the SNKRS app’s exclusive access method that encourages users to buy coveted product by sending them an invitation via push notification.
His citing the dedication score—which Nike hasn’t publicly referenced before—and exclusive access so close to each other makes it seem that one is part of the other, and that the score is a new factor that Nike will use in determining who is allowed to purchase its most limited product in the SNKRS app. Nike has given some explanation about exclusive access before, but never been totally transparent about how it works.
Its CEO is a proponent of the launch method, saying on Nike’s last earnings call that it helped bring the Off-White x Nike Dunk Low launch to the “most deserving” customers.
Nike Had to Cancel 130 Million Units
The effect of factory closures in Vietnam on Nike this year was so immense that it forced the brand to cancel production of roughly 130 million units. According to Friend, Nike lost three months worth of production volume, and it has taken factories months to get back to normal levels of output.
“As of today,” the CFO said, “all factories are operational and employee attendance rates have improved, with weekly footwear and apparel production now at roughly 80 percent of pre-closure volumes.”
The China and Asia Pacific Latin America regions suffered from a decline in units sold over the quarter because of the disruptions in production and low inventory levels. Friend said that SNKRS numbers in China were down 50 percent compared to the prior year because Nike didn’t have the inventory across all of its geographies to run a coordinated launch.
“We have been delaying launches to synchronize them around the world,” he explained, referencing Nike’s frequent sneaker release date shifts across the quarter.
Nike Is Putting Robots to Work
In describing advances in Nike’s distribution network, Friend said that the company has opened up new regional service centers on both coasts. Nike’s distribution centers are powered partly by a robotic workforce, per the CFO.
“On automation, we have added more than 1,000 robots in our distribution centers to handle the digital growth,” Friend said. “In our digital distribution center in Memphis, robots handled more than 10 million units that would have otherwise required manual labor.”
The Nike CFO also credited Celect, the A.I. platform it acquired in 2019, with advances in its distribution capabilities.
Nike in the Metaverse
On the call, Donahoe talked about Nike’s acquisition last week of RTFKT, an NFT startup founded in January 2020 that makes virtual sneakers.
“The Nike, Jordan, and Converse brands have always thrived at the intersection of sport, creativity, innovation, and culture,” Donahoe said. “The RTFKT acquisition allows us to extend this reach to serve and delight consumers and creators in both the physical and virtual worlds.”
Nike is not the only sneaker brand to recently deepen its involvement in the metaverse. On Friday, Adidas released an NFT project in collaboration with Bored Ape Yacht Club.
Nike Cutting More Wholesale Partners
Nike’s acceleration in its direct-to-consumer business has come at the cost of its partnered retailers, which the brand has been culling for years now.
“Over the past four years, North America has reduced the number of wholesale accounts by roughly 50 percent,” Friend said, “while delivering strong growth and recapturing consumer demand through Nike direct and our strategic wholesale partners.”
Nike warned in 2017 that it had plans to be more selective about wholesale accounts carrying its product, with then-brand president Trevor Edwards saying at an investor day meeting that “undifferentiated mediocre retail won’t survive.” Since then, reports of longstanding mom and pop shops losing their Nike accounts have been a regularity.
What Is Nike Doing About Omicron?
During the conference call’s Q&A portion at the end, an analyst asked Nike’s execs how the latest variant of the coronavirus was impacting its business. Donahoe responded by describing Nike’s expectations around when employees would return to its physical offices, which have recently been in flux.
“We do believe over time that with innovation and a strong brand, we want to go to a hybrid model,” Donahoe said. “As you know, in the United States we have mandated vaccines and have a very high response rate to that. So we’re ready to come back in a hybrid work environment when that’s safe.”
Friend didn’t elaborate much on how the rapidly spreading Omicron variant could deter Nike’s financial goals, explaining that its forecast was already taking into account the volatility of the sportswear business right now.