A customer enters a Nike store along the Magnificent Mile shopping district on December 21, 2022 in Chicago, Illinois.
Scott Olson | Getty Images
Nike on Thursday unveiled plans to cut costs by about $2 billion over the next three years as it warned of “softer” revenue prospects for the second half of the year.
The sneaker giant plans to simplify its product lineup, increase automation and use of technology, streamline its overall organization and leverage its scale “to drive greater efficiencies,” the company said in a press release announcing the fiscal profit for the second quarter.
The company plans to reinvest the savings it makes from these initiatives into fueling future growth, accelerating innovation and driving long-term profitability.
“As we look ahead to a softer revenue outlook for the second half, we remain focused on strong gross margin execution and disciplined cost management,” chief financial officer Matthew Friend said in a statement.
The plan will cost the company $400 million to $450 million in pre-tax restructuring costs, much of which will come to fruition in Nike's current quarter. These costs are mainly related to employee dismissal costs, Nike said.
The stock was down about 5% after hours. Nike shares were up 4.7% so far this year through Thursday's close, far lagging the S&P 500's gains for the year.
Earlier this month, The Oregonian reported that Nike had quietly laid off employees in recent weeks and indicated it was making plans for a broader restructuring. A series of divisions made cuts in areas including recruitment, sourcing, brand, engineering, human resources and innovation, the outlet reported.
The company did not immediately return a request for comment on The Oregonian's report.
Nike is considered a leader among its peers Lululemon And Under armorbut profits are under pressure and it is in the midst of a strategy change that is affecting its relationships with wholesalers like Macy's And Designer brandsthe parent company of DSW.
Over the past six quarters, Nike's gross margin has declined compared to the same period last year, but on Thursday the story reversed. According to StreetAccount, Nike's gross margin rose 1.7 percentage points to 44.6%, slightly more than expected.
This time last year, Nike's stocks were up as much as 43% and the retailer was in the midst of an aggressive liquidation strategy to clear out old styles and make way for new ones, weighing heavily on margins. However, several quarters later, Nike is in a much better inventory position, which could be a boon for margins.
Yet the retail industry is generally flooded with steep promotions and discounts as retailers struggle to convince inflation-weary consumers to pay full price. When Nike reported first-quarter earnings in September, Chief Financial Officer Matthew Friend said Nike was “cautiously planning for modest improvements in markdowns” given the overall promotional environment.
As one of the last retailers to report earnings before the December holiday season, investors are eager to hear good news when it comes to Nike's expectations for the crucial shopping season. When many retailers announced their expectations for the holiday quarter in November, the commentary was mostly tepid and cautious, as companies appeared to under-promise and over-deliver in an increasingly uncertain macro environment.
China is another important part of the Nike story. As the region emerges from the Covid pandemic and widespread lockdowns, China's economic recovery has been a mixed bag so far. In November, retail sales in the region increased by 10.1%.
This was the fastest pace of growth since May, but these numbers were in comparison to easily comparable figures and the growth was largely driven by car sales and restaurants, according to a research note from Goldman Sachs. How Nike has performed in the region will provide investors with insight into the Chinese consumer and how the region fits into the retailer's strategy, both in the short and long term.
Read the full earnings release here.
This is a development story. Check back for updates.