Earnings Call Transcript - NKE Q3 2024

Operator, Operator

Good afternoon, everyone. Welcome to NIKE, Inc.'s Fiscal 2024 Third Quarter Conference Call. For those who want to reference today's press release, you'll find it at investors.nike.com. Leading today's call is Paul Trussell, VP of Corporate Finance and Treasurer. I would now like to turn the call over to Paul Trussell.

Paul Trussell, VP of Corporate Finance and Treasurer

Thank you, operator. Hello, everyone, and thank you for joining us today to discuss NIKE, Inc.'s fiscal 2024 third 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 nonpublic 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 questions to one. Thanks for your cooperation on this. I'll now turn the call over to NIKE, Inc., President and CEO, John Donahoe.

John Donahoe, President and CEO

Thank you, Paul, and hello to everyone on today's call. Before I get into our Q3 performance, I want to take a moment to acknowledge the tragic passing of Kelvin Kiptum last month. Kelvin had just set the Marathon world record in Chicago. He was a world-class athlete and champion and a beloved member of the NIKE family. Kelvin was an inspiration to so many of us, and he'll long be remembered and honored for the impact he had both on the running community and beyond. Looking at our business, Q3 performed in line with our expectations. That said, we know NIKE is not performing at our potential. While our Consumer Direct Acceleration Strategy has driven growth and direct connections with consumers, it's clear that we need to make some important adjustments. Simply put, we need to make adjustments in four areas. We need to sharpen our focus on sport. We must drive a continuous flow of new product innovation. Our brand marketing must become bolder and more distinctive. And while NIKE Direct will continue to play a critical role, we must lead with our wholesale partners to elevate our brand and grow the total marketplace. And this is exactly what we're doing. Starting last June, we aligned our organization to put the consumer and a sharp focus on sport back at the center of everything we do. We integrated our leadership structure, appointing Heidi O'Neill and Craig Williams as Co-Presidents. We've reinvested in consumer-led, sport-focused teams that are the foundation of our offense, and we're driving our winning formula of creating a relentless flow of innovative product, combined with distinct brand storytelling, delivered through differentiated marketplace experiences. And while we still have much work to do, we are making significant progress. We're well on our way to building a multiyear cycle of innovation that's bringing freshness and newness to consumers. We pulled forward several innovations more than a year, and our intent is to delight consumers and disrupt the industry. Our brand storytelling will leverage our athletes and sport moments to become sharper and bolder, beginning with the Olympics this summer. We're increasing our investment in wholesale to help us elevate and grow the entire marketplace. We recognize that our wholesale partners help us scale our innovation and newness in physical stores and connect our brands in the path of the consumer. Most importantly, we're back on our front foot with growing confidence in our innovation pipeline. We know it will take some time to scale these innovations, but we see some early green shoots. Our product portfolio will go through a period of transition over the coming quarters, but altogether, we are relentlessly focused on driving NIKE's next chapter of healthy and sustainable growth. We're looking forward to sharing our plans in depth at an Investor Day later this year. Our success always starts with innovative products. So that's where I'm going to focus today's call. Today, our innovation engine is moving with speed. Our innovation, design, and product creation teams are working hand in hand with urgency and creativity. They leverage new technologies to be faster, more collaborative, and more expansive in their thinking. We have many platforms at NIKE that drive growth. But today, let's go deep on our greatest innovation platform and a true source of competitive advantage: Air. As a platform, Air is a double-digit billion dollar business on its own, larger than some Fortune 500 companies. There is nothing like Air. It's a proprietary technology that lets us iterate and revolutionize. It drives breakthrough performance benefits for athletes and defines the future of sportswear. Air offers stability, resilience, and energy return, unlike any other cushioning platform. Simply put, Air helps athletes win. Over the decades, we've developed breakthroughs in Air. As we approach the Olympics in Paris this summer, we continue to innovate with Air with a focus on helping the world's greatest athletes compete and win on sports' largest stage. This summer, you're going to see Air drive major advancements in measurable performance benefits on the track, on the court, and on the pitch. In addition to Alphafly 3, which continues to set the standard for distance racing, you'll see Air in new footwear that brings elite performance to everyday runners. You'll see Air in football and basketball footwear in new and more visible ways. You're going to get a chance to see all of these products, in fact, our full Olympics innovation lineup two weeks from now at our Innovation Ignition events that we'll be hosting in Paris. Beyond creating leading-edge performance innovation, we also continue to bring new sensations of Air across our business, including our lifestyle portfolio. Dynamic Air, our newest innovation platform, is a true breakthrough delivering a uniquely comfortable sensation with each step. It's a total rethinking of what airbags can be. Historically, airbags have been fixed and static, picture an inflatable raft; they compress when you step and then immediately return to their original shape, ready for the next step. Dynamic Air changes the game. It unchambers the Air to create a new underfoot sensation that's truly responsive. As the consumer takes a step, our new four-tubed air unit allows air to flow freely between the tubes, responding to the pressure of each unique stride to deliver maximum comfort. We will scale Dynamic Air across many of our leading Air franchises, but it starts with the Air Max DN, a shoe that offers just the latest example of how we're using Air to craft a new lifestyle franchise. I've been wearing the DN all week, and in fact, I'm wearing it right now. It really is a unique and great sensation. What's more, DN's bold style and design identity is deeply rooted in youth culture and the next generation. We're excited for consumers to experience it. Next week will be NIKE's tenth Air Max Day. It will be a day when you see us drive an integrated offense of innovation, storytelling, and consumer activations that we're very excited about. Air Max DN will be debuting in more than 4,000 stores globally on Air Max Day, creating impact like we haven't seen in years. When we teased DN last month, we saw a rise in other Air Max franchises. This is common; our experience has been that when we launch a strong new product, it creates energy for the whole family. It all speaks to the confidence we feel when we look at our overall innovation engine and pipeline, from Air to the rest of the portfolio. Earlier, I mentioned the impact NIKE can have as we sharpen our focus on sport. The world got a great reminder today with the announcement of the awarding of the German football contract. I was fortunate enough to be in Germany for our pitch earlier this week, and I can tell you it was simply NIKE at its very best. It started with our deep and unparalleled commitment to sport. We are the world's leading sports brand, the largest sports brand, and the leader in football, the world's most popular sport. Our focus started with product innovation, both on the pitch, with unmatched kits and footwear that popped and had style and performance, and extended into distinct and fashionable lifestyle design. Our ability to tell stories shone through, making the German team a global brand and their athletes global heroes and our ability to expand the game, inviting youth culture into football all mattered. It was a remarkable team effort and a great proof point that when NIKE brings out our best, no one can beat us. We feel deeply honored and privileged to partner with the German Football Federation starting in 2027. Before wrapping up, let me touch on something else that's core to our DNA as a company: NIKE'S purpose. Purpose will always be our foundation and remains deeply embedded in our strategy. We're defined by our commitment to the future of sport and service to athletes around the globe, and purpose continues to guide us and redefine our potential for positive impact in the world. We're pleased with the progress we've made against our 2025 purpose targets across representation, sustainability, and community. To learn more, please see our recently released FY '23 NIKE, Inc. Impact Report. In the end, we're acting with urgency as we make the adjustments needed to compete and win. I'd like to conclude by saying that I deeply appreciate how much our team has kept our focus on delivering results amid macro volatility and an organizational restructure. This has been a difficult time for our organization, and I feel truly grateful for our teammates who demonstrated such dedication and commitment to our work together. It's thanks to them that I feel confident in NIKE's future. And with that, I'll turn the call over to Matt.

Matthew Friend, CFO

Thanks, John, and hello to everyone on the call. NIKE's third quarter showcased the operating discipline of our teams as we delivered revenues up slightly on top of the prior year's double-digit growth, outperforming our expectations in North America and more than offsetting dynamic conditions in some other geographies. We executed well to recapture transitory cost headwinds and expand gross margins even in a promotional environment. Our inventory position remains healthy, with total marketplace units down double digits versus the prior year and weeks of supply at their lowest levels since the pandemic. Most importantly, our teams are focused on what matters most to capture the strong growth opportunity we see in the marketplace. This means creating more value for consumers by scaling new product innovation, with greater brand impact across the full marketplace with even more inspiration through sport and our athletes. Last quarter, we highlighted that particularly in an uneven macro environment, newness and innovation are what drives brand distinction. Consumers are moving quickly to access new products. Trends are igniting in different places and rapidly spreading around the world. NIKE needs to be faster. So, we are accelerating a multiyear innovation cycle. This quarter showed that we are on the right track. Since the start of this fiscal year, new and updated footwear models have grown into a majority of our top 20 growing footwear franchises in Q3. Footwear products introduced over the past several quarters are on track to generate a multibillion dollar run rate on an annual basis, and we see even more opportunity ahead. Performance footwear grew high single digits this quarter, with double-digit growth from $100-plus franchises, including Kobe and Ja in basketball, Metcon and Motiva in fitness, and Structure and Vomero in running. Women's fitness footwear grew double digits, and key apparel franchises such as $100-plus leggings continued scaling with strong sell-through. New product journeys from Book 1 to Vomero 5 and V2K to Lunar Roam and Travis Scott Jordan Jumpman Jack drove consumer energy ahead of a new wave of NIKE Air innovation, the Air Zoom Alphafly 3 debuted with a marathon world record and sellout launches across multiple markets. As you heard from John, we believe the Paris Olympics will serve as a catalyst for our brands as we launch our newest NIKE Air innovations for athletes. Most importantly, this is just the beginning. With a growing portfolio of new concepts, platforms, and capabilities, our innovation teams are well-positioned to continue driving breakthroughs in performance and lifestyle over the coming years. Now to maximize the impact of our new product cycle, we are accelerating several important actions lined up against key brand and sports moments. First, we are elevating and differentiating the consumer experience with our brands at retail, especially as consumers continue to shift back into physical stores. This includes increased investment to support strong seasonal retail marketing execution, breadth and depth of assortment, and elevated service and product presentation. You heard John say that we will initially launch the Air Max DN next week at more than 4,000 doors. We will increasingly leverage our full portfolio of thousands of physical doors to position our newest products in the path of consumers. Second, we are sharpening our brand storytelling to tell fewer, bigger stories with greater reach. We will focus our demand creation investments to elevate our brand and most distinctive products, leading with the voice of the athlete, amplifying our new innovation, and engaging consumers at the point of sale. As we look forward, we see our Olympics Air for Athletes campaign will be the boldest expression of NIKE's brand voice in many years. Third, we are in the midst of shifting our product portfolio towards newness and innovation. Last quarter, we spoke of our intentional actions to reduce marketplace supply of certain key franchises to ensure they remain healthy and strong while feeding and scaling new products. Given the way consumers are responding to our newest product journeys, even amidst a more promotional environment, we decided to accelerate our actions. For example, we are pulling back supply of classics, such as the Air Force 1, and we're reducing supply of Pegasus ahead of launching new innovation in the Peg 41. We've been here before. Twelve months ago, our basketball portfolio was meaningfully impacted when we exited a key signature franchise. Since then, we've more than offset that impact by scaling innovation with the GT series, introducing newness to consumers in Ja, Sabrina, Kobe, and Book, and returned to strong double-digit growth this quarter in basketball. Looking ahead, we expect lifecycle management of key product franchises to create some near-term headwinds, particularly on digital. However, we are confident that we are taking the right actions to fuel brand momentum and return to stronger long-term growth. Last, while we continue to bring operational discipline as we manage our business through these shifts and a multiyear period of higher cost inflation, we are also positioning NIKE for the future. This includes restructuring our organization to sharpen our focus and increase our investment on the consumer and sport, which we believe will fuel our next phase of long-term growth. This quarter, we began streamlining support and operating functions, reducing management layers, and shifting more of our resources towards consumer-facing activities. In particular, we are increasing investment in areas such as design, product creation, merchandising, brand, and our ground game to drive greater impact for consumers, dimensions of sport, and the marketplace. Overall, our focus is on allocating our resources to drive more return while building an operating model with greater speed and better cost productivity as we grow. Now let me turn to our NIKE Inc. third quarter results. In Q3, NIKE, Inc. revenue was up slightly on a reported and currency-neutral basis with low single-digit growth in the NIKE brand, partially offset by declines at Converse. As a reminder, this follows 14% reported and 19% currency-neutral growth one year ago, as we were liquidating excess inventory in Q3 of fiscal '23. NIKE Direct was up slightly versus the prior year, with NIKE stores up 6% and NIKE Digital down 4%, and wholesale grew 3%. Gross margins expanded 150 basis points to 44.8% on a reported basis, driven by strategic pricing actions, lower ocean freight rates, and improvements in supply chain efficiency, partially offset by higher product input costs. This includes 50 basis points of negative impact from restructuring charges. SG&A grew 7% on a reported basis; increased investments in demand creation were partially offset by disciplined expense management. This quarter, SG&A was also impacted by approximately $340 million in restructuring charges. Our effective tax rate for the quarter was 16.5% compared to 16% for the same period last year. Diluted earnings per share was $0.77. Excluding the impact of the restructuring charges, earnings per share would have been $0.98, up 24% versus the prior year. Now let me turn to our operating segments. In North America, Q3 revenue grew 3%. NIKE Direct grew 2% with NIKE stores up 3% and NIKE Digital up 1%. Wholesale grew 5%, and EBIT grew 18% on a reported basis. This builds on extraordinary growth in the prior year, with North America revenue up 27%, including NIKE Direct up 23% and wholesale up 32% in Q3 of fiscal '23. This quarter, we exceeded our expectations in North America with strong holiday sales, lighter markdowns than our competitors, and unit growth versus the prior year. Inventory is also down double digits at the end of Q3. Kids grew double digits across footwear and apparel with seasonal fleece and performance footwear resonating. We also saw positive momentum in women's lifestyle and fitness with strong growth from the Dunk, free Metcon, and retro running styles. Jordan Remix and Sport Performance grew double digits, and in running, various models delivered double-digit growth. In EMEA, Q3 revenue declined 4%. NIKE Direct declined 4% as NIKE stores grew 6%, and NIKE Digital declined 10%. Wholesale was down 5%, and EBIT declined 6% on a reported basis. These results compare to tremendous growth in Q3 of fiscal '23 when EMEA revenue was up 26%, NIKE Direct was up 39%, and wholesale was up 20%. However, sales in the geography fell short of our expectations this quarter as we navigated increased macro volatility and softening consumer demand. That said, newness and brand distinction continue to fuel momentum in EMEA. In running, Alphafly 3's launch energized our road racing portfolio. In Lifestyle, P-6000 and Vomero 5 continue to scale, and fitness grew double digits as we activated our ground game with brand activations and our trainer network. Overall, inventory remains healthy with units down double digits versus the prior year. Looking forward, we see the launch of Air Max DN Euro Champs '24 and the Paris Olympics as opportunities to create near-term brand momentum despite a challenging consumer backdrop. In Greater China, Q3 revenue grew 6%, in line with our revised expectations we shared at the end of last quarter. NIKE Direct declined 1% with NIKE stores growing 6% and NIKE Digital declining 13%. Wholesale grew 12%. EBIT grew 3% on a reported basis, with multiple points of impact from foreign exchange headwinds. Chinese New Year sales grew year-over-year with our NIKE and Jordan Year of the Dragon Express Lane collections driving excellent sell-through. Retail sales with our partners grew double digits in Q3 versus the prior year. Kids led our growth in the quarter with strong double-digit growth. In basketball, our new models launched with strong sell-through. In running, various models drove strong growth this quarter. The Jordan brand also delivered double-digit growth in women's and kids with consumer anticipation building ahead of this week's opening of Jordan World of Flight Beijing, which will be the brand's first pinnacle retail concept in China. In APLA, Q3 revenue grew 4%. NIKE Direct grew 4%, with NIKE stores up 18% and NIKE Digital declining 6%. Wholesale grew 3%, and EBIT declined 3% on a reported basis. In Central and South America, we delivered double-digit growth and improved return on sales in the first full year of our shift to a distributor model. In Mexico, we gained brand strength and momentum with strong growth in football. In Japan, running grew double digits. Across APLA, football and basketball grew double digits, fueled by Mercurial, LeBron, and the GT series. Women's holistic fitness resonated across all channels. Now let me turn to our financial outlook. Looking forward, we are driving earnings growth and offsetting softer second half revenue with strong gross margin execution, disciplined cost controls, and healthy, more productive inventory levels across the marketplace. Excluding restructuring charges, we expect to deliver on the full year earnings outlook that we communicated at the beginning of this fiscal year. Specifically, we continue to expect revenue to grow approximately 1%. We now expect Q4 revenue to be up slightly, reflecting some shipment timing benefits in Q3 and lower digital growth due to franchise lifecycle management. Q4 also has a negative impact on reported revenue from a stronger U.S. dollar. Moving down the P&L, I'll note that our guidance includes restructuring charges of approximately $450 million in our second half, with $403 million incurred in the third quarter. This primarily impacts SG&A with approximately 15 basis points of impact on full-year gross margins. We expect Q4 gross margins to expand approximately 160 to 180 basis points. This guidance reflects benefits from strategic price increases, lower ocean freight rates, lower product input costs, and improved supply chain efficiency. Our outlook is now partially offset by higher markdowns and reduced benefits from channel mix due to franchise lifecycle management and worsening foreign exchange headwinds. For the full year, this translates into gross margins expanding approximately 120 basis points, including approximately 60 basis points of impact from foreign exchange headwinds. We now expect Q4 SG&A to be down slightly versus the prior year, including restructuring charges, reflecting improvement versus our prior guidance. For the full year, SG&A is expected to grow low single digits, including restructuring charges, also reflecting improvement versus our prior guidance. Excluding the impact of restructuring charges, we expect full year SG&A to be roughly flat. Our guidance for other income and expense and our effective tax rate remains unchanged. Additionally, given the strategic actions we discussed earlier, I want to share some early thoughts on planning for our next fiscal year. First, we expect revenue and earnings to grow versus the prior year, with operating margins expanding, excluding the impact of restructuring charges in fiscal '24. However, we are prudently planning for revenue in the first half of fiscal '25 to be down low single digits. This reflects near-term headwinds from lifecycle management of our key product franchises, offsetting the scaling of new products as we shift our product portfolio toward newness and innovation. This continues to reflect the subdued macro outlook around the world. Most importantly, we are focused on amplifying brand strength and consumer impact, laying the foundation for sustainable long-term growth. Looking ahead, we are confident in our product pipeline for fiscal '25 and the momentum we will build throughout the year, creating brand impact and deep consumer connection through sport. With that, let's open up the call for questions.

Operator, Operator

Our first question will come from Jay Sole with UBS. Please go ahead.

Jay Sole, Analyst

Great. Thank you so much. Maybe just to start, Matt, I want to ask you about the fiscal '25 commentary you made. You're talking about low single-digit growth for the first half year. You said operating margin, I think you said grow, actually restructuring charges and EPS growth. Can you give a little bit more detail around what you expect for operating margin next year, like what kind of growth you expect? Will growth on the reported numbers from this year, or will it be sort of below that? And then, I guess just a bigger picture, if we could take a step back. Just talk about the operating model. The company switched to a men's-women's-kids construct a couple of years ago, away from the category offense. How has that changed? How have you perceived that change? Has it been what you expected it to be? Does NIKE plan to make any changes to the operating model? Thank you so much.

John Donahoe, President and CEO

Matt, why don't I take the second part of that question, and then you take the first. So Jay, as I mentioned, we are making, and started nine months ago, important adjustments in our offense. That started with putting the consumer and sport squarely back into our offense. So that allows a sharpness across men's, women's, kids, and Jordan around sport. There’s sharpness around running, end-to-end, around fitness, around basketball, around football, and around lifestyle. We brought the best of the category offense right back in, along with the gender umbrella. That resulted in consumer-led, sport-focused teams that are back on our front foot, as we talked about, building a strong innovation pipeline. And in classic NIKE form, it's not just one or two products. It's building a three-year pipeline so that we can bring innovation season after season in each sport. We were just this week, we had 300 or 400 of our top leaders here for spring '25. That addition of the next round of innovation, I can tell you, our teams are excited. And it's not just one season. It's a full three-year pipeline. We're combining that with elevating our brand and bigger, bolder stories, grounded in sport and athletes that cut through and connect with impact. Again, you'll see that in the Olympics. You saw that with Caitlin Clark and Sabrina, with recent examples of it, getting back to what we do best, and we're doing that with brand. Then in the marketplace, while we have a sport focus, we're combining the best of our direct offense with a reinvestment with our wholesale partners, to bring a more holistic offense that grows the market and gets in the path of our consumer. That’s what's driving our growth. We've made the necessary adjustments to bring the best of what's worked in our proven formula so that we move forward.

Matthew Friend, CFO

And Jay, the way I think about fiscal '25 is that we are taking our product portfolio through a period of transition. We talked about this last quarter regarding our focus on scaling newness and innovation and the green shoots that we were seeing in terms of the way consumers are responding to the newness we’re bringing to market. This quarter only gave us more confidence that our focus will continue to create greater impact and distinction from a brand point of view. This quarter, we saw a majority of our top 20 growing footwear products be new products created this year. Those products are on a trajectory to deliver multi-billion dollar annual run rates of incremental revenue. That's where our focus is. At the same time, we're managing some of our largest lifestyle franchises and performance franchises back to make space for the newness. That's going to have a corresponding offsetting impact. Given we've been missing some new product at scale in our portfolio over the last several seasons, these actions result in a decline of low single-digits, as we're thinking about the first half of the year. However, we believe we'll inflect in the second half and grow next year on the top line. When we step back and think about newness and innovation, not just to drive the top line, but to create consumer impacts at scale, that's foundational for driving long-term growth.

Operator, Operator

Our next question will come from the line of Matt Boss with JPMorgan. Please go ahead.

Matt Boss, Analyst

Great. Thanks. So John, could you elaborate on the new multi-year innovation cycle and how best to think about the timeline for transition to the next chapter of growth that you cited? And maybe Matt staying on that topic, high level, any material changes to consider with the top line growth profile, or your high teens margin target, as we think about this next chapter of growth?

John Donahoe, President and CEO

Yes, Matt. Well, I can't tell you the change in the feeling of our innovation design and product creation teams, getting back on their front foot. It's not about a product or an item here and there; it's about building a robust pipeline of innovation. I mentioned in my remarks that Air has been the single largest innovation platform in NIKE's history. We continue to innovate with Air, both in performance—which you'll see in the Olympics—and you’ll see it impact almost every sports dimension. You'll see that in a couple of weeks with measurable performance benefits. Again, classic NIKE innovation. Also in lifestyle. Take Air Max DN, for example. We're launching Air Max DN next week, but we've already developed next year's Air Max and the following year, further innovations in Air. It's not just one year; it's three years in the pipeline that we're working on improving as we bring it with power to consumers. Beyond that, I was in the running room yesterday with Matt, and the three-year pipeline of innovation is clear across Vomero, Structure, and Peg. We'll have Peg 41 launch in June, Peg Premium, as well as other members of the Peg family. All coming in the second half of the year. We’re clear about what's coming in '25 and '26 across Peg, Vomero, and Structure. Again, it's pipeline. The same applies to women's products. Our team has lined up not just what's coming in the short term, but what's coming season after season. This is what allows NIKE to drive innovation at scale and with consistency.

Matthew Friend, CFO

I will hit on your question about the timeline of transition. I'll reiterate that we believe it will occur in the second half of fiscal '25. You'll continue to hear us talking about scaling newness and innovation from this point forward. The products already out in the market we expect to continue to scale. John referenced the DN, the Peg 41, and we have other things that are coming in the first half of this fiscal year. We’re excited about that, offset by how we're managing some of our franchises. Regarding material changes to the long-term growth profile, one point here is that while our strategy has been consumer-led, over the past year, we’ve focused more on achieving marketplace targets than serving consumer demand where they shop. There’s been more focus on achieving the 40% digital metric or the 60% direct metric when that was always a consumer-focused strategy. The consumer still shops in multi-brand retail. We need to elevate our brand and positioning to serve the consumer and have the most impactful connection for the new innovations we're bringing to market. As we look at industry growth potential, we continue to see strong consumer interest in sport and an increase in people participating in fitness and a healthy lifestyle. The natural consumer trends will drive growth in our sector, and we expect to grow and take market share as we have before. Regarding our long-term margin target, I think this quarter has shown us how we can execute to capture transitory cost headwinds and expand gross margins while managing costs effectively.

Operator, Operator

Our next question will come from the line of Brooke Roach with Goldman Sachs. Please go ahead.

Brooke Roach, Analyst

Good afternoon. Thank you for taking our question. I was hoping to get your updated thoughts on the pricing power of the NIKE brand and the markdown opportunities you see as you build into this new multi-year innovation cycle. Are there any near-term or medium-term offsets that we should contemplate as you work through franchise management and the current macro? And how are you thinking about the most important drivers of operating margin expansion into next fiscal year? Thank you.

John Donahoe, President and CEO

Let me start with pricing power. One of the biggest benefits of a strong brand, an innovative brand that continues to bring freshness and newness to the consumer, is pricing power. Over the last couple of years, given our brand strength, we've implemented strategic pricing to offset some of the headwinds. As we look forward, we believe that more newness and freshness, products connected to stories relevant to consumers should give us the ability to continue to expand our profitability. The point I was making about Matt's question is that when the brand is strong, the biggest driver of growth and margin expansion is strong consumer demand for the products we have and high levels of full-price realization. That is ultimately fundamental as we proceed. In the near term, one headwind we’re facing is that our digital business carries a higher mix of the biggest franchises that consumers love. As we manage the supply of our larger franchises, we expect some near-term channel mix headwind transitioning our product portfolio. We view this as a near-term factor, as ultimately for NIKE to grow at the rates we aspire to, we have to grow units across the marketplace, and that includes growing units in NIKE Direct, through digital, in our stores, and with our partners. This is where our focus lies, segmented through sport, our fields of play, in the way we’ve always segmented the marketplace. We're working to serve the consumer where they shop. Regarding operating profitability long-term, we believe we can expand gross margins by efficiently managing our operating model and driving value out of initiatives that lower our input costs. We're beginning to see benefits in the back half of this year while continuing to drive supply chain efficiency. Managing SG&A involves shifting more resources to consumer-facing activities, focused on building an operating model with greater speed and productivity as we grow. We believe this will also be a source of long-term margin expansion for the company.

Operator, Operator

Our next question will come from the line of Michael Binetti with Evercore ISI. Please go ahead.

Michael Binetti, Analyst

Hi guys, thanks for all the detail and diagnosis about a lot of the moving parts in the business here today. Very helpful. I guess as we look at the second quarter in a row, I guess wholesale in China has grown a lot faster than DTC. Obviously, that's a very important market for you, with a lot of important things for us to think about. Can you help us color the different trends in that market? And then, as we think about how you'll manage these franchises into next year, we've also heard some good growth rates in some parts of the wholesale channel, for the first half of your fiscal year. So, I'm assuming we'll see more of that franchise management on the DTC side. And if so, considering that's an important channel for the rest of the P&L, I'm assuming we can orient ourselves around gross margin pressure at the start of next year as you work your way through that before we see the influence of returning to growth down the P&L?

John Donahoe, President and CEO

Yes, Matt, why don't I take the first part of that while you take the second. So, Michael, on China, Angela Dong and her team and all of our top partners were here for the last week. We have 6,000 model brand doors, and they were here for innovation. A couple of things are clear: sport is strong in China, and NIKE is strong in China. Our growth in Q3 was 6%, which was in line with our plan. We’re gaining share, both against global brands and local brands. NIKE's brand is strong, and it's back. As for channel mix in your specific question, part of what's driving that is that consumers are back on the street. I would say that the physical retail channel in China is stronger than digital. Within digital, Tmall, which was historically the biggest digital driver, is experiencing less growth. We're still the number one sports brand on Tmall. Social commerce, Douyin, is growing, and we’re just getting on Douyin. You'll see us expanding our growth into social commerce, which is the growing digital channel in China. Matt and I had a chance to meet with our partners from China, and they came away excited about the innovation pipeline I’ve been discussing. It was their first time back on our campus in four years since COVID. We're optimistic about the future in China, and we will grow across multi-channels.

Matthew Friend, CFO

Yes. To John's point, not only do we have 6,000 stores, but China is a monobrand market. Whether it's owned or partnered, it's a monobrand market, allowing us to have the best expression in front of consumers, directing the assortment. As we bring newness, innovation, and new stories, we partner effectively. I would also note that the penetration of NIKE Direct in China is lower than in other geographies. Regarding franchise management, yes, it will be more in NIKE Direct, primarily due to the high levels of promotional activity happening across digital in all our geographies. While we have supplied our largest franchises to our wholesale partners, we're seeing very strong weekly sell-through on these franchises, high levels above our targets for full price realization. Our franchises are healthy; we could sell more of these products if we wanted. However, we don’t believe that would be beneficial from a brand point of view. We manage these franchises for long-term health while focusing on scaling the newness and creating consumer space to tell stories about products. This will influence the near-term transition mentioned earlier. On the margin question, we plan to grow revenue and earnings next year. We expect to drive operating margin expansion excluding restructuring charges. This will come from gross margin expansion first and maintaining discipline in SG&A to drive productive growth.

Operator, Operator

Our next question will come from the line of Alex Straton with Morgan Stanley. Please go ahead.

Alex Straton, Analyst

Perfect. Thanks for taking the question. Just a couple from me. On the front half '25 revenue guidance down those single-digits, can you give us any color on how you're thinking about it by geography or channel? And then, just bigger picture on this kind of wholesale reentering, are you having any trouble kind of rebuilding the muscle there, facing any difficulty as you reenter? Has NIKE's criteria changed at all in terms of how you think about the right partners or distribution going forward? Thanks a lot.

Matthew Friend, CFO

Okay, John, why don't I take the first part, and then you can dive in? So, Alex, the only thing I’d say is that we are not assuming that economic conditions in the international markets improve; we assume a status quo relative to where we are today. In the next quarter, I'll provide more insights into not only the first half but our full-year growth over fiscal '25. Regarding wholesale, the biggest takeaway is that we don't like how our brand is showing up in wholesale. We own that. We need to focus on elevating the consumer experience as they interact with our brand. If you segment our marketplace by dimension and where we sell our units, our wholesale partners represent three-quarters of the market from a unit perspective. It's critical to elevate and position our brand to help consumers connect with our products. We're focusing on the DN, and you will feel the DN launch across 4,000 doors. We will scale that innovation across seasons through product journeys, telling different stories with partners. We're excited about the impact and know it’s essential for us to be successful. Investments will focus on seasonal marketing campaigns, elevating product presentation, and investing in our safe product assortment.

John Donahoe, President and CEO

I would add to what Matt just said. Our partners want us; they need NIKE to help grow the market. They want newness and NIKE freshness. They want us to lean in with them, and that's exactly what we're doing. The reception has been very strong and positive. We'll capitalize on that to collectively grow the market in service of the consumer.

Operator, Operator

Our final question will come from the line of Bob Drbul with Guggenheim Securities. Please go ahead.

Bob Drbul, Analyst

Hi. Good afternoon. Just two quick questions from me. The first one is in the running area. When you talk about wholesale, do you talk about any progress that you're seeing with the RSG as partners? And then, the second question is, Matt, you mentioned the opportunity or the ability to see a catalyst in sales from the Olympics. Can you just talk about your opportunity to capitalize on some of those products and your expectation from that? Thanks.

John Donahoe, President and CEO

Bob, as I mentioned earlier, we've had a chance to be with Heidi and her teams looking at the running pipeline. There are already some early green shoots. The Vomero 17 and Structure 25 out in the market today are both growing double digits to very strong reception. We're investing in our ground game with more focus on running than before. This includes being where runners are, such as at marathons and local races. We had a strong presence at the LA Marathon and activations with positive response. In fact, we had a shoe exchange effort that was very successful, as many switched to NIKE. We'll continue to do that. In the RSG channel, as you mentioned, we've increased our focus and penetration, including doubling our EKINs to provide expertise to our partners. With a strong portfolio and presence where runners are, plus marketplace distribution, we feel positive about the momentum in everyday running.

Matthew Friend, CFO

Another indicator of green shoots is that our bookings for fall '24, which is the fall season coming up in running footwear, delivered strong growth. As John noted, this spans our $100-plus products and entering the market with a new line of core running footwear. It's another sign of momentum in running, and we’ll continue to drive that. I believe the Olympics will be a catalyst for this, supported by the Air for Athletes campaign showcased through these games, alongside products that you've referenced. You will see these products on the track, streets for the marathon, and on the basketball court. We're excited about the innovation and leveraging the Air platform to ignite momentum going forward, leading to the balance of '25 and into '26, especially with upcoming Air iterations. For us, it represents a tremendous opportunity to capitalize and reposition NIKE with the athlete at sport and drive growth for us.

Operator, Operator

And that does conclude our conference for today. We thank you all for joining. You may now disconnect your lines.