Nike could have a more serious problem than inflation and China lockdowns

Inflation and lockdowns in China are catching up with Nike, making it difficult for the sportswear giant to pull inventory off the shelves.

On Thursday afternoon, Nike reported earnings of 93 cents for the first quarter of fiscal 2023, ended August 31, 2022, just 0.01 cents better than analysts’ estimates. Additionally, revenue came in at $12.69 billion, $410 million higher than analysts’ expectations.

Management saw these results as a good start to the new fiscal year and confirmation of the company’s competitive strength.

“Our competitive advantages, including the strength of our brand, deep customer relationships and pipeline of innovative product, continue to prove our strategy is working,” said John Donahoe, President and CEO of NIKE, Inc., in a statement accompanying the release of the company’s financial results first quarter. “We anticipate that our relentless focus on better serving consumers will continue to drive growth and create value as only NIKE can.”

Markets saw things differently, sending Nike shares sharply lower during Friday’s trading session, adding to losses accumulated ahead of the earnings release. So far in 2022, Nike shares have lost nearly 50% of their value, compared to a 24% decline in the S&P 500.

Chelsea Wiater, portfolio manager at EFG New Capital, attributes the decline in Nike stock to an unexpected drop in profit margins due to excessive inventory build-up in North America.

“Due to supply chain disruptions, Nike received certain shipments of seasonal clothing later than expected, meaning they missed an opportunity to sell these goods to customers,” she told the International Business Times in an email.

Therefore, the company would have to lower prices in order to aggressively deduct goods from the shelves.

Then there’s food and energy inflation, which leaves minimal funds for other things like branded clothing.

And there are China’s lockdowns, making it difficult for Nike to do business in its second largest market.

“Nike is not the only victim of inflation and lockdown in China,” said Dr. Tenpao Lee, Professor Emeritus of Economics at Niagara University, in an email to IBT. “All global companies are suffering from the unprecedented economic conditions. In particular, the pandemic, the war in Ukraine and China’s zero-tolerance policy have had a significant and negative impact on all companies in all sectors.”

Aron Solomon, JD, chief legal analyst at Esquire Digital, a marketing agency, believes Nike’s overstock problem is more serious than just the late delivery of merchandise for the season.

“The big problem for Nike today is that they’re sitting on a lot of inventory that their customer base doesn’t want,” he told IBT. “Inventory is up 44%, but it’s not what people want – limited drops and colorways of popular items.”

Nike may lose its magic with consumers as the competition closes in.

Solomon points to a 16% annual drop in sales in China as evidence that Nike is overestimating the power of its brand as the competition catches up.

“There are other sneaker companies that work harder and are more creative (e.g. New Balance, Puma),” he adds.

dr Lee sees no quick fix to Nike’s problem. “Shipping has led to stagflation and the global economy has no quick fixes. In the end, only companies with a competitive advantage through innovative technologies will survive,” he said.

Disclosure: The author owns shares in Nike

https://www.ibtimes.com.au/nike-may-have-more-serious-problem-inflation-china-lockdowns-1839021?utm_source=Public&utm_medium=Feed&utm_campaign=Distribution Nike could have a more serious problem than inflation and China lockdowns

Fry Electronics Team

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