Nike falls amid eroding profitability and inventory builds

Nike Inc.’s stock losses accelerated in late trade on Thursday after inventories surged and the sportswear giant was forced to enforce margin-smashing rebates that hurt profitability.

Higher freight costs, discounts and foreign exchange effects weighed on profitability in the fiscal first quarter ended August 31, with gross margin of 44.3 percent, below Wall Street expectations. North American inventories surged 65 percent, and the footwear giant also lowered its full-year outlook.

Shares fell 9.4 percent Thursday in after-market trading in New York. The stock is down 43 percent this year by market close. The news weighed on shares of rivals in Europe on Friday, with shares in Adidas AG falling as much as 3.2 percent and Puma SE down as much as 4 percent.

“We are taking decisive action to reduce excess inventory,” Chief Financial Officer Matt Friend said when speaking to analysts. He said this is expected to have “a temporary impact on gross margins this fiscal year,” but added that “these costs will be far outweighed by the benefit of freeing up marketplace capacity.”

Nike is the latest company to grapple with an increasingly complex economic panorama that began with supply chain delays and port congestion. As companies were able to get stocks on shelves, demand shifted as stubbornly high inflation eroded some consumers’ purchasing power. In Nike’s case, supply difficulties caused a spike in off-season merchandise. In addition, the inexorable rise of the dollar has affected the results of other countries.

The company now expects gross margin to fall by 200 to 250 basis points this fiscal year — versus a previous forecast that the profitability indicator would be flat or fall by as much as 50 basis points. Margin erosion is expected to be particularly severe in the company’s second quarter. While currency-neutral sales growth for the full year is still expected to be in the low double-digits, real growth is now in the low to mid-single digits.

Nike, in particular, struggled to solve logistics problems arising from port congestion and shipping congestion. Total inventory rose 44 percent year-over-year in the most recent quarter. The amount of goods in transit also rose sharply, although executives noted that shipping times are improving.

China, which has seen its Covid-zero policy weighing on the economy, is another headache. Nike said sales in the Greater China region fell 16 percent in the quarter.

Despite volatile demand, executives have said they still see the country as a long-term growth market and are committed to continuing to pump investment into the region.

Chief Executive Officer John Donahoe said Chinese consumers are emerging from the pandemic restrictions with an appetite to spend and the company expects results to improve. He added that demand in North America is also resilient. First-quarter sales in Nike’s home region beat analyst estimates.

Global currency-neutral sales increased 10% during the period. Total sales came in at $12.7 billion, ahead of analysts’ median estimate of $12.3 billion, but those sales were less profitable due to markdowns. Earnings per share missed expectations. Nike falls amid eroding profitability and inventory builds

Fry Electronics Team

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