Nike’s Inventory Glut Sets Up Biggest Stock Plunge in Two Years
Kim Bhasin
Fri, September 30, 2022
OVERPRODUCTION IS THE CRISIS OF CAPITALI$M
(Bloomberg) -- Nike Inc. shares headed for their biggest drop since the early days of the pandemic after a glut of unwanted merchandise eroded the sportswear giant’s profitability.
North American inventories surged 65% in the fiscal first quarter ended Aug. 31, and resulting markdowns caused gross margin to miss Wall Street’s expectations. The retailer also cited higher freight costs and foreign-exchange effects in its earnings report, released late Thursday, and downgraded its outlook for the full year.
Nike is the latest company to grapple with an increasingly complex economic panorama that began with supply-chain delays and port congestion. By the time companies were able to get supplies to store shelves, demand shifted as stubbornly high inflation eroded some consumers’ purchasing power. In Nike’s case, shipping woes caused a surge in out-of-season merchandise. On top of this, the dollar’s relentless rise has crimped results from other countries.
Elevated inventories are “driving intense margin pressure pressure,” Wedbush Securities analyst Tom Nikic said in a research note. Nike is going to need “excess clearance activity in order to clean up the marketplace,” he said.
Wedbush was one of several banks that slashed their price targets on Nike shares in the wake of the disappointing earnings report.
The shares fell more than 11% in early New York trading as of 8:24 a.m., on pace for their worst intraday slump since March 2020. Concern about a lack of pricing power weighed on rivals in Europe Friday, with Adidas AG shares dropping about 6% and Puma SE declining about 7%.
The company now sees gross margin falling 200 to 250 basis points this fiscal year -- versus a previous forecast that the gauge of profitability would be flat or decline as much as 50 basis points. The margin erosion is expected to be particularly steep in the company’s second quarter. While full-year sales are still expected to grow in a low double-digit range when adjusting for currency, real expansion is now seen in a range of low to mid-single digits.
Nike in particular has struggled to resolve logistics issues stemming from port congestion and shipping logjams. Overall inventory rose 44% in the most recent quarter compared to the prior year. The amount of merchandise in transit also spiked, even though executives noted that shipping times are improving.
China Results
China, which has seen its Covid Zero policy weigh on the economy, represents another headache. Nike said sales fell 16% in its Greater China region in the quarter.
Despite volatile demand, executives have said they still see the country as a long-term growth market and have pledged to continue pumping investment into the region.
Chief Executive Officer John Donahoe said Chinese consumers are emerging from pandemic restrictions with an appetite to spend and the company expects results to start improving. He added that North America demand also is robust. First-quarter sales in Nike’s home region beat analysts’ estimates.
Globally, sales rose 10% on a currency-neutral basis in the period. Total revenue was $12.7 billion, above analysts’ average estimate of $12.3 billion, but those sales were less profitable amid markdowns. Earnings per share missed expectations.
Nike: 'It will be a difficult Christmas season' — but there's hope, analyst explains
Supply chains and too much inventory continue to hammer Nike, as shown in the footwear giant's latest earnings results, with the company reporting inventories up 44% year-over-year and up 65% in North America.
“It will be a difficult Christmas season and Nike and other have projected that with inflation affecting consumer spending and the ongoing weakness in China,” Morningstar Equity Analyst David Swartz told Yahoo Finance Live (video above). “But I think it’s generally improving.”
Nike saw revenues decline 16% year-over-year in Greater China, the company’s highest margin region. Nike executives believe inventory issues will be normalized by the end of its current fiscal quarter, but investors appear wary amid a sector-wide inventory pile up and increased discounting.
“We plan to compete… in a more promotional environment,” Nike CFO Matt Friend said on Thursday’s earnings call. “And given the macro uncertainty that's out there for the consumer, we're taking a more measured approach and we're tightening our inventory buys around the world based on some of the risks that could materialize in the second half.”
Nike stock (NKE) fell around 11% in pre-market trading on Friday and was down more than 42% so far in 2022 entering the last trading day of the third quarter.
Nike reported revenue of $12.69 billion for the first quarter, up 4% from last year and beating analyst estimates. The company's $0.93 adjusted earnings per share came in slightly higher than analyst expectations — but fell 22% compared to the same quarter last year.
Growing strength in the U.S. dollar also proved to be a laggard for Nike in the first quarter and could be moving forward as well. Currency changes drove down reported revenue by 16% in Europe and 12% in Asia Pacific and Latin America. After exchanges, the company reported just 2% growth in Europe while Asia Pacific and Latin America remained flat.
“Headwinds from foreign exchange have also shifted significantly in the last 90 days as the trend of U.S. dollar strengthening has accelerated,” Friend said on the earnings call.
On the bright side, Nike showed signs of growth in its direct-to-consumer business with sales up 8%.
“Nike has a very strong brand that’s why we rate it as a wide moat company,” Swartz said. “We say it has a competitive advantage because people do love Nike products and they do sell a lot of them at very good prices. Nike has to do discounting and it will continue the next couple quarters. But generally, I don’t see them having to do a huge amount of discounting.”
And despite acknowledging how the gloomy macroeconomic could impact consumer demand, the retailer didn’t waiver on its forward revenue guidance — something that analysts had feared prior to the report. Friend noted that Nike met its internal guidance for double-digit revenue growth in the first quarter and now has its sights set on “low double digit” growth in the coming quarter.
“We're coming off a strong quarter and we feel very good about our competitive position, and we have not yet seen any signs of slowdown,” Nike President and CEO John Donahoe said on the earnings call. “That said, we don't have any crystal ball around the external factors, whether it's FX, whether it's inflation, whether it's the impact of energy prices on consumer spending.”
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