Nike stock takes a beating as margins weaken, inventories rise and China declines – WWD

Nike Inc. was bogged down by weaker margins, a big inventory build and declines in China — shares of the active giant fell 9.2 percent after the close on Thursday.

The company’s tax income fell 22 percent in the first quarter to $1.5 billion, or 93 cents a diluted share, from $1.9 billion, or $1.16 a share, a year earlier.

Revenue for the three months ended August 31 increased 4 percent to $12.7 billion for a currency-neutral gain of 10 percent. Nike Direct revenue increased 8 percent to $5.1 billion, a currency-neutral increase of 14 percent.

Both the top and bottom line results beat analysts’ expectations, which averaged earnings per share of 92 cents on sales of $12.3 billion.

However, revenue in Greater China fell 13 percent to $1.7 billion as that country continued to struggle with COVID-19 restrictions.

Nike inventories were valued at $9.7 billion at the end of the quarter, up 44 percent year-on-year, a jump the company attributed to “increased inventory levels in transit due to continued supply chain volatility, partially offset by strong consumer demand during the quarter. ”

And gross margins fell 220 basis points to 44.3 percent of sales, raising concerns about how pro-sale the market could become as the fashion industry and consumers struggle through a slowing economy.

The results only seemed to increase investor skepticism about the company — an active powerhouse that nonetheless operates in a tricky market complicated by supply chain issues, inflation and the threat of a recession.

The decline in Nike aftermarket shares to $86.60 came on top of a 3.4 percent drop to $95.33 in regular Wall Street trading ahead of the quarterly update.

But John Donahoe, president and chief executive officer, underscored to analysts on a conference call that Nike, as the world’s largest athletic apparel and footwear company, is still setting the pace.

“Our ability to expand the world of esports and shape the future of esports itself is why I wouldn’t trade Nike’s position with anyone,” said Donahoe. “Consumers continue to rate us as their number one coolest and their number one favorite brand, and we connect directly and deeply with consumers worldwide. Regardless of the macroeconomic dynamics, regardless of the competitive landscape, the Nike brand and indeed all three of our brands, including Jordan and Converse, have built meaningful relationships with consumers across age, gender, ethnicity and more.”

It fell to Chief Financial Officer Matthew Friend to run through the financial details. He said: “During this quarter, we realized that conditions in North America were changing again. Previous orders from retailers, driven by strong consumer demand and less predictable delivery times, have led to increased inventory levels in consumer products. Then transit times began to improve rapidly, with signs that further improvement might be to come. At the same time, consumers are facing greater economic uncertainty and promotional activities across the market are accelerating. Especially in clothing. This brings us to a new level of complexity.”

Friend said the company is now “taking decisive action to clear excess inventory, with a focus on specific bags of seasonally delayed products, primarily apparel.” Nike stock takes a beating as margins weaken, inventories rise and China declines – WWD

Sarah Y. Kim

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