By Bill Peters
Shares of Nike Inc. plunged as much as 10% after hours Thursday, after the athletic-gear giant’s executives said price-cutting efforts to flush off-season clothing from warehouses in North America would dent gross margins for the rest of its fiscal year and warned of a big potential hit from the stronger dollar.
Management also said they expected their rivals to keep cutting prices through at least the end of the calendar year, as they try to clear their own stockpiles. But the Nike executives said inventory levels in North America likely “peaked” in its first quarter, which ended on Aug. 31, and expected levels to even out — with newer, seasonally-aligned, in-demand product — in the months ahead as it prepares for the holiday rush.
“We’re taking decisive action to clear excess inventory, focusing on specific pockets of seasonally late product, predominantly in apparel,” Chief Financial Officer Matthew Friend said on Nike’s earnings call.
He added that he expected the moves to have a “transitory impact” on gross margins for the year.
The lopsided inventory levels, which grew 44% during Nike’s third quarter, followed factory closures last year in Asia, where most of its footwear is made, that led to late product deliveries, Friend said.
But those late deliveries are now getting mixed in with holiday-season deliveries that are set to arrive earlier than planned. The earlier arrivals, executives said, were a function of earlier ordering — due to the shipping delays that have characterized the past year —and then a sudden, more recent improvement in those shipping times.
And as the U.S. dollar strengthens, Friend said he expected the full-year negative impact of foreign exchange on reported sales and earnings before interest and taxes to be $4 billion and $900 million, respectively.
Still, executives said inventory management in China was “ahead of plan” as it recalibrates supply and navigates COVID-19 related restrictions there. And they said that consumer demand was still strong, despite rising prices. Friend and CEO John Donahoe both repeated that Nike remained customers’ “No. 1 cool” and “No. 1 favorite” brand.
Donahoe said shoes like the Air Max Scorpion — which offered the “most air ever, in terms of pound per square inch” — reflected Nike’s commitment to innovation. The company’s Travis Scott and LeBron 20 sneakers also remained popular, executives said. The back-to-school season, and demand for its Jordan and Converse sneakers, were also solid.
As for fiscal first-quarter financials, Nike reported net income of $1.5 billion, or 93 cents a share, compared with $1.9 billion, or $1.16 a share, in the year-earlier period. Sales came in at $12.7 billion, compared with $12.2 billion a year ago.
Analysts polled by FactSet expected earnings of 92 cents a share on sales of $12.28 billion. Shares of Nike /zigman2/quotes/203439053/composite NKE +3.24% were last down 9.3% after hours, but fell more than 10% at one point after the close.
Prior to the report, analysts following Nike had zeroed in on the impact of the stronger U.S. dollar , the impact of China’s COVID lockdowns , as well as the effects from bigger discounts to sell shoes and other gear that sat around for too long due to backups in the company’s supply chain. The back-to-school season, and competition with the likes of Adidas AG /zigman2/quotes/203671926/composite ADDYY +3.07% were also points of focus for Wall Street.
Gross margins fell to 44.3% from 46.5% during the quarter. Nike executives said the decrease “was primarily driven by North America, which took measures to liquidate excess inventory through Nike Direct markdowns and wholesale marketplace actions.”
Inventory for Nike stood at $9.7 billion, a 44% increase from the year-earlier period, due to what executives described as “ongoing supply-chain volatility, partially offset by strong consumer demand during the quarter.”
Nike, in June, said it expected “higher promotional activity” in the first quarter, as it tries to sell seasonal items that arrived late, following the factory closures last year in Asia. However, for the full year ahead, management at that time said it was planning for “mid-single-digit price increases.”
Executives also said then that they were planning to expand sales that go directly to consumers, via its own stores and online. The company over the years has been trying to rely less on retail chains like Foot Locker Inc. /zigman2/quotes/204092533/composite FL +0.30% for sales.
Shares of Nike have fallen 43% so far this year. By comparison, the S&P 500 index /zigman2/quotes/210599714/realtime SPX +3.09% is down around 24% over that time.