Nike closed out its most recent fiscal quarter last week, reporting lower profits and sky-high inventory levels, causing a 13% loss to company shareholders last Friday. While the stock has seen some signs of recovery, share value may struggle as the company moves to offload its excess inventory.
Inventory is up 44% from the year prior.
Nike stated in an earnings release that the increase in inventory was “driven by elevated in-transit inventories from ongoing supply chain volatility, partially offset by strong consumer demand during the quarter.”
Investors were also unhappy to see that Nike’s gross margin “decreased 220 basis points.”
Nike’s Chief Financial Officer Matt Friend told investors in a conference call that Nike’s margins will continue to decrease over the next fiscal quarter, partly due to the company’s plan to discount products to move more inventory.
“We expect second-quarter gross margins to decline approximately 350 to 400 basis points versus the prior year, the largest impact across the fiscal year as we discount out-of-season product more aggressively in a largely promotional marketplace,” said Friend. “This will require higher markdowns in our own channels and through wholesale partners.”
Nike’s excess inventory came about in the broader context of COVID-era supply chain disruptions. Like other companies, it struggled to meet consumer demand before runaway inflation, so when two of its factories in Indonesia and Vietnam closed last year, the company ordered a surplus of inventory in anticipation of future seasons. Now, it holds too much.
“We [are facing] a new degree of complexity,” Friend said on the conference call.
Still, some observers do not seem especially bothered by Nike’s inventory dilemma.
Matthew Boss, an analyst with JP Morgan, commented, “We see NKE’s brand momentum across geographies as sustainable and providing insulation to macro volatility and supporting high-single-digit to low-double-digit top-line growth.”
Cedric Rossi from Bryan, Garnier & Co felt that Nike’s sales outlook was actually “reassuring” and that the additional inventory was the only concern.
“Solving the dilemma between top-line growth and margin protection is more complex than ever against a context of inflation and lower consumer spending,” Rossi stated.
