Nike shares tumbled the most since the early days of the pandemic after a glut of unwanted merchandise eroded the sportswear giant’s profitability.
North American stocks of goods surged 65% in its financial first quarter to the end of August, and resulting markdowns caused gross margin to miss analysts' expectations. The retailer also cited higher freight costs and foreign-exchange effects in its earnings report, 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,” 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 13% at one stage in New York, the worst intraday slump since March 2020. They later pared some losses to be 10% lower. Concern about a lack of pricing power weighed on rivals, with Adidas shares dropping about 5% and Puma declining about 7%.
Nike 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.