Nike stock drops 10% as executives plan for cheaper clothes for at least the rest of the year

Shares of Nike Inc. plunged as much as 10% after hours on Thursday after executives at the sports equipment giant said price-cutting efforts to eliminate off-season apparel from warehouses in North America North would cut gross margins for the rest of its fiscal year and warned of a potential big hit from the stronger dollar.

Management also said it expects rivals to continue cutting prices at least through the end of the calendar year as they try to eliminate their own inventory. But Nike executives said inventory levels in North America likely “peaked” in the first quarter, which ended August 31, and expect levels to even out – with new, in-demand products aligned with the seasons – in the coming months as it prepares for the holiday rush.

“We are taking decisive action to eliminate excess inventory, focusing on specific pockets of backlog seasonal products, primarily in apparel,” Chief Financial Officer Matthew Friend said on Nike’s earnings call.

He added that he expected these measures to have a “transitional impact” on gross margins for the year.

The lopsided inventory levels, which rose 44% in Nike’s third quarter, followed factory closures last year in Asia, where most of its shoes are made, leading to late deliveries of products, Friend said.

But those late deliveries are now intermingling with holiday season deliveries that are expected to arrive earlier than expected. Earlier arrivals, executives said, were a function of earlier orders — due to 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 expects the full-year negative currency impact on sales and reported 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 consumer demand was still strong, despite rising prices. Friend and CEO John Donahoe both reiterated that Nike remains the “no.” 1 fee” and “No. 1 favorite brand”.

Donahoe said shoes like the Air Max Scorpion — which offered “the most airflow ever, in terms of pounds per square inch” — reflected Nike’s commitment to innovation. The company’s Travis Scott and LeBron 20 sneakers also remained popular, executives said. Back-to-school and demand for its Jordan and Converse sneakers has also been strong.

Regarding fiscal first quarter financial data, Nike reported net income of $1.5 billion, or 93 cents per share, compared to $1.9 billion, or $1.16 per share, the last year. Sales reached $12.7 billion, compared to $12.2 billion a year ago.

Analysts polled by FactSet had expected earnings of 92 cents per share on sales of $12.28 billion. Shares of Nike NKE,
-3.41%
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 focused on the impact of the stronger US dollar, the impact of COVID lockdowns in China, as well as the effects of steeper discounts to sell shoes and other equipment that remained too long due to backups. in the company’s supply chain. Back to school and competition with Adidas AG ADDYY,
-5.21%
were also points of attention for Wall Street.

Gross margins fell to 44.3% from 46.5% in the quarter. Nike executives said the decline “was primarily due to North America taking steps to liquidate excess inventory through Nike Direct markdowns and wholesale market actions.”

Nike’s inventory was $9.7 billion, a 44% increase from the prior year period, due to what executives described as “the chain’s continued volatility.” supply, partially offset by strong consumer demand in 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 factory closures throughout the year. last in Asia. However, for the full year ahead, management said at the time that it expected “mid-single-digit price increases”.

Executives also said at the time that they planned to expand direct-to-consumer sales, through its own stores and online. Over the years, the company has tried to rely less on retail chains like Foot Locker Inc. FL,
-6.36%
for sale.

Nike shares have fallen 43% so far this year. For comparison, the S&P 500 SPX index,
-2.11%
is down about 24% during this period.

James T. Quintero