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Nike Inc. share losses accelerated in late trading Thursday after inventory surged and the sportswear giant was forced to push through margin-busting discounts that hurt profitability.
igher freight costs, markdowns and foreign-exchange effects weighed on profitability in the fiscal first quarter ended Aug. 31, with gross margin of 44.3pc coming in below Wall Street’s expectations. North American inventories surged 65pc, and the footwear giant also downgraded its outlook for the full year.
The shares fell 9.4pc in after-market trading in New York on Thursday. The stock has declined 43pc this year through the close. The news weighed on shares of rivals in Europe Friday, with Adidas AG shares dropping as much as 3.2pc and Puma SE declining as much as 4pc.
“We are taking decisive action to clear excess inventory,” Chief Financial Officer Matt Friend said on a call with analysts. He said this is expected to have “a transitory impact on gross margins this fiscal year,” but added that “this cost will be far outweighed by the benefit of clearing marketplace capacity.”
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 erodes 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.
The company 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. While full-year sales are still expected to grow in a low double-digit range when adjusting for currency, real expansion is now seen in a range of low to mid-single digits.
Nike in particular has struggled to resolve logistics issues stemming from port congestion and shipping logjams. Overall inventory rose 44pc in the most recent quarter compared to the prior year. The amount of merchandise in transit also spiked, even though executives noted that shipping times are improving.
China, which has seen its Covid Zero policy weigh on the economy, represents another headache. Nike said sales fell 16pc in its Greater China region in the quarter.
Despite volatile demand, executives have said they still see the country as a long-term growth market and have pledged to continue pumping investment into the region.
Chief Executive Officer John Donahoe said Chinese consumers are emerging from pandemic restrictions with appetite to spend and the company expects results to start improving. He added that North America demand also is robust. First-quarter sales in Nike’s home region beat analysts’ estimates.
Globally, sales rose 10pc on a currency-neutral basis in the period. Total revenue was $12.7bn, above analysts’ average estimate of $12.3bn, but those sales were less profitable amid markdowns. Earnings per share missed expectations.
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