Nike stock falls 10% as execs predict cheaper apparel for at least the rest of the year

Shares of Nike Inc. fell. up 10% after hours Thursday, after the athletic giant’s executives said price-cutting efforts to flush out-of-season clothing from North American warehouses would hurt gross margins for the rest of its fiscal year and warned of a potential big hit from the stronger dollar.

Management also said they expected their competitors to continue cutting prices through at least the end of the calendar year, as they try to clear their own stockpiles. But Nike executives said inventory levels in North America were likely to “peak” in the first quarter, which ended Aug. 31, and were expected to level off — with newer, seasonally aligned in-demand product — in the coming months as he prepares for the holiday rush.

“We’re taking decisive action to clear excess inventory, targeting specific pockets of late-season products, mostly apparel,” Chief Financial Officer Matthew Friend said on Nike’s earnings call.

He added that he expected the moves to have a “temporary impact” on gross margins for the year.

The lopsided inventory levels, which grew 44% during Nike’s third quarter, came after a factory closure last year in Asia, where most of its footwear is made, which led to late product deliveries, Friend said.

But those late deliveries are now being mixed with holiday season deliveries that are coming earlier than planned. The earlier arrivals, executives said, were a function of an earlier order — due to the shipping delays that have characterized the past year — and then a sudden, later improvement in those shipping times.

And as the U.S. dollar strengthens, Friend said he expects full-year foreign currency to have a negative impact on sales and reported earnings before interest and taxes of $4 billion to $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 remained strong, despite rising prices. Both friend and CEO John Donahoe said 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 pounds per square inch” — showed 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 Jordan and Converse sneakers, was also solid.

For the fiscal first quarter, Nike reported net income of $1.5 billion, or 93 cents per share, compared with $1.9 billion, or $1.16 per share, in the year-earlier period. Sales came in at $12.7 billion, compared to $12.2 billion a year ago.

Analysts polled by FactSet expected earnings of 92 cents a share on sales of $12.28 billion. Nike NKE shares,
-3.41%
It was last down 9.3% after hours, but fell more than 10% at one point after the close.

Ahead of the report, analysts after Nike had weighed in on the impact of the stronger US dollar, the impact of China’s COVID lockdown, as well as the effects of greater discounts to sell shoes and other gear that sat around for too long because of backups. in the company’s supply chain. Back to school season, and competition with the likes of Adidas AG ADDYY,
-5.21%
focal points for Wall Street as well.

Gross margins fell to 44.3% from 46.5% during the quarter. Nike executives said the decline was “primarily driven by North America, which took steps to liquidate excess inventories through Nike Direct markdowns and actions in the wholesale market.”

Inventory for Nike was $9.7 billion, up 44% from the year-earlier period, due to what executives said was “continued volatility in the supply chain, 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 late-arriving seasonal items, following a factory closure in Asia last year. However, for the full year ahead, management said at the time that they were planning for “mid-unit price increases”.

Executives also said at the time that they planned to increase direct-to-consumer sales, through their own stores and online. The company has over the years tried to become less dependent on retail chains like Foot Locker Inc. FL,
-6.36%
for sales.

Nike shares have fallen 43% so far this year. In comparison, the S&P 500 index SPX,
-2.11%
a decrease of approximately 24% over that time period.

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