NIKE (NKE) Is Going To “Just Do It” And Aggressively Clear Its Inventory, Weighing On Outlook
4:09 pm Friday, September 30th, 2022
In the face of inflationary headwinds and a more cost-conscious consumer, NIKE (NKE) extended its earnings winning streak, narrowly beating 1Q23 EPS estimates on healthy demand in North America. However, the company’s ninth straight quarterly EPS beat is far from the focal point this morning. Instead, NKE’s mountain of inventory, which jumped by an eye-popping 44% yr/yr, is the main storyline that’s driving the stock action. While already operating in a highly promotional environment, NKE plans to aggressively unload out-of-season product at discounted prices, deeply cutting into margins.
After initially guiding for FY23 gross margin to be flat to down 50 bps yr/yr, the company now expects gross margin to decline by 200-250 bps yr/yr. Most of the damage will take place in Q2 as NKE employs a “rip the band-aid off” approach to clearing out its inventory. Specifically, NKE is forecasting a 350-400 bps plunge in Q2 gross margin, following a 220 bps decline in Q1 to 44.3%.
A number of factors are at play regarding the inventory situation.
Entering Q1, inventory levels were already high (+23% in Q1) as late deliveries with out-of-season product piled up at shipping ports. Now, that problem is being exacerbated by earlier than expected holiday ordering patterns from retailers and improving transit times. As a result, in-transit inventory spiked by 85% in Q2.
If all of this wasn’t enough, NKE is also facing intensifying FX headwinds as the dollar strengthens. In fact, it doubled its FX headwind outlook for the year to 800 bps from 400 bps, resulting in estimated FY23 reported revenue growth of low-to-mid single digits. The bottom line is that NKE is taking hits from multiple sides, but the massive jump in inventory really caught investors by surprise. That inventory will act as an albatross during the all-important holiday shopping season, causing plenty of disappointment among investors.
