Nike Inc. (NKE, Financial) has seen better days. It has faced many setbacks recently, including delays in deliveries, higher shipment costs and factory lockdowns due to Covid-19. In response, the company has been investing more in its online presence and has restructured how it sells its products.
Although Nike shares may have done well in the recent past, this year is different. The sports apparel company is facing a steep increase in inventories and diminished operating income. Investment banks are cutting their price targets on the company as it regroups.
On the bright side, Nike has has great success with its digital sales in recent years. In particular, its digital sales skyrocketed during the pandemic as more and more people turned to online shopping. However, it has hit a snag recently due to inflation. Regardless, its digital sales platform is one of the most advanced in the industry and provides a great way for the company to reach its customers. Nike also has a strong brand and a loyal customer base.
The near to medium-term outlook for Nike is stressed, though. Inflation is not going to go away anytime soon, while the U.S. Consumer Price Index jumped 8.3% during the year through August. Although the figure cooled from the preceding two months, it is still significant. With disposable incomes falling, Nike will find it difficult to sell its products.
Nike is getting hit with the perfect storm
Nike is one of the world's most popular brands, and it has built its success on a foundation of innovation and marketing excellence. In recent years, the company has been forced to change course in the face of increased competition from online retailers. Digital sales have been a major priority for Nike, and its efforts have clearly paid off.
The company's robust e-commerce platform helped it offset some of the lost sales from its brick-and-mortar stores. Nike's strong performance during the pandemic is a testament to its to adapt to changing market conditions.
Nike has been adjusting its priorities to focus on selling directly to consumers. The move allows it to sell more products than ever, as nearly half of all sales are made through digital platforms. It also offers apps that let customers keep track of its new products and order items while also helping people stay healthy. This means there is potential for more business and online sales in the years ahead.
However, it is now working to overcome the effects of inflation and other headwinds.
In September, Nike reported that its revenue for the first quarter of fiscal 2023 were up 4% at $12.7 billion. The company's direct sales grew 8% to $5.1 billion, while digital sales recorded an impressive hike of 16% on a reported basis. Due to lockdowns, China experienced a 16% decrease in sales from the previous quarter.
Nike's earnings per share declined by 20% to 93 cents from the previous quarter. The gross margin saw a 2.2% decrease due to logistical and freight costs and markdowns in its direct sales business. The margin decrease was mainly due to the North American region, where Nike sold excessive inventory at significant discounts.
The company has $9.66 billion worth of inventory, which is a 44% increase from the previous year. Supply chain issues made for higher inventory levels for Nike, but that was partially offset by increased demand in North America and the low rates of its foreign counterparts.
Logistics have been a major issue in recent years, with the pandemic being the most notable example. This and other delays caused bottlenecks for all businesses. Besides the delayed deliveries, the freight cost over the last couple of years has skyrocketed. It seems like the bottlenecks are finally easing now, though.
A sluggish holiday season is raising alarm bells
Early warning signs indicate we will see sluggish holiday sales in the retail sector. Ocean shipping logistics managers told CNBC they are seeing significant consumer pullback currently.
They have also noticed a decrease in ocean freight orders for September and October across many products, from machinery to housing.
The recent developments in the retail industry are no surprise to those paying attention. For months, retailers have been ordering more inventory than last year to avoid the "empty shelves" phenomenon that occurred during the pandemic.
However, this has led to many retailers having excess inventory on hand. This will likely lead to even more discounting and clearance sales in the coming weeks as they try to get rid of their excess stock before it becomes obsolete. Nike will likely also suffer a similar fate.
Takeaway
Nike is a reliable stock that has done well in most circumstances. However, the recent build-up in inventory is cause for concern.
It is a red flag for investors, indicating the company may have difficulty moving its products. The build-up in inventory will eventually lead to markdowns and discounts, which will eat into Nike's profits. Under these circumstances, the stock will remain under pressure this year.
