Nike Inc NYSE:NKE faces many challenges at the moment, not least concerns over the health of China’s retail market. But there are other concerns being voiced by analysts at the moment, such as an elevated inventory, slower sales and reduced margins due to inflation as well as high mark-ups.
Nike’s biggest market remains the US, however, and it is here that its customers have been cutting back on discretionary spending. The company is also facing more competition, and in a recent analysts call, management described the running shoe business as “a competitive battlefield.” New brands like Hoka, for example, are helping to put a dent into Nike sales.
Looking into Nike’s fiscal 2023, investors’ primary focus centred on the FY24 guidance, inventories, and how high inflation is weighing on sales. Investors are also curious about the company’s strategic decision to slightly shift back its business model to collaborating with established wholesalers like Macy’s NYSE:M and DSW NYSE:DSW (and moving further away from its direct-to-consumer approach once more).
“In recent quarters, Nike, like many other companies, has grappled with elevated inventory levels, which have become more pronounced as demand starts to wane following the post-pandemic period, as well as higher inflation and rising interest rates,” said Carolane De Palmas, an analyst with ActivTrades.
Nike stock had been probing the $115 level over the past month, but has dropped substantially since then, now trading at $109 going into the 4th of July holiday in the US. It looks likely the stock will hit $103, possibly less, in the near future. Nike stock had rolled off the $125-130 level it has been trading at in April and May as the reality of inflation and consumer spending in North America sank in with investors.
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Nike: inventory is ‘flat in value’
In Nike’s earnings conference call, executives explained that inventory was flat in value compared to 2022 at $8.5 billion, and that the company now enjoys a “healthy inventory position”. Still, there are different factors that are pressuring Nike’s sales, profits and margins, which also play an important role in its inventory.
Nike reported lower margins and profits for Q4 2023 at 43.65 (-1.4 percentage points), as high inflation lowered consumers’ purchasing power, which is cutting back on discretionary spending.
“Higher production and transportation costs also hurt Nike’s profits,” noted De Palmas. “To attract consumers and lower its inventory, the company had to offer promotions and heavily invest in marketing, which has also reduced its margins. Finally, unfavourable currency exchange rates have also weighed on margin.”
In short, Nike faces challenges with elevated inventory, slower sales, and reduced margins due to inflation, high mark-ups, and unfavourable currency exchange rates. Investors will be closely watching how Nike addresses these issues and sustains growth. Will the restored wholesale relationships with DSW and Macy’s be beneficial, or should Nike keep focusing on its direct-to-consumer approach?
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