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Nike shares drop as analysts flag rising inventory issues

Nike stock fell over 9% in Friday pre-market trading as analysts flagged rising inventories at the sports apparel maker.

On Thursday, Nike
NKE,
-3.41%

reported an “upbeat” fiscal first quarter ending Aug. 31 according to one analyst – revenue was up 4% to $12.7 billion, compared with the same period last year. Net income for the three-months dropped 22% to $1.5 billion, as opposed to last year’s $1.87 billion.

But Nike, as well as other retailers, has been facing supply chain pressures from rises in shipping costs and times to North America, stemming from factory closures in Vietnam and Indonesia last summer. Retailers began to order earlier than usual and once shipping times improved, Nike saw a swelling in inventories.

The firm also reported dwindling sales in Greater China, its third biggest market.

“We face a new degree of complexity,” Nike CFO Matthew Friend said to analysts on Thursday.

He added that Nike will “more aggressively” liquidate the several seasons’ worth of stock it has piled up.

Although Cédric Rossi from Bryan, Garnier & Co said that Nike gave a “reassuring” sales outlook over the second quarter and fiscal 2023, it was overshadowed by excess inventory and margin erosion concerns, which have had investors raising eyebrows for some months.

“Solving the dilemma between top-line growth and margin protection is more complex than ever against a context of inflation and lower consumer spending,” he said.

JP Morgan analysts rated Nike overweight due to its “brand momentum” globally providing protection from external macro-volatility, but cut its price target to $120 from $130.

“We view this, combined with continued gross margin expansion (increased full-price selling, favorable [direct-to-consumer] mix), driving multi-year mid- to high-teens sustainable earnings per share growth,” said the team led by Matthew R. Boss.

Piral Dadhania, leading the RBC Capital Markets analyst team said Nike’s recovery would be better proved outside of North America – mainly China – and reduced the company’s FY23 earnings per share expectation by 21% and price target down to $115 from $125.

“We maintain our Outperform rating on strong revenue growth and potential China recovery,” they said.

Adidas shares fall

Leading competitor Adidas’
ADS,
-4.76%

stock dropped 4% on Friday off the back of Nike’s earnings report.

The brand is also intending to improve its sales in China, after extensive lockdowns in the country are dampening demand and a change of its head of China operations.

Cedric Lecasble, analyst at Stifel, said he expects Adidas to reiterate its lowered guidance and its new CEO to help the company.

“The change in CEO – scheduled in FY23 with no more precision – will be central to the case. Strong track record in brand-building and marketing are likely to be the strongest requirements,” he said.

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