When Nike released its first-quarter fiscal 2023 financials on September 29, the results looked solid at first glance.
The company generated revenue of $12.7 billion and earnings per share of $0.93 in the quarter ended Aug. 31, both above Wall Street analysts’ estimates. However, the stock dropped by double-digit percentages immediately after the announcement.
Investors need to pay attention to a huge problem that thislarge clothing company is currently facing, which came to light in the latest financial update.
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That’s a lot of shoes
While Nike’s sales were up 3.6% year-over-year – a pretty solid result given that revenue was up 15.6% in the year-ago quarter – which spooked investors in the earnings announcement is the fact thatstocks increased by 44%. And this balance, now at $9.7 billion, caused the stock to fall sharply.
Throughout the worst of the coronavirus pandemic, businesses have struggled to acquire enough goods due to strained supply chains in the global economy, leading to these businesses ordering as much inventory as they need. could.
But now, with the bottlenecks easing and the situation normalizing somewhat, stocks are rising more than expected.
In the case of Nike, the company decided to place its holiday orders in advance, a decision that backfired. Delays in delivery of previous orders exacerbated the problem. Inventory levels in North America, Nike’s biggest market, which accounted for 43% of revenue in the first quarter of 2023, have soared 65% year-over-year.
Good inventory management is essential for a company like Nike. It’s a balancing act. If there isn’t enough merchandise available, it could lead to lost sales and customers flocking to competing brands.
Why is too much Nike inventory important?
On the other hand, too many products tie up cash that could be used for other corporate initiatives, such as marketing expenses, investing in research and development, or returning capital to shareholders in the form of dividends or share buybacks.
And then there’s the challenge of trying to get rid of all the excess trainers and apparel, forcing the company to resort to costly promotions and discounts that can impact profitability and damage the company’s image. the brand.
While NikeGross margin will certainly be negatively impacted in the current quarter, the management team believes that the inventory issues plaguing the business peaked in the last quarter and will begin to ease going forward . This is clearly a positive sign for Nike shareholders.
“We expect total inventory in North America to peak in the first quarter, and expect sequential improvement through the year as we rebalance supply and continue to meet strong demand from consumers,” Chief Financial Officer Matt Friend said on therecent earnings call.
Take a long-term approach
This inventory headwind will subside in due time. To give Nike credit, the operating environment has been extremely challenging over the past two years for all businesses, but especially for businesses that sell physical goods. And Nike has not been spared from this challenge.
Historically the company’s fastest growing region, Greater China has faced pandemic-related lockdowns that have severely hurt finances. In the last quarter, this market saw sales decline 16% year-over-year, while all other regions saw gains. This stands in contrast to the situation in the United States, where restrictions eased some time ago and consumer demand remains strong despiteinflation.
If you zoom out, however, you’ll see a company that consistently tops the list when it comes to brand recognition — not just in the apparel industry, but in general. And this sustained relevance to consumers is powerful because it increases the chances that the business will be able to weather any short-term headwinds.
Investors who can look past the current inventory problem — and who believe in Nike’s long-term prospects — can buy shares today at a hefty 50% discount to their all-time high. Seems like a pretty smart decision.
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