Why Nike Stock Dropped This Week

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What happened

Nike (NKE -1.48%) shareholders lost ground in a falling market this week. Their stock fell 10% through Thursday, compared to a 3.2% drop in the S&P500according to data provided by S&P Global Market Intelligence. The decline has pushed the footwear and apparel giant deeper into negative territory so far in 2022, down 38% from the market’s 20% decline.

It was prompted by an earnings report that worried investors about a persistent slowdown in growth ahead.

So what

Nike said Monday that sales for the period ending in late May, its fourth fiscal quarter, rose just 3% after adjusting for changes in exchange rates. This result essentially met Wall Street expectations and reflected solid demand across most of the portfolio. Neither has Nike’s profitability suffered much from supply chain shocks and rising costs. Gross profit margin fell less than 1 percentage point, in fact.

But investors have instead chosen to focus on a few potential issues ahead. First, Nike forecast a further decline in its profit margin in its first fiscal quarter. Second, the chain revealed a 24% increase in inventory, putting it in a risky position if consumer demand weakens significantly.

Now what

Management does not anticipate such a slowdown at this time. On the contrary, CEO John Donahoe and his team confirmed their forecast for fiscal 2023 which calls for sales to increase at a double-digit rate as the Chinese market recovers from the blockages related to COVID-19 and consumers continue to spend on high-end clothing products in the United States. and European.

It is likely that Nike will reduce its high inventory over the next few months without having to resort to the type of discounts or write-offs that other retailers, like Targethave announced.

But investors have decided the added risk is enough to dent Nike’s valuation for now, as they await more signs that growth isn’t slowing in the new fiscal year.

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