Nike said it will take “decisive action to clear excess inventory” in the coming months, with markdowns set to pressure near-term profit margins for the sports apparel giant.
Nike (NKE) – Get Nike Inc. Report shares fell sharply lower Friday after it cautioned that “higher markdowns” will be needed to reduce its bloated global inventory, pressuring profit margins for the world’s biggest sports apparel company.
Nike, which topped Street forecasts for its first quarter earnings by a penny, posting a bottom line of 93 cents per share on revenues of $12.7 billion, said inventories rose 44% from last year to $9.7 billion, with an unprecedented 65% surge in it key north American market.
Nike said shifting the goods will likely narrow margins by between 2% and 2.5%, with most of the pressure coming during the current quarter. A surging U.S. dollar, which hit a fresh 20-year peak against its global currency peers earlier this week, will likely clip $4 billion from its annual revenue forecast, Nike said.
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The inventory surge “reflects the combination of late delivery for the past two seasons plus early holiday orders that are now set to arrive earlier than planned and a prior year that was impacted by factory closures in Vietnam and Indonesia,” CFO Matthew Friend told investors on a conference call late Thursday.
“As a result, we are taking decisive action to clear excess inventory, focusing on specific pockets of seasonally late products, predominantly in apparel,” he added. “While we expect this to have a transitory impact on gross margins this fiscal year, we believe this cost will be far outweighed by the benefit of clearing marketplace capacity to align seasonally relevant product, storytelling and retail experiences for the consumer.”
Nike shares were marked 9.3% lower in pre-market trading to indicate an opening bell price of $86.49 each.
KeyBanc Capital Markets analyst Noah Zatzkin, who carries a sector weight rating on the stock, noted that China’s ongoing weakness — with sales falling 16.5% to $1.66 billion — also remains a challenge.
“At around 17% of Nike Brand revenue, greater China is an important driver of the business, and while we see long-term growth opportunity, we think substantial improvement in trends could remain elusive in the near term,” Zatzkin said.
“Encouragingly, Nike noted that 1Q top-line trends were ahead of plan (-16% y/y) and that it should be in a strong inventory position in the region by the end of 2Q; however, we remain cautious regarding the timeframe for a return to strong growth,” he added.
