Dive Brief:
- Nike warned of gross margin trouble ahead as North America inventory grew 65% in the first quarter, leading the retailer to take “decisive action,” Chief Financial Officer Matt Friend said on a call with analysts. Nike revenue still grew 4% to $12.7 billion.
- The company’s gross margin declined 220 basis points to 44.3% thanks to elevated freight costs and higher markdowns to clear out inventory, which itself was up 44% total over last year.
- After tying its loyalty program together with Dick’s Sporting Goods in November, Nike is expanding that strategy to more wholesale partners. The retailer extended its connected membership program to Zalando and JD Sports, CEO John Donahoe said on a call with analysts.
Dive Insight:
Inventory was a challenge for Nike in the quarter as some apparel arrived late and other apparel arrived early. That is driving markdowns as the retailer tries to clear out the excess, and is hitting gross margin hard. Wedbush analyst Tom Nikic noted that Nike’s gross margin decline was double the projection.
“We effectively have a few seasons landing in the marketplace at the same time,” Friend said of Nike’s inventory position. “Because we have a portion of that inventory being seasonally out of relevance, we've decided to take that inventory and more aggressively liquidate it so that we can put the newest and best inventory in front of the consumer in the right locations.”
Nike’s net income also took a hit, falling 22% to $1.5 billion, but executives said they believe trimming inventory now will set the retailer up well later. Telsey Advisory Group analysts led by Cristina Fernández agreed with that take, saying in emailed comments Friday that they were “encouraged by healthy demand,” as well as Nike’s strong product pipeline and other factors.
“All in, the [first quarter] report and revised [fiscal year] outlook were incrementally negative, but we believe Nike is taking the right actions to realign inventory levels and emerge in a stronger position,” the analysts wrote.
Inventory problems aside, global foot traffic at Nike stores is up, which Donahoe attributed to the company’s DTC approach led by several different store concepts. The company opened another Nike Rise store in July, in London, and direct sales in the quarter were up 8% to $5.1 billion. Nike once again touted its new Forward material, announced earlier this month, with Donahoe saying shoppers have “responded” to it since launch.
China is still an issue for the retailer, with revenue down 16%, but Donahoe noted that Chinese consumers are emerging from COVID lockdowns with a “hunger for innovation.”
All-in-all, Nike’s results were “worse than we expected,” Wedbush’s Nikic said. “That said, we do have confidence in [Nike]'s ability to navigate choppy waters and emerge more rapidly from the current disruption than most other brands we cover. Our hope would be that numbers are now properly re-set.”
