How bad is Nike's inventory overload?
Nike is one of many companies suffering with an overload of inventory. Supply chains were very broken, making timing of wholesale purchases an impossible task. Then consumer spending began to slow… Now they’re holding the metaphorical bag into their earnings report on Tuesday. Nike is our pick for stock of the week.
Nike shares are already down by over a third this year. The charts paint a mixed picture too. The potential for confirmation bias is huge in both directions:
If you’re bearish, this is merely a bear flag, primed for continuation lower. Price has risen within the downtrend, pulled back to the 200 day moving average and outer trendline. Lower prices await.
If you’re bullish, price has broken out of the inner trendline, rallied beyond the 50 day moving average (which is now turning upwards) and primed for another move higher. Perhaps a pullback to the 50 day moving average within the channel will be the platform for a leg higher?
Tricky to pick a side purely on the price action is a tricky task. So, let’s take a look at the potential catalysts. The earnings report on Tuesday should be illuminating.
First, some context. In early October, Morgan Stanley analysts pointed out Nike’s North American inventory levels had increased drastically in the recent reporting period, mainly due to supply chain inefficiencies. A combination of later than expected deliveries of Q1 season products (caused by transit delays) and early delivery of products for the holiday season (to get ahead of transit delays) meant the company was holding way too much stock.
The analysts saw this as a risk to future earnings, mainly due to potential discounting for inventory clearance:
“Nike now plans to aggressively clear excess inventory, which will result in gross margin pressures for the remainder of the year… the company believes that only about 10% of its inventory will be subject to clearance-driving markdowns.”
So, that’s one of the big points to monitor. Has Nike been able to clear a load of inventory? If so, was discounting a big part of that?
Recently, sell-side analysts have turned more positive on Nike’s fortunes.
Barclays expects “a solid FY2Q23 from NKE across all distribution channels, delivering sales & EPS upside, driven particularly by NA and EMEA”.
Goldman is similarly positive, upgrading growth and earnings forecasts, even though China sales may disappoint:
“For 2023 specifically, we now forecast… +8-10% YoY growth in 2Q-4Q23. Our full-year 2023 SG&A forecast now calls for +8.9% growth vs. +7.8% prior. We now forecast Greater China sales to grow at an FX-Neutral rate of +18.0% in 2Q23, down from +22.0% prior as we bake in additional conservatism around COVID lockdowns in the region. Our 2Q23 EPS forecast is now $0.63 (vs. $0.51 prior).”
UBS went further, elevating Nike to a highest conviction pick for 2023:
“We believe the market doesn’t fully appreciate how Nike’s investments in product innovation, supply chain, and e-commerce are working in concert to drive unit growth and ASP (Average Selling Price) increases,”
“Athleisure is still about comfortable and casual attire, but is moving away from ‘performance’ to more ‘streetwear’ styles. Fortunately for Nike, sneakers are at the center of streetwear culture and consumers accept it as a streetwear brand.”
If the global economy slows and consumption shifts more to necessities, are continued price increases likely? Or is the risk that Nike’s products become unaffordable, too expensive for the average consumer, but not quite luxury enough to demand the full fashion premium?
Tuesday’s earnings report will offer clues to map out the path they’re on.
Not investment advice. Past performance does not guarantee or predict future performance.