Nike skids after warning on squeeze from higher discounts, stronger dollar

NIKE cautioned on Thursday (Sep 29) that gross margins would remain under pressure through the year as the world’s largest sportswear maker joined peers in warning of a blow from ramped up discounts and a rapidly strengthening dollar.

The company’s shares, already one of the worst performing Dow components for the year, fell 10 per cent in extended trading.

“We’re going to see substantial markdowns this year through the holiday season. But going into the calendar year 2023, I believe inventories will be much lower after the holiday sell through and then the post holiday sales,” Morningstar analyst David Swartz said.

Overall inventories surged 44 per cent to US$9.7 billion at the end of the first quarter at Nike, while it soared 65 per cent in its biggest market of North America.

Demand for Nike’s brands including Jordan and Converse has slowed, analysts have said, as sneakerheads lose enthusiasm for discretionary products due to the cost-of-living crisis.

Rival Under Armour, big-box retailer Target and a host of other companies have also turned to heavy discounting after inventories ballooned in recent months.

Nike expects full-year gross margins to decline between 200 and 250 basis points, anticipating the greatest fall in the second quarter.

Meanwhile, the company, like other US businesses with sprawling international operations, has grappled with a stronger dollar.

“Headwinds from foreign exchange shifted significantly in the last 90 days as the trend of US dollar strengthening has accelerated,” chief financial officer Matthew Friend said in an earnings call.

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The company, which makes over half its revenue from outside North America, doubled its estimates for a hit to annual revenue from the soaring dollar to US$4 billion.

The strengthening greenback also helped fuel Nike’s 220 basis points decline in first-quarter gross margins to 44.3 per cent. Analysts had expected a gross margin of 45.4 per cent, according to Ibes data from Refinitiv.

Nike’s net income fell 20 per cent to US$1.47 billion, or 93 US cents per share, in the 3 months ended Aug 31. REUTERS