Nike profitability lags even as sales outpace expectations

NIKE reported quarterly sales that beat Wall Street’s expectations as the sportswear brand worked down its excess inventory, but profitability missed estimates amid markdowns and high freight and material costs.  

Global revenue rose 14 per cent to US$12.4 billion in the quarter that ended Feb 28. That was above analysts’ average estimate of US$11.5 billion. Gross margin was 43.3 per cent, below the 43.7 per cent estimate.

Chief executive officer John Donahoe and his team have made progress in dealing with the merchandise glut that has forced the company to discount merchandise, hurting profit margins. Inventories were up 16 per cent from the year prior after the company reported a 43 per cent jump in the previous quarter.

Even so, the company cited “higher markdowns to liquidate inventory” as hurting gross margin, as well as higher costs for its materials and freight. Nike sees gross margin down 250 basis points in its current fiscal year, versus its prior outlook for a decline in a range of 200 to 250 basis points.

In a call with investors, chief financial officer Matt Friend said the company expects pressures on profitability to ease in the next fiscal year, which begins around June.

The company is also “closely monitoring the building pressure on consumer confidence”, Friend said. Nike sees revenue growing this fiscal year in by a high-single-digit percentage, up from its prior guidance of mid-single-digit expansion.

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Nike shares slipped about 3 per cent at 5.50 pm in after-market trading, erasing an earlier gain. The stock had been up about 7 per cent this year through Tuesday’s (Mar 21) close.

Weakness in China persisted, though Nike’s troubles there may alleviate as the nation’s reopening reaches full swing. Sales rose across all regions except for greater China, where revenue fell almost 8 per cent. BLOOMBERG