Coming off a quarter marked by inventory excesses and widespread promotions, Nike will likely report a hit to gross margin and profits when it reveals second-quarter earnings on Tuesday — as the company continues to discount portions of its merchandise such as apparel, analysts said.
Nike ended Q1 with inventory up 44% over last year. The company also reported a 22% decrease in net income of $1.5 billion due to elevated freight and logistics costs, as well as higher markdowns in the Nike Direct business.
Given the expected inventory clearing headwinds, analysts were cautious about the stock, noting that Nike’s short-term performance could likely take a hit.
In a note to investors, Williams Trading analyst Sam Poser said to “remain on the sidelines due to ongoing lack of visibility” for fiscal year 2023. Weak sales in Nike’s basketball and the Air Max division and a highly competitive promotional environment will also impact results this quarter as well, Poser noted, adding that management will likely have a clearer view on the marketplace after the third quarter as inventory clears and sales in China recover.
Despite the expected headwinds, analysts don’t expect a completely devastating quarter for Nike. According to a note from Morgan Stanley analysts, a hit to EPS or GM in Q2 wouldn’t be crushing, especially if it means Nike is able to move through its inventory excesses and come out lighter than last quarter. This would position the company well for the future.
“We expect Nike likely takes advantage of potentially stronger-than-expected North American sportswear demand to clear through excess apparel inventories,” the Morgan Stanley analysts wrote. “Even if a 2Q EPS beat fails to materialize as a result of deeper discounting-related GM pressure, we do not necessarily view that as a negative for the stock.”
Nike will also be entering the holiday season with a few tailwinds. After Adidas cut ties with Kanye “Ye” West and the Yeezy brand in late October, the absence of Yeezy products in the marketplace this year will leave its former market share up for grabs, with Nike emerging as the most likely brand to win it over.
Yeezy sales have typically peaked in December. As Wedbush analyst Tom Nikic pointed out in a Monday note, there were 10 Yeezy launches in December of last year, out of about 65 total launches over the year, “demonstrating how concentrated the brand had become to December.”
Throughout December, Nikic expects to see 26 high heat launches from Nike. The lack of competition from the Yeezy brand will likely prompt stronger demand for these releases, as well as lower-tiered Nike products as well.