Nike stock turns lower, as enduring costs, markdowns weigh on margins

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Athletic-gear giant Nike Inc. on Tuesday said it was benefiting from the star power of both younger and older NBA athletes and enthusiasm in its running-shoe segment. But shares fell after hours, after executives said gross margins for its full year would land at the low end of expectations.

The weaker margin forecast comes as Nike
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+3.64%

and others still try to cut prices on clothing to clear piles of it that built up in their stockrooms and warehouses, after rising prices for basics last year made shoppers less able to drop money on new clothes or a new pair of sneakers. The markdowns that resulted can lure customers, but threaten the company’s profit growth.

Nike executives on Tuesday said they expected fiscal 2023 margins to fall by around 250 basis points, at the low end of their forecasts, amid efforts to even out inventories by the end of its fiscal year.

However, as a result of third-quarter results reported earlier in the day that topped expectations, management raised their full-year sales forecast to a percentage gain in the “high single digits,” up from a prior outlook for “mid-single-digit” gain.

Shares fell 1.9% after hours, after rising earlier in the extended session.

The maker of sneakers and sports apparel reported third-quarter net income of $1.24 billion, or 79 cents a share, compared with $1.4 billion, or 87 cents a share, in the same quarter a year ago. Revenue increased 14% to $12.39 billion, compared with $10.87 billion in the prior-year quarter.

Analysts polled by FactSet expected earnings per share of 56 cents, on sales of $11.48 billion. Nike’s last earnings report, in December, also topped estimates.

Nike’s gross margin fell 330 basis points to 43.4%. Inventories stood at $8.9 billion, up 16%, amid “higher product input costs and elevated freight costs.”

Nike executives on Tuesday said that a “surgical approach” to pricing allowed them to actually raise prices by mid-single digits, on average, overall this year so far. Chief Financial Officer Matt Friend said that during the third quarter, selling gear to consumers directly — online or via Nike’s own retail stores — along with its pricing strategy helped offset “the short-term cost of promotions to liquidate excess inventory.”

The company also said the amount of clothing it was holding had fallen. Management said the company was buying less for the spring and summer seasons, putting it in a better position for “healthy” inventories.

But abroad, sales fell in China. And as consumers stay cautious, some analysts have said that a broader discounting push could endure for longer than once expected. Nike executives during the fall said that clothing — the main thing the company has been trying to offload, after supply-chain contractions left it with too much off-season selection — could stay cheap for months.

However, Jefferies analyst Randal Konik, in a research note last week, suggested that rival Adidas AG’s struggles could become Nike’s gains, as Adidas
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+0.41%

finds itself stuck with a bunch of Kanye West-branded shoes. West’s antisemitic remarks last year led to the termination of a collaboration between the two.

“The athletic footwear space is highly fragmented, and we believe that NKE will likely continue to benefit as Adidas regroups,” he said in a note.

Konik said that Jefferies’ own data suggested that holiday-season interest in sneakers was still strong, despite inflation. And he said trends in China were getting better, as that nation’s economy reopens.

Foot Locker Inc.
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+7.07%

on Monday said that it had “revitalized” its relationship with Nike — to focus on data-sharing and sneaker culture — after Nike over recent years began relying less on outside retailers to drive sales. And after weaker sales of Nike products in the past, Foot Locker Chief Executive Mary Dillon said the new arrangement with Nike would return both to growth in 2024.

Shares of Nike are down 4.4% over the past 12 months. By comparison, the S&P 500 Index
SPX,
+1.30%

is down 10.4% over that period.

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