Nike Q1 - Inventory Problem

Nike's quarterly results are out of sync with the rest of the market; they don't come out in the usual earnings season. Last night they released their latest set of numbers, beating Wall Street's profit and revenue estimates. Unfortunately, the share price is down in after-hours trade due to weak guidance for the next few months. China's Covid lockdowns and supply-chain snafus continue to plague the company.

The strong Dollar significantly impacted revenue given that Nike has more than half their sales outside of the US. Over the next year, management estimates that the firmer Dollar will cost them $4 billion in sales. In the previous quarter, Nike grew revenues by 4%, which would have been 10% at constant currencies.

Another notable point from the results is a 44% increase in inventories. Due to supply-chain issues, the amount of stock manufactured but still waiting to go to customers has swelled. Retailers have apparently placed their orders early for the upcoming season, which makes the net position a bit worse. As it stands, Nike is sitting with stock from three seasons - last, current and upcoming. They plan to sell products at a discount to clear them all out, which will hurt profits in coming quarters.

We have probably reached a point of "peak pessimism" for this company. Their current headwinds will take a few quarters to work their way out of the system. Most importantly though, Nike is still enjoying strong sales growth, reflecting the strength of their brand. We will hold this one.