Nike (NKE 0.34%) is scheduled to report its fiscal third-quarter 2022 earnings on March 21 after the market closes. The athletic apparel and equipment maker is grappling with widespread supply chain disruptions, a slower-than-expected recovery in China, and a rising US dollar among others.
Fortunately for the iconic global brand, consumer demand remains robust. Therefore, the crucial element for Nike's success in the near term is ensuring sufficient inventory to restock shelves.
Image source: Getty Images.
Nike's primary challenge is restocking shelves
Nike's sales fell 4.4% in fiscal 2020 to $37.4 billion when several of its wholesale partners were forced to close their doors to in-person shoppers. But sales rebounded with a vengeance in 2021, rising 19.1% year on year, while increasing more than $5 billion from 2019 levels. As restrictions on venturing outdoors eased across the globe, consumer demand and the ensuing sales growth normalized to pre-pandemic levels quicker than expected. As a result, several businesses, including Nike, are having difficulty scaling up production to keep up with consumer spending.
Unsurprisingly, inventory is taking an elevated role in operations. Nike has been closely monitoring COVID outbreaks in the regions where its manufacturing facilities are located and boosting production as capacity becomes available. Nevertheless, Nike has not produced enough to serve total demand. As a result, the company is choosing to allocate more of its products to its own direct-to-consumer channels and withhold inventory from third-party retailers.
Such a strategic shift in supply is creating a competitive advantage and a customer acquisition tool that should ultimately boost profits. Customers are growing tired of visiting other retailers' websites and third-party stores that consistently have scarce products. As Nike reduces product allocation to third-party retailers and cuts out other middle-men, it should automatically attract more customers to its own stores and website, including its SNKRS mobile app.
In the most recent fiscal quarter that ended Nov. 30, the company witnessed falling sales, primarily in markets outside of the U.S. and Europe, because of insufficient inventory. Sales in China fell by 20% year over year and by 8% in the Asia Pacific & Latin America region. Meanwhile, sales expanded by 12% in North America. The bifurcation highlights not only inventory shortages but also logistical challenges in getting products to different locations.
It had also ended the second quarter with $6.5 billion of merchandise, a modest 7% yearly increase heading into the holiday (Thanksgiving/Christmas) season.
Next week, however, investors will want to hear how management is resolving manufacturing challenges and can produce full tilt. Nike and its shareholders will want to capitalize on the elevated consumer demand before spending gets allocated elsewhere.
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What this could mean for Nike investors
Analysts on Wall Street expect Nike to report revenue of $10.63 billion and earnings per share (EPS) of $0.71. If it meets those EPS estimates, it would be a decrease of 21.11% from the same period the year before. And the revenue estimate is a mild increase from the $10.35 billion in the same quarter last year.
The company is ramping up its marketing expenses to create more demand after reducing it last year and is also incurring higher transportation and logistics costs. The modest increase in sales estimates from the previous year doesn't look sufficient enough to offset those costs, and earnings, as a result, are expected to fall. The stock has paid the price for these lowered expectations and is down 29% year to date in 2022. If Nike wants to stop the bleeding, it has to demonstrate operational excellence in the near term by manufacturing products and getting them to where customers are demanding them.
