What happened
Nike (NKE -0.36%) shareholders lost ground to a falling market this week. Their stock dropped 10% through Thursday trading compared to a 3.2% slump in the S&P 500, according to data provided by S&P Global Market Intelligence. The decline pushed the footwear and apparel giant deeper into negative territory so far in 2022, down 38% compared to the market's 20% drop.
It was driven by an earnings report that had investors worried about a persistent growth slowdown ahead.
So what
Nike announced on Monday that sales for the period that ended in late May, its fiscal fourth quarter, were up just 3% after adjusting for currency exchange rate shifts. That result essentially met Wall Street expectations and reflected solid demand across most of the portfolio. Nike's profitability didn't take much of a hit from supply chain shocks and rising costs, either. Gross profit margin fell by less than 1 percentage point, in fact.
But investors chose instead to focus on a few potential problems ahead. First, Nike projected another profit margin decline in its fiscal first quarter. Second, the chain revealed a 24% increase in its inventory holdings, putting it in a risky position if consumer demand weakens significantly.
Now what
Management isn't forecasting such a downturn right now. To the contrary, CEO John Donahoe and his team affirmed their fiscal 2023 forecast that calls for sales to rise at a double-digit rate as the China market recovers from COVID-19-related lockdowns and consumers keep spending on premium apparel products in the U.S. and Europe.
It is likely that Nike will work through its elevated inventory in the coming months without having to resort to the type of discounts or write-offs that other retailers, like Target, have announced.
But investors decided that the extra risk is enough to reduce Nike's valuation for now as they wait for more signs that growth isn't decelerating in the new fiscal year.
