What happened
Shares of Nike (NKE +0.87%) slid by 21.9% in September, according to data provided by S&P Global Market Intelligence. Shares of the sports apparel and footwear company have nearly halved year to date as investors worry over a plethora of problems.
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So what
Nike released its fiscal 2023's first-quarter earnings, and it wasn't a pretty picture. Although revenues inched up 4% year over year (YOY) to $12.7 billion, gross profit slid by 1% YOY to $5.6 billion as gross margin fell from 46.5% a year ago to 44.3%. The reasons for the weaker margins were plenty -- a strengthening of the U.S. dollar against a basket of foreign currencies, higher freight and logistics expenses, and discounting to clear off excess inventory.
NYSE: NKE
Key Data Points
Along with higher operating expenses, these factors resulted in Nike's net income falling by 22% YOY to $1.5 billion. Growth seemed elusive for this quarter as the company grappled with myriad problems. Its North American inventory surged by 65% YOY due to a combination of factors, such as late deliveries from past quarters, earlier-than-planned deliveries for the holiday season, and a low base effect resulting from factory closures a year prior. The company's China division saw revenues fall 16% YOY while operating income plunged by 23% YOY due to COVID-related closures and disruptions.
Now what
The troubles aren't over yet for the sports giant. Further strengthening of the U.S. dollar will reduce reported revenue for fiscal 2023 by $4 billion and operating income by $900 million. Because of heavy discounting to clear the inventory glut, Nike also expects its gross margin to decline between 2% and 2.5% for the full year.
The good news is these problems are transitory and should resolve themselves in a few quarters. Meanwhile, Nike's shares should continue to be under pressure, but long-term investors ought to view this as an opportunity to scoop up shares on the cheap.
