Not long ago, it seemed like products were constantly out of stock. From the grocery store to Amazon, ever-present supply chain issues affected inventory levels for many companies. However, in the wake of those challenges, some companies have overcorrected, leaving them with massive stockpiles.

This is its own problem as stale merchandise can become a drag on a company's balance sheet and profitability. Unfortunately, this scenario is exactly where Nike (NKE 0.31%) has found itself, and where many other retailers could soon find themselves too.

Nike's inventories are rising faster than ever before

Nike's report for the fiscal 2023 first-quarter (ended Aug. 31) shed light on its situation. Inventory rose 44% year over year to $9.6 billion, far above the baseline Nike has established over the last five years.

As of Aug. 31 by Year Inventory Level YOY Change
2022 $9.66 billion 44.2%
2021 $6.70 billion (0.1%)
2020 $6.71 billion 14.9%
2019 $5.84 billion 11.6%
2018 $5.23 billion 0.3%

Source: Nike.

Speaking to this outsized change, management noted in-transit inventories helped elevate the number, and "strong consumer demand" offset it. However, it's hard to believe Nike is seeing that strong a consumer when revenue only rose 4% in the quarter.

Additionally, Nike fared poorly worldwide in sales growth, primarily due to a weak Chinese market and strong dollar.

Region YOY Sales Change, as Reported YOY Sales Change, Currency Neutral
North America 13% 13%
Europe, Middle East & Africa 1% 17%
Greater China (16%) (13%)
Asia Pacific & Latin America 5% 16%

Source: Nike.

In North America, Nike began liquidating some of its inventory through its outlet channels, contributing to a 220 basis-point decline in its gross margin. Management can't have it both ways -- either the consumer is strong with little need to liquidate inventory, or they're working to get ahead of the issues presented by the elevated merchandise on hand.

This dichotomy doesn't sit right with me, making me wonder what management has in store for investors.

What's next, and is the stock a buy?

In its earnings call, Nike stated it would continue liquidating inventory while tightening up its second-half buying activity. Management is guiding for full-year, currency-neutral revenue growth in the "low double digits." Analysts' estimates reflect the headwind presented by the strong U.S. dollar with calls for 4.7% top-line growth in fiscal 2023 and 8.1% growth next year.

Despite that outlook, Nike stock trades at 26.5 trailing earnings, a premium to the broad market. For a company that isn't expected to grow sales very fast and whose earnings per share fell 20% in the fiscal first quarter, that's a rich valuation.

Additionally, Nike decided to terminate its $15 billion share repurchase program after $9.4 billion shares were repurchased from June 2018 onward. That's yet another signal Nike is battening down the hatches with a potential economic storm coming, despite management painting a rosy picture.

After this latest earnings report, investors must pay attention to other retail stocks and analyze management's messaging about the consumer and inventories. While every company has a different view of the topic, any emerging trends can help you determine what's truly going on.

As for Nike, this seems to be a stock investors should avoid for the time being.