What happened
Shares of Nike (NKE -1.26%) were up 2.7% as of 12:09 p.m. ET on Tuesday, following the latest report from the U.S. Bureau of Labor Statistics that showed cooling inflation in October.
Rising inflation and interest rates have weighed on Nike and other apparel stocks this year. Nike stock is currently down 35% year to date, but a lower rate of inflation could be a catalyst to watch in 2023.
So what
U.S. producer prices rose 8% over the last 12 months through October, which was lower than the 8.3% analysts expected. It's also lower than the 8.5% increase through September.
If the rate of inflation begins to decline, it would be good news for Nike's margins, which have been weighed down by higher costs. A lower gross profit margin contributed to a 20% year-over-year decline in earnings per share last quarter.
Demand for Nike's products has been strong. In the fiscal first quarter ending in August, Nike said revenue increased by 4% year over year, or 10% on a constant-currency basis. However, investors are still concerned about an upcoming holiday shopping season that's expected to lean heavily on discounting to drive sales.
Now what
In light of these headwinds, management said on the last earnings call that it would tighten up and liquidate excess inventory more aggressively, starting this quarter. As a result, they guided for gross margin to fall another 200 to 250 basis points in the fiscal second quarter.
The market has largely discounted the lower earnings in the near term from margin pressure. But lower inflation would provide investors better visibility for Nike's margins in the near term. This is a catalyst for all apparel stocks that have been beaten down due to high inflation.
