Do Nike’s inventory woes foretell a bleak holiday season for apparel?

Discussion
Photo: Getty Images/hapabapa
Oct 03, 2022

Nike said sales climbed 10 percent on a currency-neutral basis in the first quarter ended August 30 on strong demand but warned that aggressive markdowns required to clear apparel inventories would drive down gross margins for its fiscal year.

“We are taking decisive action to clear excess inventory, focusing on specific pockets of seasonally late products, predominantly in apparel,” said Nike’s CFO Matt Friend last week on the company’s quarterly call.

Inventories were up 44 percent company-wide at the quarter’s end, largely driven by a 65 percent hike in North America, its largest market.

Nike blamed its inventory glut on:

  • Late deliveries for the past two seasons;
  • Earlier ordering by retailers this year due to strong demand and less predictable delivery timelines as a result to factory closures in Vietnam and Indonesia;
  • Transit times that slowly began improving in the first part of the current calendar year and then “rapidly” in recent months.

In North America, in-transit inventory was up 85 percent and amounted to 65 percent of inventory.

Nike now expects gross margins for the year to decline 200-to-250 basis points (negative 50 basis points to flat previously), including 150 basis points from higher markdowns and higher off-price mix with the rest reflecting headwinds from elevated freight costs and foreign exchange pressure.

Nike’s report follows a challenging second quarter for many apparel retailers as inflation pushed consumers to cut back on discretionary spending while inventories similarly piled up for many chains, signaling the return of promotional selling.

“I hesitate to call it a bloodbath, but it’s going to be ugly in terms of the amount of discounting and markdowns,” said Urban Outfitters CEO Richard Hayne on the retailer’s earnings call last month.

Nike plans to tighten buys in the second half and liquidate excess inventory more aggressively beginning in its current quarter, hoping to better balance inventories n 2023.

Mr. Friend said, “While we expect this to have a transitory impact on gross margins this fiscal year, we believe this cost will be far outweighed by the benefit of clearing marketplace capacity to align seasonally relevant product, storytelling and retail experiences for the consumer.”

DISCUSSION QUESTIONS: Did Nike make the right move in ramping up promotions to realign inventories instead of seeking to soften the margin hit? Do Nike’s problems and those of other brands and retailers suggest that there is a problem with the industry’s forecasting systems?

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Braintrust
"The entire world's forecasting for the last 50 years just didn't get bad suddenly in one year. The world is still experiencing the after-effects of shock."
"Hopefully Nike’s move is the one that costs less. At the end of this it’s about carrying cost and the bottom line."
"The question is why so many companies stumbled on demand forecasting and assortment decisions."

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19 Comments on "Do Nike’s inventory woes foretell a bleak holiday season for apparel?"


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Neil Saunders
BrainTrust

From a sales perspective, Nike’s results were reasonable and, in the U.S., showed very little sign of a consumer slowdown. However because of various issues – including supply chain snafus – inventory has piled up and needs to be sold through via discounting. This left Nike’s bottom line looking somewhat shabby. I think this will be the theme of this holiday: sales will hold up, but profits will be more elusive because of discounting and higher costs.

Dick Seesel
BrainTrust

Nike is right to address its inventory problems aggressively, just as Target made the same move at the expense of short-term earnings. The question is why so many companies stumbled on demand forecasting and assortment decisions. There will come a point — soon — where the aftereffects of the pandemic will no longer offer an excuse for bad planning.

David Naumann
BrainTrust

Good points Dick! There are a lot of dynamics that are creating a perfect storm that is negatively impacting inventory levels and margins. Once we get through the supply chain uncertainties and inflation, inventory management should become more effective. However, we never know what the future brings and forecasting will continue to be challenging.

Rick Watson
BrainTrust

Apparel is in trouble no question.

These Nike issues are second-order effects from over-ordering earlier in the year. How does a company get two seasons coming at the same time? The only answer to that question is they ordered at the wrong time (not likely) or more likely the manufacturer was backlogged from the previous order, and they didn’t cancel it.

Vietnam is generally not having manufacturing issues, so likely it was a “peak demand” type issue.

There are not major port delays, and there is not too much product on the water now, meaning supply chain transportation is not to blame.

No forecasting system worked in the past two years. Not on the way up, and certainly not on the way down. If there are existential shocks to the system, it will be bad again.

If consumer demand normalizes, then it becomes easier to see what happens next, hence better forecasting.

The entire world’s forecasting for the last 50 years just didn’t get bad suddenly in one year. The world is still experiencing the after-effects of shock.

Liza Amlani
BrainTrust

I’d prefer Nike take markdowns off the table. The footwear giant has more seasonless product than other brands. The performance space doesn’t need as many promotions and brands should just refocus and stop overbuying.

Drastic markdowns will drive revenue but will erode gross margins and could devalue the brand. Nike is a powerhouse and leader in the market – reducing buys and limiting assortments would help drive the right product at the right time and right place. Rethinking merchandising strategies across brands with inventory management challenges is critical right now. Overbuying is not only a problem for brands but for the planet. It needs to stop.

Andrew Blatherwick
BrainTrust

Once again we see the cost of poor inventory management. Yes we have been through a tough time with many swings but with modern forecasting and supply chain management retailers and brands must be able to do better than this. The cost of holding stock with higher interest rates is expensive, price reductions to clear stock hits margin hard so the impact of poor inventory management really is poor results. Fashion brands need to keep clean inventories to be able to present the next season’s merchandise at the right time so getting ordering and timing wrong is even more expensive. Today with good supply chain solutions this should not happen, even in these tough times.

Scott Norris
Guest

I don’t think we could come up with better examples of galaxy-class companies with well-supported IT and forecasting departments than Nike and Target. I’d put IKEA and Home Depot in there as well – and all of them have been battling shortages and imbalances. We have to admit the forecasting software is never going to be able to handle major disruptions, no matter how talented the team that uses it. Even when we get to Star Trek-style desktop replicators there’ll always be supply hitches with feedstock at some point, and humans will have to figure things out the best they can from a menu of suboptimal choices.

Gary Sankary
BrainTrust

One significant differentiator between great companies and “others” is how quickly they detect and react to changes in their business. Nike understands their issue, and they are willing to make the strategic decision to take a short-term hit to margin to improve their position in the future.

David Slavick
BrainTrust

Nike is a premium brand. A brand with high affinity. A brand that is selling direct to consumer to a much greater extent than ever before by cutting ties with smaller/less prominent shoe and apparel retailers. The production, logistics and economic variables are challenging. If they have to discount it actually hurts the brand as traditionally regular price is the norm for most shoe and apparel sales through their own channels. This foretells savings for consumers, but not a suppression on holiday sales.

Brandon Rael
BrainTrust

Supply chain disruptions have led to retailers and DTC companies to build up contingency inventory to ride out the storms to come. However there are several levers that retailers such as Nike could use to help reduce their over-inventoried situations. These include markdowns, aggressive promotional strategies, and other event-based activities to drive sales. There are consequences to this with an accompanying margin.

Nike is in a unique position compared to other retailers and DTC companies in that they have an extremely resilient and growing business model that can withstand the short-term margin hit. In addition, a significant amount of Nike’s products span across seasons, and are not dependent on the typical merchandising seasonal calendar.

Retailers will have to take a more prescriptive approach to inventory, supply chain, merchandising, and assortment optimization strategies to mitigate the need for contingency stock. Less is more, and inventory curation with the right products in the right place and at the right time is critical in our current economic climate.

Phil Chang
BrainTrust

Hopefully Nike’s move is the one that costs less. At the end of this it’s about carrying cost and the bottom line. The less “red” they see at the end, the more they are on the right path. Excess inventory means less cash, it means we’re making less product, which means less jobs. Until we (the industry) right size this, this conversation will continue.

Nike’s problems are everyone else’s problems – they either don’t know it yet, or aren’t talking about it yet. The computer industry is having the same problem – excess inventory of old stock while trying to launch new innovative products that nobody wants to buy at MSRP.

We’re in for a rough ride – the industry/industries, the consumers and everyone in between.

Dave Wendland
BrainTrust

You’re so right, Phil. MANY industries may have not yet recognized the troubled road ahead. Give it a month or two and we’ll see bleak headlines similar to those of Nike, Urban Outfitters, Target, and others.

Jeff Sward
BrainTrust

If it were as simple as a combination of both early and late deliveries, markdowns would not be necessary. Things would sort themselves out in six months. But for some reason Nike needs to take aggressive action — now. Which means that after all the early/late issues are sorted out, Nike over-bought in addition to miscalculating on a couple of trends. And they picked a really odd moment to over-buy. Along with a lot of other brands and retailers. It seems like the next year or two would be well served by a little inventory caution. Maybe even risk selling out of a style or two every now and then.

Dave Wendland
BrainTrust

Nike is not the only brand (and retailer) eyeing a lackluster and less-than-profitable holiday season due to inventory woes. Expect to see significant markdowns, inventory shortages (wrong product, wrong time), and frustrated shoppers. Although apparel will be most dramatically affected, I envision other categories (electronics, household, and lawn and garden) facing similar issues.

Do inventory forecasting systems need to be examined? Absolutely. This starts with sourcing, lead times and assortment planning. Then it extends from port of entry or distribution center all the way to the retail shelf. It’s time to holistically address the problem — applying yesterday’s approach to the problems of today will not produce a long-term cure.

Doug Garnett
BrainTrust

In a nutshell, then, Nike discovered they can clear inventory by giving it away? I know that’s a harsh assessment. But digital catalog expert Kevin Hillstrom writes about many situations of identical form and function — where executives crow about revenues yet their approach to creating revenues will lead to their own future disaster.

Does Nike have goods customers want today? That’s the first critical question. Is Nike now reaping the just deserts for having bet too big on their digital sales? This sounds very much like customers returning to the stores make that major strategy a dead end (which has been my assumption).

Mohamed Amer, PhD
BrainTrust

Nike and Target: What happens when two operationally well-respected companies tell the market that they have an inventory problem as we head into a slowing macro environment? It would be foolish to ignore those data points, but since you can’t do anything about the past, what will apparel and footwear retailers and brands do moving forward? If you’re Walmart, the impact is reduced because of the significant grocery sales that mitigate the glut in apparel inventory. Suppose you’re Skechers, which has little R&D but is fast in introducing hot styles based on market demand. In that case, you’re in much trouble because as Nike and others effectively liquidate their excess inventory, any price advantage Skechers evaporates.

My take is that the discounting will be deeper and more extended right through Q1. Grocery and basics will be the only islands of relative stability.

David Mascitto
BrainTrust

If the choice is between over-buying and having to mark down (and let’s be honest, even at markdowns, Nike still makes a healthy profit margin off these items), vs. under-buying and having no stock and therefore no sales, the choice is obvious. This is the dilemma manufacturers faced when placing orders to their overseas factories last year, in the face of massive uncertainty and ongoing factory and port shutdowns. Nike erred on the side of caution because they have the deep pockets to do so. As for forecasting, not sure anyone could have forecasted massive gas price hikes (caused by a number of factors) impacting consumer goods, demand and spending in the last couple of quarters.

Kai Clarke
BrainTrust

Out of stocks are a major fear of all retailers, but especially those in the apparel world. Add irregular demand fueled by a Pandemic and this is a difficult holiday season for everyone. Only time will tell if this is the right decision for Nike.

Anil Patel
BrainTrust

Customers always expect the latest designs and styles from apparel brands. Therefore, I believe Nike has made the right decision to offer discounts in order to clear the current inventory. The move will allow them to stock newer styles based on the season’s demand.

Forecasting algorithms analyze historical data but each and every event is not foreseeable. Some situations are way beyond the control of systems. However, data from trend analysis can be used for identifying the gaps and then framing strategic decisions.

wpDiscuz
Braintrust
"The entire world's forecasting for the last 50 years just didn't get bad suddenly in one year. The world is still experiencing the after-effects of shock."
"Hopefully Nike’s move is the one that costs less. At the end of this it’s about carrying cost and the bottom line."
"The question is why so many companies stumbled on demand forecasting and assortment decisions."

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