Do Nike’s inventory woes foretell a bleak holiday season for apparel?
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.”
- Nike, Inc. Reports Fiscal 2023 First Quarter Results – Nike
- Prepared Remarks / Unofficial Transcript – Q1fy23 Nike Inc – Nike
- Nike (NKE) Q1 2023 Earnings Call Transcript – The Motley Fool
- Urban Outfitters, Inc. (URBN) Q2 2023 – Seeking Alpha
- American Eagle joins list of clothing retailers reporting bleak earnings – CNBC
- Clothing retailers set for discount battle to clear inventory glut – Financial Times
- Retailers Face Pressure to Offer Discounts While Battling Inflation – The Wall Street Journal
- Inventory Pileup, Uneasy Shoppers Put Retailers in Jeopardy – The Wall Street Journal
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?