By Mehr Bedi
(Reuters) -Nike Inc cautioned on Thursday that gross margins would remain under pressure through the year as the world's largest sportswear maker joined peers in warning of a blow from ramped up discounts and a rapidly strengthening dollar.
The company's shares, already one of the worst performing Dow components for the year, fell 10% in extended trading.
"We're going to see substantial markdowns this year through the holiday season. But going into the calendar year 2023, I believe inventories will be much lower after the holiday sell through and then the post holiday sales," Morningstar analyst David Swartz said.
Overall inventories surged 44% to $9.7 billion at the end of the first quarter at Nike, while it soared 65% in its biggest market of North America.
Demand for Nike's brands including Jordan and Converse has slowed, analysts have said, as sneakerheads lose enthusiasm for discretionary products due to the cost-of-living crisis.
Rival Under Armour, big-box retailer Target Corp and a host of other companies have also turned to heavy discounting after inventories ballooned in recent months.
Nike expects full-year gross margins to decline between 200 and 250 basis points, anticipating the greatest fall in the second quarter.
Meanwhile, the company, like other U.S. businesses with sprawling international operations, has grappled with a stronger dollar.
"Headwinds from foreign exchange shifted significantly in the last 90 days as the trend of U.S. dollar strengthening has accelerated," Chief Financial Officer Matthew Friend said in an earnings call.
The company, which makes over half its revenue from outside North America, doubled its estimates for a hit to annual revenue from the soaring dollar to $4 billion.
The strengthening greenback also helped fuel Nike's 220 basis points decline in first-quarter gross margins to 44.3%. Analysts had expected a gross margin of 45.4%, according to IBES data from Refinitiv.
Nike's net income fell 20% to $1.47 billion, or 93 cents per share, in the three months ended Aug. 31.
(Reporting by Mehr Bedi in Bengaluru; Editing by Sriraj Kalluvila)