Nike stock slips as analysts warn of inventory problems ahead of earnings
Nike (NKE) stock slumped nearly 3% on Tuesday as Wall Street analysts trimmed their expectations for fourth quarter earnings.
Ahead of the company's expected announcement after the bell on Thursday, June 29, Wall Street analysts will be focused on where inventories stand exiting the company's fiscal year 2023 and what Nike believes is in store for 2024.
Nike has been working through high inventory levels over the last several quarters but in March told investors it believed it turned a corner. Inventory grew nearly 16% in the third quarter, down from a 43% pop in the second quarter.
"We're going to exit (2023) with even leaner inventory than we had anticipated given the momentum that we're seeing," Nike CFO Matthew Friend said during the company's third quarter earnings call on March 21.
A new research note from Morgan Stanley on Tuesday indicates the shoe giant's inventory comeback may not be as rosy as hoped.
"Recent NA & Europe sportswear channel checks make it clear that demand for mass sportswear has potentially slowed, leaving a sizable inventory glut across the industry that is currently being promoted away...a potential headwind that could pressure NKE revenue & margin," Morgan Stanley equity analyst Alex Straton said.
Morgan Stanley, which maintains an Overweight rating and $130 price target on Nike, notes that the increased retail inventory levels aren't "currently appreciated by the consensus." Straton added Nike isn't excluded from industry-wide concerns.
Part of the concerns for Nike comes from the company's wholesale division. As of its March 2022 investor day, Foot Locker reported more than 70% of its sales were Nike shoes. With the retailer cutting its full-year sales outlook a month ago, analysts are increasingly concerned that slowing sales at Foot Locker could lead to a backlog of Nike shoes at stores. Eventually, that could lead to less wholesale sales for Nike and pressure on margins.
"The takeaway was Nike sneaker sales for styles like Air Max slowed during mid-March, possibly due to lower than expected tax refunds and a weakening consumer spending environment," UBS retail analyst Jay Sole wrote in a note to clients on Tuesday. "As a result, the market learned the industry is now holding too much footwear inventory in the US and this should lead to excess promotions likely through the Back-to-School season and possibly beyond."
The combination of factors could limit Nike's overall outlook for North America but isn't all bad for the company. UBS believes Nike's positive inventory positions in other areas around the globe could balance out struggles in North America.
In addition, UBS points to strong earnings from Dick's Sporting Goods (DKS) and JD Sports (JD.L) since Nike last reported as signs that Foot Locker's issues may be more isolated than initially thought.
"Even though the Foot Locker news dominated the conversation, we don't believe Foot Locker's trend is representative of Nike's overall trend, just part of it," Sole wrote.
Josh is a reporter for Yahoo Finance.
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