Nike shares are rising because the main problem may be disappearing

Nike (NKE) is getting its inventory under control, much to the delight of investors.

Shares of the clothing and footwear giant were up 12% in premarket trading on Wednesday as better-than-expected sales and earnings — for now — allayed concerns that Nike would be hammered by sluggish global economic growth. The stock is the top trending ticker on Yahoo Finance as of 5:30am ET.

But the real highlight of Nike’s fiscal second quarter was that the company noticeably reduced its excess inventory — caused by the economic downturn earlier this year — compared to three months ago. It’s a problem that has plagued profit margins (due to Nike aggressively liquidating merchandise) and stock price, analysts have argued.

Nike’s stock fell 3% sequentially, spurred by a single-digit decline in unit numbers. The total number of inventory units decreased by a double-digit percentage compared to the first fiscal quarter.

Management told analysts during an earnings call that it continues to focus on cleaning inventory, particularly through low-price stores. Further progress is expected in calendar year 2023, including a more prudent approach to buying new inventory.

“We believe the stock spike is behind us and the actions we are taking in the marketplace are working,” said Nike CEO John Donahoe.

The inventory improvement paves the way for better profit margins for Nike in the coming quarters, provided the global economy doesn’t fall off a cliff.

Yahoo Finance Analysis: Nike’s Earnings

The good

  • Sales, gross profit margins and profit exceed analyst estimates.

  • Inventory levels fell sequentially in units.

  • Management proclaimed strong online sales in November.

  • The selling power continued into December, execs said on the conference call.

  • Fiscal year sales are now up at a low teen rate, compared to a low double-digit rate previously.

The not so good

  • The stock was still up 43% year over year.

  • Gross profit margin declined 300 basis points year over year due to increased write-downs.

  • Full-year gross profit margins were still down 200 to 250 basis points year-over-year.

  • Sales in Greater China were down 10% year over year.

What Wall Street says

“We believe Nike’s Q2 performance proves that the brand remains strong, margin factors are intact (Direct to Consumer/Digital) and global demand is healthy. Looking ahead, we expect inventory and China-related issues to will decrease, driving margin improvements. We are moving our estimates higher and recommend buying Nike stock and selling Lululemon stock.” -Jefferies Randal Konik (Buy rating; $140 price target)

“Going forward, we expect GM’s guidance to again prove to be conservative and indicate that unlike the majority of retail businesses seeing pandemic revenues rise, sales weigh heavily, NKE sees material NA strength, with wholesale an interesting positive call this quarter. With revenue momentum and China improving to significantly easing comparisons.” -BMO Capital Markets Simeon Siegel (Outperform rating; $120 price target)

Brian Sozzi is editor-in-chief and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and further LinkedIn.

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