The Dire Message in Nike and VF’s Warnings

If fashion is a business of follow the leader — and corporate rhetoric aside, it very often is — the industry is in for some trouble.

Both Nike Inc. and VF Corp. — two of retail’s strongest and best-positioned players — just shook investors with warnings that their businesses were headed into much rockier terrain as fall approached.

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Nike felt the pinch most recently, with its stock falling 12.2 percent to $83.75 in midday trading on Friday. But on Wednesday it was VF’s turn with a 6.9 percent drop.

Each company has its own particular woes.

VF’s biggest business, Vans, is in the midst of a reset after losing touch with youth culture and relying too much on its classic styles.

But amid that reset, the market has gotten tougher, for both Vans and VF’s other brands, which include The North Face and Supreme. Chief financial officer Matt Puckett told analysts: “We certainly continue to see building and elevated inventories across markets. That’s kind of a global comment. And as a result of that, we expect a more … impactful promotional environment impacting the marketplace in the back half of the year.”

Kith x Vault by Vans Summer Collection
A closer look at the Kith x Vault by Vans summer collection.

Nike is certainly part of that broader inventory buildup — and while its sales have continued to increase, inventories are rising more, up 44 percent at the end of its fiscal first quarter, with more goods in transit given the global supply chain backups. At the same time, gross margins have fallen 220 basis points to 44.3 percent of sales.

Matthew Friend, Nike’s CFO, also pointed to promotions in the market.

“While our inventory was high at the end of the first quarter, we do expect to see sequential improvement in inventory balances from here over the next three quarters,” Friend said. “We plan to compete … in a more promotional environment. And given the macro uncertainty that’s out there for the consumer, we’re taking a more measured approach and we’re tightening our inventory buys around the world based on some of the risks that could materialize in the second half.”

And that’s a big part of the problem — the risks are everywhere.

Consumers are facing inflation at levels not seen in a generation, with food and energy prices skyrocketing. Interest rates have been charging higher. The threat of recession looms. War in Ukraine continues. And supply chains are still working out the pandemic kinks.

Add in a flood of goods and price promotions — a habit fashion more or less claimed to have kicked over the last two years — could be the driving force going into the holidays.

It’s a reality that Nike and VF can likely face.

As Nike chief executive officer John Donahoe noted, “In a promotional environment, brand strength matters. And so we will be aggressive … on liquidating excess inventory but also coming hard with our key popular franchises to bring heat and energy to them.”

Nike can bring more heat than most — and other brands by comparison might find themselves cooling down — but this is a world that has some even looking at Nike and wondering about the future.

BMO analyst Simeon Siegel said: “Although we still see its scale as a long-term competitive advantage, for today, Nike looks increasingly like other over-inventoried promo-chasing retailers.”

If that is an accurate description of Nike, what about everybody else?