Nike: 'It will be a difficult Christmas season' — but there's hope, analyst explains

Supply chains and too much inventory continue to hammer Nike, as shown in the footwear giant's latest earnings results, with the company reporting inventories up 44% year-over-year and up 65% in North America.

“It will be a difficult Christmas season and Nike and other have projected that with inflation affecting consumer spending and the ongoing weakness in China,” Morningstar Equity Analyst David Swartz told Yahoo Finance Live. “But I think it’s generally improving.”

Nike saw revenues decline 16% year-over-year in Greater China, the company’s highest margin region. Nike executives believe inventory issues will be normalized by the end of its current fiscal quarter, but investors appear wary amid a sector-wide inventory pile up and increased discounting.

“We plan to compete… in a more promotional environment,” Nike CFO Matt Friend said on Thursday’s earnings call. “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.”

Nike stock (NKE) fell more than 12% as of the market close on Friday and was down more than 50% so far in 2022 entering the last trading day of the third quarter.

Nike reported revenue of $12.69 billion for the first quarter, up 4% from last year and beating analyst estimates. The company's $0.93 adjusted earnings per share came in slightly higher than analyst expectations — but fell 22% compared to the same quarter last year.

Growing strength in the U.S. dollar also proved to be a laggard for Nike in the first quarter and could be moving forward as well. Currency changes drove down reported revenue by 16% in Europe and 12% in Asia Pacific and Latin America. After exchanges, the company reported just 1% growth in Europe while Asia Pacific and Latin America remained flat.

“Headwinds from foreign exchange have also shifted significantly in the last 90 days as the trend of U.S. dollar strengthening has accelerated,” Friend said on the earnings call.

On the bright side, Nike showed signs of growth in its direct-to-consumer business with sales up 8%.

“Nike has a very strong brand that’s why we rate it as a wide moat company,” Swartz said. “We say it has a competitive advantage because people do love Nike products and they do sell a lot of them at very good prices. Nike has to do discounting and it will continue the next couple quarters. But generally, I don’t see them having to do a huge amount of discounting.”

Santa Claus shows off the Nike Air Kringle shoes in a 2015 ad. (screenshot/ESPN via SneakerFiles)
Santa Claus shows off the Nike Air Kringle shoes in a 2015 ad. (screenshot/ESPN via SneakerFiles)

And despite acknowledging how the gloomy macroeconomic could impact consumer demand, the retailer didn’t waiver on its forward revenue guidance — something that analysts had feared prior to the report. Friend noted that Nike met its internal guidance for double-digit revenue growth in the first quarter and now has its sights set on “low double digit” growth in the coming quarter.

“We're coming off a strong quarter and we feel very good about our competitive position, and we have not yet seen any signs of slowdown,” Nike President and CEO John Donahoe said on the earnings call. “That said, we don't have any crystal ball around the external factors, whether it's FX, whether it's inflation, whether it's the impact of energy prices on consumer spending.”

Josh is a reporter and producer for Yahoo Finance.

Click here for the latest trending stock tickers of the Yahoo Finance platform

Click here for the latest stock market news and in-depth analysis, including events that move stocks

Read the latest financial and business news from Yahoo Finance

Download the Yahoo Finance app for Apple or Android

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube