Whatās Going On Here?Sportswear titan Nike gave a disappointing quarterly update late last week. What Does This Mean?A 22% drop in profit is never good news ā but set against an uptick in sales, it can leave shareholders especially miffed. See, although a strong US dollar means that Nikeās overseas takings look pretty measly when brought back home, fumbling the bag this badly canāt be blamed entirely on that. And itās pretty clear where the company took a wrong turn: back when supply chains were hopelessly clogged, Nike had the bright idea to order stock early, giving goods ample time to arrive. That made sense then ā but later, when supply chains eased and demand slowed, Nike found itself flooded with gear, and inventory hit levels 44% higher than the same quarter last year. In the end, the company was forced to slash prices in a bid to offload the kicks that were piling up in storage, ultimately denting profit. Why Should I Care?For markets: It gets worse.
This problem isnāt over yet. Nikeās warned investors that shifting its mountains of extra stock will probably eat away at profitability for the rest of the year (tweet this). Whatās more, the company has doubled estimates of the hit itāll take from the strong dollar this year, and is now putting the number at a shudder-inducing $4 billion. And investors did shudder ā as they sent Nikeās stock plunging a full 10% after the news. Rivals Adidas and Puma suffered too, dropping 4% and 5% respectively, with investors guessing similar inventory problems might be plaguing them.
The bigger picture: Nikeās not alone.
Ballooning inventory and the inevitable discounts they trigger arenāt unusual right now. (In recent months, the big-box retailer Target has faced similar issues.) But Nikeās results are a sign that the phenomenon is spreading and could become a key theme this earnings season. That doesnāt bode well for companies, but lower prices will play well with cash-strapped consumers and might ultimately help put a lid on inflation. | 