Nike's Inventory Woes: Passing the Buck

Nike Inc. (NKE) has seen a 0.16% change in its stock.

The company achieved impressive results in the last quarter, and also made some wise strategic decisions.

Nike's latest performance was impressive: the company reported a 28% increase in revenue on a currency-neutral basis for its fiscal quarter ended Nov. 30 compared to the same period last year. This was 5.9% higher than what analysts had predicted. It is even more impressive when considering that Lululemon's revenue base is only 14% of Nike's, yet their sales growth is only slightly behind. Net income was flat compared to the previous year, which was much better than the 23% decline that Wall Street had anticipated.

Nike increased its outlook for the entire fiscal year, predicting that revenue would increase by more than 10% on a currency-neutral basis, which is higher than the previous prediction of a 5% growth. Investors responded positively to the news, causing Nike's stock to rise 12.6% in after-hours trading.

Nike's inventory was up 43% last quarter compared to the same period the year before, only a slight improvement from the 44% increase in the previous quarter. CFO Matt Friend mentioned on an earnings call that the prior-year comparison isn't accurate due to factory closures in Vietnam last year. Despite this, Wall Street analysts had anticipated the bloat to be 28% higher than the year before.

Nike is fortunate to have athletes who are willing to purchase their products. The company's sales through the wholesale channel increased by 30% on a currency-neutral basis, which is higher than the 25% growth in direct sales. During the call, Mr. Friend mentioned that this is the first time in six quarters that they can meet the demand of the wholesale channel.

Nike's demand from wholesale channels was higher than expected, resulting in gross margins of 42.9%, a 3-percentage-point decrease from the previous year. After the company's call, Foot Locker's stock prices rose 4% in after-hours trading and Dick's Sporting Goods gained 3%, showing that investors are pleased with the increased availability of Nike products through wholesale partners.

The current positive situation for Nike may not continue once it has sold all of its extra merchandise. The company has a long-term aim of achieving operating margins in the high-teens, which is higher than the 12.5% it reported in the last quarter. To reach this goal, Nike will likely need to increase its sales through direct channels rather than relying on wholesalers.

Nike is likely to come out of the situation with too much inventory unscathed, but its wholesale partners may not be so lucky.