Based on my DCF model, I assume a terminal multiple of 15x year 5 EBITDA, and discount back by a discount rate of 9%, deriving a 1-year target price of $94, implying 8% upside from current levels. That said, I incorporate in my financial model and forecasts Nike's industry leading position, strong brand name, and resilience supply chain and inventory management practices. Third, there was also an early delivery of this year's holiday products. While the macroeconomic environment remains uncertain, there are many signs that the slowdown in the economy could be inevitable and as such, consumer demand for Nike's products could deteriorate in the near-term. Top editors give you the stories you want delivered right to your inbox each weekday. And my top concerns are: NKEs inventory currently sits at $9.66B, a historical peak as you can see from the top panel in the following chart. I remain optimistic about Nike's long-term prospects as it looks to remain a market leader in the industry given its continued strong brand equity and growth story in China. Friend said on the call. Therefore, I think that management has done well in China thus far in a very challenging environment for the business, proving to investors that they are able to execute well in these situations. Taking this as it is, the higher inventory levels are certainly a big cause for concern as there are worries of a global slowdown that affects retail businesses like Nike, and this is certainly not a position that investors will want Nike to be in heading into the second half of the calendar year. A sluggish holiday season is raising alarm bells. Nikes promotions and outlook is a bad omen for guidance at Under Armour, Adidas, Puma, and others in the athletic space, Cowen analyst John Kernan said, adding he expects forecast cuts at those brands. I am not receiving compensation for it (other than from Seeking Alpha). America problems a. China remains a difficult market to operate in with the tough covid policies, but while management has been executing well in the region, major uncertainties loom for the China business. 2] Arlene Martin Nike flop is first of many, Computer Weekly, March 6, 2001. Nike, based in Beaverton, Ore., said it will be aggressively liquidating its apparel and sneakers as it powers through elevated inventory levels up 44% overall and 65% in North America, the company said as it reported results for its latest quarter on Thursday. 9 May 2009 http://ezinearticles.com/?The-History-of-Nike-Sneakers&id=1760467 # http://www.nikebiz.com/media/pr/2011/06/27_Q4FY11Earnings.html # http://www.nike.com/nikeos/p/nike/en_IN/ # http://www.marketingteacher.com/swot/nike-swot.html # http://www.degree-essays.com/essays/marketingessays/nike-marketing-strategies.php # http://www.rncos.com/Market-Analysis-Reports/Sports-Wear-Market-in-India-IM235.htm # http://business.mapsofindia.com/top-brands-india/top-shoe-brands-in-india.html # http://www.fibre2fashion.com/news/leathers-news/newsdetails.aspx?news_id=31395 # http://knowledge.wharton.upenn.edu/article.cfm?articleid=629 # http://invest.nike.com/phoenix.zhtml?c=100529&p=irol-newsArticle&ID=1580524&highlight, Author: J. Pooja & Co-Author Mrs. G. Jayasheela, Submit your Article by using our online form 9 May 2009 http://xroads.virginia.edu/~CLASS/am483_97/projects/hincker/nikhist.html # Seay, Roland . EzineArticles.com. Inflation-battered shoppers will soon find some huge deals on Nike products. It is a red flag for investors, indicating the company may have difficulty moving its products. You do not need to pay for the costly lessons from the market itself. NIKE inventory for 2022 was $8.42B, a 22.85% increase from 2021. In particular, its digital sales skyrocketed during the pandemic as more and more people turned to online shopping. Inflation is not going to go away anytime soon, while the U.S. Consumer Price Index jumped 8.3% during the year through August. Second, management said that the higher levels of inventory was also a result of the deliveries of the past 2 seasons products that came in later than expected. NKEs inventory currently sits at $9.66B, a historical peak as you can see from the top panel in the following chart. Furthermore, this higher inventory position results in elevated risks for Nike should consumer demand fall as the macroeconomic environment deteriorates. Pandemic-related supply chain issues and labor shortages are currently impacting businesses across the globe. Athletes call for controversial TV host to be fired after 'sick' Damar Hamlin tweet, Bills say Damar Hamlin still in ICU as his rep, family provide updates after on-field collapse, Damar Hamlin updates: Bills safety in critical condition after cardiac arrest, Secret 'Narnia' room hidden behind wardrobe, Jason Aldean trolled after wife Brittany gets forehead kiss from Donald Trump. Supply chain issues made for higher inventory levels for Nike, but that was partially offset by increased demand in North America and the low rates of its foreign counterparts. The article acknowledged the perpetual compounding power of NKE (which is still valid now). In the remainder of this article, you will see why I am still concerned about the stock. The combination of costlier shipping and longer shipping times is creating troubles for its bottling too. Nike also has a strong brand and a loyal customer base. First, the valuation change caused by its large price corrections and also the changes in its fundamentals since then. I wrote this article myself, and it expresses my own opinions. 3] Larry Barrett, Long Strange (Reuters) Nike Incs shares soared about 11% on Wednesday as investors shrugged off margin pressure at the sportswear giant and focused on the companys efforts to fix its inventory problems that have plagued its business in recent quarters. On top of all these issues, the strengthening in the U.S. dollar adds another headwind. From equipping athletes with the finestsports equipment in the world to continuously improving their financial performance, Nike dominates competitors. Click here That is: Longer Term ROI = OEY + PGR. Finally, the Chinese market showed some sales weakness, as the country keeps dealing with the lingering effects of the pandemic. This was due to headwinds caused by higher freight and logistics costs, higher markdowns seen in North America, and lastly, unfavourable foreign exchange impacts. Nike Inc. (NYSE:NKE) has seen better days. As one of the world's most recognized athletic brands, Nike has many goods to manage. Investors liked what they heard, sending Nike stock up 12.6% in after-hours trading. 2022 revenue is now expected to grow in the single digits versus double digit growth in 2021 and expectations for that to continue next year. However, the recent build-up in inventory is cause for concern. The recent developments in the retail industry are no surprise to those paying attention. Nike is a reliable stock that has done well in most circumstances. BlackRock, CitigroupAmong Firms NamedFossil-FuelBoycotters by Kentucky, Apple, Tesla stocks start off new year at 52-week lows, UPDATE 1-U.S. natgas futures drop 11% to 10-month low on warmer Jan forecasts, EMERGING MARKETS-Brazil's real, Bovespa slide on fiscal worries, Bankman-Fried Pleads Not Guilty, Faces Trial in October. Nike shares closed down nearly 13% Friday to $83.12 and was set to shed about $15 billion in market value. Lastly, foreign exchange headwinds also will contribute to negative 70 basis point impact to gross margin for FY2023. It also offers apps that let customers keep track of its new products and order items while also helping people stay healthy. The organization does have a diversified range of sports products. Heres what happened to Nike and how the company recovered: In 2001, Nike implemented an updated version of their inventory management software. The idea of this newly implemented inventory control software was to help predict which products they would sell the most, and thus prepare the right amount of supply to meet the demand. And with NKEs current 30+ P/E multiple and profitability headwinds, I see good odds for its total returns to fall below the 7.0% to 6.4% range. "Consumer demand for Nike remains at an all-time high and we are confident that our deep consumer connections and Brand momentum will continue," Friend said. " WebNike's Inventory Problem: Passing It Along. The initial supply-chain strains led to increased ordering so the company would not be caught with a lack of products to sell. In the quarter, Nike management reported that revenues declined by 13% year on year while EBIT fell by 23%. Nikes supply chain issues are ripple effects from Covid-19. Nike not only scored big last quarter, but it also made some great strategic passes. Although Nike shares may have done well in the recent past, this year is different. WebBy late 2000, Nike had a major inventory problem on its hands. While uncertainties remain about whether the government may change its policies, I think that there are increasing uncertainties about the Chinese economy as the zero covid policies takes a toll on the economy. Your competition will decrease the buying to deplete inventory. As a result, I think that Nike's shares are actually fairly valued at the moment, as I will elaborate below, and advise investors to wait for a better entry point when these uncertainties clear up or has been priced in. WebNike Has An Inventory Problem. This article first appeared on GuruFocus. Lastly, subscribers will be able to get direct access to me and can ask me anything about the investment process or stock picks.CFA charter holder and graduated with degrees in Finance and Accounting. By clicking Sign up, you agree to receive marketing emails from Insider I think that what was done well is that management continues to be proactive in adjusting its supply to the changing demand situation and as such, this led to better management of inventories than expected. Nike's earnings per share declined by 20% to 93 cents from the previous quarter. How to solve problem in China? Phil Knight and Bill Bowerman probably could not haveimagined in 1962 to what degree their handshake agreement and $500 investmentswould yield. However, the income of Gross margins for 1Q23 came in at 44.3%, lower than the market consensus of 45.3%. I have been a long time SA reader, and am excited to become a more active participator in this wonderful community! Nike is operating in a very difficult environment as supply chain challenges continue to persist, high logistics and freight costs continue and the uncertainty remains with China's covid policy. Nike felt that a third-party perspective from an integrator's point of view could have exposed the flaws in the implementation. The Study on Inventory Problem Faced By Nike While the share price movement post earnings would have implied otherwise, Nike actually reported beats to its revenues and earnings. document.getElementById( "ak_js_1" ).setAttribute( "value", ( new Date() ).getTime() ); Thanks for contacting us. The apparel makers inventory still looks bloated, but it has wholesale customers clamoring for its products. Impressively, its sales growth is only slightly behind that of The History of Nike Sneakers.5 Dec. 2008. Revenues for 1Q23 came in at $12,687 million, 3% higher than that of the market consensus of $12,278 million. Nike stopped using i2 demand planner for its sneaker model which resulted in hike in the nike products and the inventory system was working just fine , the orders given by the consumer was given on the promised date, which brought the companys reputation. I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. Nike faces supply chain issues, impacting the company's inventory as holiday shopping starts. Click here to check it out. While Nike is likely to emerge from the excess-inventory problem a winner, its hungry wholesale partners might not. There is no doubt that Nike is increasingly seeing a tougher operating environment and this article hopes to look into this and evaluate if this is a good time to be buying Nike stock. There will be some offset to these negative impact to gross margins as management expects some positive impacts from improvements in SG&A expenses. Nike must continue to improve the workenvironment where they do business in foreign lands without involving themselves inthe political aspects of those countries Nike will continue to face new challenges, such as technical advances of the futureand the unrest and changes occurring in governments around the globe. My 1-year target price is $94, implying 8% upside from current levels. This and other delays caused bottlenecks for all businesses. The latter is slightly more predictable as it is expected that as Nike tries to reduce excess inventory in North America, we will see pressures on gross margins for the region for the rest of the year. not only scored big last quarter, but it also made some great strategic passes. There was a lot to like in Nikes latest performance: The company said on Tuesday that revenue was up 28% on a currency-neutral basis in its fiscal quarter ended Nov. 30 compared with a year earlier. Copyright 2023 Dow Jones & Company, Inc. All Rights Reserved, $60 off sitewide for VIPs with DSW coupon, All Jeans + Pants 25% off! Nikes sniffle raises risk the group catches a cold, Baird analyst Jonathan Komp said. While demand may still appear resilient in 1Q23, for the remainder quarters of the year, we may see demand fall off as consumer sentiment turns negative. Nike will likely also suffer a similar fate. My writing interests are mostly asset allocation and ETFs, particularly those related to the overall market, bonds, banking and financial sectors, and housing markets. It is far above its long-term average of 96.1 days, and at a historical peak level in the past 10 years except for the breakout of the pandemic. The decline of China sales to $1,656 million was actually slightly better than expected as there were serious concerns by the market when Nike was heading into the 1Q23 results that China sales could cause a miss as there were many challenges faced by the China business due to the lockdowns imposed in the country. The negative publicity affected both companies with monetary losses and the production set backs. The next step is how long will this timing issue last and what happens as Nike aggressively reduces excess inventory. For months, retailers have been ordering more inventory than last year to avoid the "empty shelves" phenomenon that occurred during the pandemic. The 1Q23 results showed strength in the revenues and earnings per share numbers while gross margins disappointed. Nike, Inc. is a company based on competition. While North America sales increased by 13% year on year in the 1Q23 quarter, inventory increased by 65% year on year in the North America business, while in-transit inventory grew even faster at 85% year on year growth. Nike, one of the largest, most well-known brands in the world, has been having revenue issues that continue to plague the company. https://www.wsj.com/articles/nikes-inventory-problem-passing-it-along-11671597205. However, as to be elaborated on later, given its long-term profitability levels, a 30x P/E limits long-term total return to the mid- or lower-single-digit level. All told, I am seeing an unfavorable risk/return profile. Putting all these together, this resulted in higher levels of inventory in the 1Q23 quarter. Please disable your ad-blocker and refresh. Proven solutions for both high income & high growth with isolated risks. Nike raised its guidance for the full fiscal year, expecting revenue to grow more than 10% on a currency-neutral basis, up from its prior expectation of roughly 5% growth. Nikeshares closed down nearly 13% Friday to $83.12 and was set to shed about $15 billion in market value. To contextualize the size of the inventory, the bottom panel shows the inventories in terms of the number of days outstanding. Appeared in the December 22, 2022, print edition. To contextualize In addition, earnings per share came in at $0.93, about 1% higher than the market consensus for 1Q23 of $0.92. It has a lofty longer-term goal of reaching operating margins in the high-teens percentage, up from 12.5% last quarter. Furthermore, we are seeing more anecdotes from management that product innovation continues to bring real advantages to the business as they see very strong demand for its newer performance products like the Alphafly Next% 2 and the Pegasus 39. GivenNikes (update and) plans to aggressively liquidate out-of-season goods over the next two quarters, we see risk that the overall industry becomes much more promotional as a result.. The good news is that Nike appears to be putting some distance between itself and its peak inventory problem at the end of Q1 a few months ago. As such, I think that while there were negative impacts to the business with regards to the disruptions to Nike China's operations as well as offline traffic in its stores, the management of the business operations was rather satisfactory for the quarter. The gross margin saw a 2.2% decrease due to logistical and freight costs and markdowns in its direct sales business. is still valid now). NKE has an inventory problem. 9 May 2009 http://www.shoesselling.com/nike-air-news/About-Air-Jordan-xx/ # Goldman, Robert and Stephen Papson. Digital sales have been a major priority for Nike, and its efforts have clearly paid off. WebNikes Excess Inventory Problem. The article was published more than 1 year ago back in August 2021. News Corp is a global, diversified media and information services company focused on creating and distributing authoritative and engaging content and other products and services. Guidance was adjusted based on the fact that Nike continues to expect strong consumer demand, while factoring in the supply chain situation. As a result, its OEY is in the range of ~3.2% to 2.6%. Its P/E has shrunk to ~30x now, still expensive. I am not receiving compensation for it (other than from Seeking Alpha). Nike shares surge as inventory challenges start to abate, demand stays strong. The worlds biggest sportswear company said it was stuckwith a glut of out-of-season inventory that will force it to mark down prices going into the all-crucial holiday period. editor@legalserviceindia.com. Delving deeper into the inventory problem, it looks like Nike is experiencing more of a timing issue. That said, if China does not slowdown as I expect, then there is a chance that China may provide some positive upside to the investment case for Nike. The near to medium-term outlook for Nike is stressed, though. I will be running a Marketplace service, Outperforming the Markets, where I will share with you The Barbell Portfolio, which consists of high conviction growth and value stocks to help you outperform in the long-term, as well as The Price Target Report, which tells subscribers how much discount the stock is trading to intrinsic value and the upside potential. Similarly, the largest customer of your suppliers will do the same in case they have high inventories. The country remains to be one of the few with strict zero covid policies that is directly impacting Nike's China business. Nike said Tuesday that revenue on a currency Well use digital a little bit to liquidate some of the excess apparel and well use other partners in wholesale to liquidate it, Friend said. "Lost weeks of production combined with longer transit times will lead to inventory shortages in the marketplace for the next few quarters," Friend explained. Against this background, this update article is motivated by two considerations. The higher inventory position was a result of timing issues due to Stronger demand from wholesale channels meant Nike hasnt had to discount as heavily: Gross margins were a better-than-expected 42.9%, a 3-percentage-point decline from a year earlier. Importantly, management did guide that they expect that 10% of Nike's North America inventory will be subject to markdowns to clear the excess inventory. One major miss in Nikes results was in inventory, which was up 43% last quarter compared with a year earlier, only a slight improvement to the preceding quarters 44% bloat. I am not receiving compensation for it (other than from Seeking Alpha). With disposable incomes falling, Nike will find it difficult to sell its products. Besides the inventory problem as aforementioned, I anticipated the supply-chain issues to continue as well. Thecompetitive nature of Nike and their constant seeking to improve, those challenges I believe will be met with a competitive view, Just Do It. Notably, I am very concerned about its current inventory levels, which I anticipate creating a range of trickle-down problems and keep its profitability under pressure, as examined more closely next. Analysts said that, among several other reasons, the most important reason for the problem was that Nike and i2 did not communicate well with each other.Both companies were also hasty in taking steps and did not bother to test the software rigorously. For Further Details Contact: At least 15 for potential buying opportunities. Delving deeper into the inventory problem, it looks like Nike is experiencing more of a timing issue. While the 1Q23 results were actually rather solid, there are significant near-term uncertainties and challenges for Nike. However, in the long-term Nike remains the top brand amongst Chinese consumers as the strength of the Nike brand is one of the best in China and difficult to replicate. It seems like the bottlenecks are finally easing now, though. The gross margin saw a 2.2% decrease due to logistical and freight costs and markdowns in its direct sales business. Is this happening to you frequently? So far, the company has lost 1o weeks of production in Vietnam, Matt Friend, Nike's chief financial officer, said on the call. As aforementioned, there is no doubt that NKE demonstrates excellent perpetual compounding power. The company has $9.66 billion worth of inventory, which is a 44% increase from the previous year. Receive our best ideas, actionable and unambiguous, across multiple assets. Like many retailers, Nike has too much inventory and has to accept a lower gross margin to move extra stock. Thus, the total long-term ROI under current conditions would be in the range of 7.0% to 6.4%. Shoesselling.com. I am an economist by training, with a focus on financial economics. Nike is also struggling with strict pandemic lockdowns in Vietnam, where a lot of manufacturing is done, and is experiencing slowed production due to a shortage of workers. Stacks of Nike shoe boxes sit on a shelf at a shoe store in Novato, Calif. on Sept. 27, 2021. WebThis case deals with the problems experienced by Nike, the leading manufacturer of shoes and other sports equipment in the world, in implementing a new software application to streamline its supply chain and manufacturing processes. It can hurt NKEs numbers in Europe, Asia, and Latin America when reported in U.S. dollars. Read more on seekingalpha.com. We have helped our members beat S&P 500 with LOWER drawdowns despite the extreme volatilities in both the equity AND bond market. When this happens, it will take time for NKE to clear its inventory, most likely by discounting the prices, which would pressure profitability consequently in the quarters to come. All in all, I remain confident in Nike in China in the long-term, but still remain cautious on the business given the risks we see in the region today. The objective of this strategy is to enhance the consumer experience by increasing the visibility of the brand. 1. And next, we will see that its valuation is still expensive, further adding to the investment risks. Still, Wall Street analystswho no doubt track that kind of dynamic very closelyhad been expecting that bloat to be just 28% above year-earlier levels. As Nike's growth story depends in part on China, with continued covid disruptions and supply chain challenges, it could bring additional problems to the management team in China as it navigates a rather difficult operating environment in the near-term. The next chart shows its profitability measured by ROCE (return on capital employed). (Reuters) -Nike Inc's shares soared nearly 15% on Wednesday as investors shrugged off margin pressure at the sportswear giant and focused on the company's efforts to fix its inventory problems that have plagued its business in recent quarters. The higher inventory position was a result of timing issues due to multiple factors. Given the above analysis, I am seeing a very limited upside (up to 7.0% in the long term). This is an update of an earlier article I published on NIKE, Inc (NYSE:NKE). However, it is now working to overcome the effects of inflation and other headwinds. In the long term, the growth rate of a business is given by the following simple equation: Longer Term Perpetual Growth Rate (PGR) = ROCE * Reinvestment Rate (RR). Despite Nikes inventory headwinds in North America Swoosh shares were down more than 12% today some analysts are bullish on the stock in the long-term. Nike said it will offer huge discounts to get rid of its excess product, a dramatic reversal from the past two years when retailers struggled to get enough items on store shelves. WebAbstract: This case deals with the problems experienced by Nike, the leading manufacturer of shoes and other sports equipment in the world, in implementing a new software application to streamline its supply chain and manufacturing processes. NKE has been maintaining a RR of ~10% in recent years. Use our proprietary allocation strategies to isolate and control risks. Early warning signs indicate we will see sluggish holiday sales in the retail sector. Analysts said that, among several other reasons, the most important reason for the problem was that Nike and i2 The History of Nike Sneakers. Management brought down guidance, although not yet reflecting any weakening of consumer demand, as it reflects lower revenues and gross margins for the rest of FY2023. In addition, it was encouraging to see that Nike was gaining interest from Gen Z consumers in China as their demand grew 25% year on year. Why did Nike have inventory Varying factors are causing supply chain problems in the US and across the globe. In China, while things do not look as bad in the 1Q23 report, I think that uncertainties remain as China's covid policies remain unclear while the Chinese economy looks to be weakening. I am still seeing very limited upside and plenty of downsides. In recent years, the company has been forced to change course in the face of increased competition from online retailers. With higher levels of inventory and a need to compete in a more promotional environment, this implies that management is walking a fine line as it has a huge balancing act on its shoulders in the next few quarters as it demonstrates its execution capabilities. Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I have no business relationship with any company whose stock is mentioned in this article. which is growing off a revenue base that is just 14% of Nikes. Nike is getting hit with the perfect storm. # Preliminary Information: Iconography. Finally, note that the reason that the so-called terminal P/E does not show up in this frame is that in the long term, all fluctuations in P/E ratios are averaged out (all luck at the end even out). 87990cbe856818d5eddac44c7b1cdeb8. So chances are when employees "check the back" for more sizes of the latest sneaker and come back empty-handed, there's really nothing there. Fortunately, following this failure, Nike developed an improved inventory management solution to solve their problems rapidly. Heres what happened to Nike and how the company recovered: In 2001, Nike implemented an updated version of their inventory management software. As a result, I think that Nike's shares are indeed fairly valued at the moment and the risk reward perspective is fairly balanced. Analysts have attributed Walmarts problems to mismanaged inventory. I wrote this article myself, and it expresses my own opinions. Nike is one of the world's most popular brands, and it has built its success on a foundation of innovation and marketing excellence. Plus, there are plenty of headwinds ahead, with its bloated inventories being a top concern. I am of the view that while the timing issue will likely be more easily addressed by management as the supply chain situation stabilising, barring any new supply chain problems emerging, the main concern investors might have pertains to the higher levels of inventory that Nike currently holds. This is the biggest risk to Nike at the moment as investors are not convinced that if the macroeconomic environment worsens, the elevated inventory position could bring elevated risks to the company and prove to escalate the impact of what was a mistiming issue with the supply chain. As a result, I think that management needs to take a cautious approach in China in the near-term to balance the risks of a slowing economy with worsening consumer sentiment and one that might open up and reduce covid related restrictions. In the meantime, there are plenty of headwinds and downsides in the near term. Inventory problems aside, global foot traffic at Nike stores is up, which Donahoe attributed to the companys DTC approach led by several different store concepts. And as you can see, NKEs ROCE has been remarkably healthy and stable with an average of 38%. This update is motivated by two considerations: its 33% price correction and also the changes in its fundamentals since then. Plus, 60% off clearance with American Eagle promo code, Michaels coupon code for senior - Extra 10% Off, Get a $200 reward card without AT&T coupon promo code, Damar Hamlins On-Field Collapse Was Due to Cardiac Arrest, Bills Say, More Bosses Order Workers Back to the Office, Jeremy Renner Remains in Critical Condition After Surgery. I have no business relationship with any company whose stock is mentioned in this article. Nike realized that implementation of the software was not easy and goals set were not realistic. The build-up in inventory will eventually lead to markdowns and discounts, which will eat into Nike's profits. Shares of Under Armour slipped 7.3%, while those of Indeed, the stock has suffered a 33% price correction since then, compared to a 10% loss in the S&P 500 index. Nike has been adjusting its priorities to focus on selling directly to consumers. We effectively have a few seasons landing in the marketplace at the same time, chief financial officer Matt Friend said on an earnings call with analysts on Thursday, adding that some of that inventory is now seasonally out of relevance and will be cleared out more quickly to make room for the newest and best inventory.. Sign up for notifications from Insider! First, there was the lower base of 1Q22 as inventory levels were suppressed at lower levels due to factory closures in Southeast Asia as a result of covid related disruptions. WebView 289709121-Inventory-Problems-at-Nike.docx from PM 2 at Boston University. On the fundamental side, the business is facing plenty of headwinds. Nike must continue to expand their product lines to meet theneeds of an ever-growing market. said on an earnings call on Tuesday that prior-year comparisons arent fair because inventory was abnormally low last year because of factory closures in Vietnam. Regardless, its digital sales platform is one of the most advanced in the industry and provides a great way for the company to reach its customers. Besides clothing, products from books and computer chips to toilet paperandCoca-Cola are being affected. Nike faces supply chain issues, impacting the company's inventory as holiday shopping starts. Nike's earnings per share declined by 20% to 93 cents from the previous quarter. As a result, I think that things are improving for the China business as management continues to remain confident in being able to reduce its higher inventory levels by the end of the year, and the long-term prospects of Nike in the region looks to be improving. At its current price levels as of this writing, its P/E ratio is in the range of 31x to 38x as you can see from the following SA data depending on which EPS you use. American Studies. The newer products will go out to its retail partners, like Foot Locker and Dicks Sporting Goods, and to Nike Direct, the company said, while the excess product will get shipped to Nike Factory stores. However, we are not immune to the global supply chain headwinds that are challenging the manufacture and movement of product around the world.". In the past decade Nike has attempted a similar strategy, but on a smaller scale Conclusion: Both, Nike and i2 suffered with the supply chain failure which was result of both Companies mismanagement. The article was published more than 1 year ago back . My 1-year target price of $94 implies that the stock is fairly valued at the present moment and I think that investors should remain cautious on Nike shares in the near-term. The company's robust e-commerce platform helped it offset some of the lost sales from its brick-and-mortar stores. Thesis and Background This is an update of an earlier article I published on NIKE, Inc (NYSE:NKE). Nike is currently dealing with a range of issues from fewer workers in its factories to shipping disruptions to send its product, according to a company earnings call on Thursday. The margin decrease was mainly due to the North American region, where Nike sold excessive inventory at significant discounts. Please disable your ad-blocker and refresh. INVENTORY PROBLEMS AT NIKE CASE STUDY SOLUTION VANDANA SINGH R110307045 PRIYANKA RAMOLA:R110307030 PIYUSH YADAV: MBA UAM However, with the recent elevated inventory situation in North America, Nike looks to be fighting many different battles in multiple regions like China and North America. WebINVENTORY PROBLEMS AT NIKE CASE STUDY SOLUTION QUESTION 1: An effective supply chain system is of critical importance, especially to a manufacturing company operating This story has been shared 152,341 times. In response, the company has been investing more in its online presence and has restructured how it sells its products. Under these circumstances, the stock will remain under pressure this year. Access our real-money portfolios, trade alerts, and transparent performance reporting. They have also noticed a decrease in ocean freight orders for September and October across many products, from machinery to housing. Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. In addition, Nike's North America business faces its own elevated inventory problems caused by mistiming issues. And you see, it translates into 116.6 days of inventories outstanding on a quarterly basis. GuruFocus has detected 3 Warning Sign with NKE. While it can be argued that from a P/E multiple perspective, Nike is trading below its historical average P/E after the heavy selling post 1Q23 results, I think that the shares of Nike are fairly valued at this moment as management has not yet baked in any potential weakness from the consumer end into its FY2023 guidance. The sports apparel company is facing a steep increase in inventories and diminished operating income. Note* we only accept Original Articles, we will not accept Retail chains Dicks Sporting Goods Inc and Foot Locker Inc dropped 7.2% and 3.2%, respectively, with Lululemon Athletica Inc tumbling nearly 6%. I wrote this article myself, and it expresses my own opinions. The average stock rating of 36 brokerages coveringNikeis buy and the median price target is $115, down from $130 a month ago. As such, there will be a negative impact on gross margins for Nike in the rest of FY2023 as the company looks to offload and sell off its excess inventory position and recalibrate its North America business. I am a portfolio manager with experience working for a hedge fund and a long-only equity fund with more than $1 billion in assets under management and I have a track record for outperformance in my portfolio. The software promised to help Nike predict items that would sell best and prepare the company to meet demands, but bugs and data errors resulted in incorrect Due to lockdowns, China experienced a 16% decrease in sales from the previous quarter. China remains a downer with 3 consecutive quarters of The guidance for FY2023 sales is now in the low to middle single digits growth, as the company incorporates a larger headwind from foreign exchange fluctuations of negative 800 basis points compared to the previous negative 400 basis points impact expected. For shoppers, this bottlenecks will mean a decrease in selection. This is an update of an earlier article I published more than 1 year ago back in August 2021. NKE 1.38% Although the figure cooled from the preceding two months, it is still significant. Carrying such a high inventory creates substantial balance sheet risks also. But the main point of that article was to caution readers about NKEs overvaluation risks at that time (when its stock prices were ~$170 and FW P/E stood around 39x). That article cautioned readers about Nikes substantial overvaluation at that time (when its stock prices were ~$170 and P/E ~39x). ** Disclosure** I am associated with Envision Research. Focused on long term investing, I believe in a barbell strategy in a portfolio, where there are both growth and value elements, which will be reflected in my articles. Investment banks are cutting their price targets on the company as it regroups. as well as other partner offers and accept our. Lastly, supply chain disruptions led to uncertain transit times, as the long transit times in 2H22 reduced significantly in 1Q23, which resulted in the pulling forward of holiday orders. In addition, Nike's North America business faces its own elevated inventory problems caused by mistiming issues. As a result of this higher levels of inventory, management expects weakness in gross margins for the rest of FY2023. Despite the shortages, customer demand for Nike apparel is higher than ever, Friend said. I am not receiving compensation for it (other than from Seeking Alpha). They did know that product quality and innovation would help athletesto achieve greater goals. Nike Reasons: Techonology problem => increase demand, excessive inventory order, retailers physiology-This was driven by high levels of in-transit stock due to supply chain I anticipate such bloated inventory levels create trickle-down problems. Considering that this is the organic growth rate that can be perpetually sustained, a 3.87% CAGR is nothing to be sneered at. China problems 2. It has faced many setbacks recently, including delays in deliveries, higher shipment costs and factory lockdowns due to Covid-19. If you have an ad-blocker enabled you may be blocked from proceeding. Dicks Sporting Goods Opinion: Americas True Divide: Pluralists vs. Zealots, Opinion: Unhappy New Tax Year for U.S. Business, Watch: Chinese Jet Fighter Intercepts U.S. Spy Plane, What to Know About the Speaker of the House Vote, Buffalo Bills Damar Hamlin Hospitalized After Collapsing in Game, California Storm Causes Floods, Power Cuts as New Year Arrives, Watch: Crowds Say Goodbye to Brazil's Pel Ahead of Soccer Star's Burial. Net income was flat compared with a year earlier, much better than the 23% decline Wall Street was penciling in. 2023 NYP Holdings, Inc. All Rights Reserved, Nike exec caught getting oral from female subordinate in company gym: suit, Nike ends longtime partnership with Kyrie Irving over anti-Semitism controversy, Gifts to ex-mayors up for auction including sneakers signed by hip-hop stars, Giulianis Yankees clock, Odell Beckham sues Nike: Did not honor its commitments. 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