Nike Shares Rise on Leaner Inventory and Improved Margin Outlook, According to Reuters

By Savyata Mishra

Nike shares surged as much as 11% on Friday as the company continued to reduce its inventory in preparation for the crucial holiday shopping season, forecasting an improved gross margin for the second quarter thanks to decreased discounts.

The global leader in sportswear has been concentrating on inventory reduction, cutting it by 10% to $8.7 billion in the first quarter compared to the previous year, when stock levels ballooned due to decreased retailer orders stemming from reduced consumer spending.

In previous quarters, Nike resorted to significant discounting to manage its surplus inventory, which had negatively impacted its margins. Year-to-date, the company’s shares had declined about 19%, including the recent trading session.

Drake MacFarlane, a research analyst at M Science, noted that Nike’s outlook for improved markdowns is "very encouraging, especially given the overall challenging promotional landscape in the footwear industry."

Competitors like Adidas and Puma have also faced difficulties due to sluggish U.S. demand and a slower-than-anticipated recovery in China, where local brands are intensifying their efforts to capture market share.

David Swartz, an analyst with Morningstar, stated, "Nike is demonstrating that it possesses pricing power in the industry, providing it with a competitive edge."

On Thursday, Nike projected a 100 basis point increase to its current-quarter gross margin while keeping its annual forecasts unchanged.

BMO analyst Simeon Siegel remarked that investor sentiment had turned "too negative" due to fears around demand in China and North America, which had led to expectations of a downward revision in forecasts.

Following these developments, Nike’s shares were trading at $96.09, and the rally also boosted shares of Adidas, Puma, and JD Sports by approximately 5%-7%. Smaller competitors, including Dick’s Sporting Goods and Foot Locker, saw their shares rise by 2%-3%.

Despite these positive signs, demand in North America remains under pressure, resulting in Nike posting a slight miss on first-quarter revenue.

Piper Sandler analyst Abbie Zvejnieks expressed concerns about the potential decline in U.S. consumer spending, particularly among lower-income customers, due to rising gas prices, the resumption of student loan payments, and dwindling savings.