Why inventory is increasingly critical for Nike

Nike (NKE 3.01% ) is expected to report its fiscal third quarter 2022 results on March 21 after the market closes. The sportswear and equipment maker is grappling with widespread supply chain disruptions, a slower-than-expected recovery in China and a rising U.S. dollar, among other things.

Fortunately for the iconic global brand, consumer demand remains robust. Therefore, the crucial element for Nike’s short-term success is ensuring sufficient inventory to restock the shelves.

Image source: Getty Images.

Nike’s main challenge is to restock the shelves

Nike’s sales fell 4.4% in fiscal 2020 to $37.4 billion when several of its wholesale partners were forced to close their doors to in-person shoppers. But sales rebounded with a vengeance in 2021, rising 19.1% year-over-year, while rising more than $5 billion from 2019 levels. markets eased around the world, consumer demand and subsequent sales growth normalized to pre-pandemic levels faster than expected. As a result, several companies, including Nike, are struggling to ramp up production to keep up with consumer spending.

Not surprisingly, inventory plays an important role in operations. Nike is closely monitoring COVID outbreaks in regions where its manufacturing facilities are located and ramping up production as capacity becomes available. Nevertheless, Nike did not produce enough to meet total demand. As a result, the company is opting to allocate more of its products to its own direct-to-consumer channels and withhold inventory from third-party retailers.

Such a strategic shift in offering creates a competitive advantage and a customer acquisition tool that should ultimately increase profits. Customers are tired of visiting other retailers’ websites and third-party stores that constantly have scarce products. As Nike reduces product allocation to third-party retailers and eliminates other middlemen, it should automatically attract more customers to its own stores and website, including its SNKRS mobile app.

In the last fiscal quarter that ended Nov. 30, the company experienced a decline in sales, primarily in markets outside the United States and Europe, due to insufficient inventory. Sales in China were down 20% year-over-year and 8% in Asia Pacific and Latin America. At the same time, sales increased by 12% in North America. The bifurcation highlights not only inventory shortages, but also the logistical challenges of getting products to different locations.

It had also ended the second quarter with $6.5 billion in merchandise, a modest 7% year-over-year increase heading into the holiday season (Thanksgiving/Christmas).

Next week, however, investors will want to know how management is addressing manufacturing issues and can produce a full tilt. Nike and its shareholders will want to capitalize on high consumer demand before spending is allocated elsewhere.

What this could mean for Nike investors

Wall Street analysts expect Nike to report revenue of $10.63 billion and earnings per share (EPS) of $0.71. If it meets these EPS estimates, it would be a decrease of 21.11% compared to the same period the previous year. And the revenue estimate is a slight increase from $10.35 billion in the same quarter last year.

The company is increasing its marketing spend to create more demand after reducing it last year and is also incurring higher transportation and logistics costs. The modest increase in sales estimates over the previous year does not appear to be sufficient to offset these costs, and profits, therefore, are expected to fall. The stock has paid the price for these lower expectations and is down 29% since the start of 2022. If Nike is to stop the bleeding, it must demonstrate short-term operational excellence by manufacturing products and getting them where customers want them. their.

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