Inventory Woes Lead to Another Margin Miss
Comment of the Day

June 28 2022

Commentary by Eoin Treacy

Inventory Woes Lead to Another Margin Miss

This article from Bloomberg may be of interest to subscribers. Here it is in full:

Concerns about company margins have been in focus as stock prices have slid this year. Another major US corporation is reporting a miss, which may add to anxiety about the upcoming earnings season.

Nike’s fourth-quarter gross margin trailed estimates, with an 80 basis-point drop from the prior year, due to what the firm said were higher inventory “obsolescence reserves” in China, along with elevated freight and logistics costs. Production issues amid Covid shutdowns have been resolved, but shipping logjams are still an issue, boosting inventory as many items were stuck in transit.

Earlier this month, bellwether national supermarket chain Kroger also reported a profit-margin miss, because of some price cuts and higher supply-chain costs. That was exactly the combination of factors that’s been a source of worry about corporate profitability.

Nike shares initially popped in postmarket trading, but pared some gains. Watch for more from the company on its 5pm conference call. Meantime, big banks, like JPMorgan, BofA and Morgan Stanley, are announcing their shareholder payout plans in the wake of the Fed’s stress tests; shares were mixed with JPM dipping slightly.

Eoin Treacy's view

Nike is another company dealing with high inventory levels. That’s stranded capital until the excess levels are worked off. Given the seasonal nature of many product lines and the industry practice of bringing out new designs on a regular basis, there is a clear scope that significant discounting will be required to clear stock levels. That’s good news for consumers, less so for Nike.

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