After its Q 4th, 2022 earnings release, Nike NKE is in rough territory, the company beat on earnings yesterday, but the stock fell today after a cautious outlook on China.
Goldman Sachs Equity Analyst and Managing Director Kate McShane joined Yahoo Finance to talk about Nike's earnings, marginalized pressures, China's COVID 19 lockdown and the outlook for the footwear manufacturer's growth.
There were some misses, according to McShane, on Nike's earnings. The greatest concern was on China, speaking to investors, going into the quarter. Now that we have the news, in terms of what happened in China during the quarter -- sales were down 20%, China's EBIT was down 55% -- now investors can take stock of what's happened. She said Nike has a game plan on how they plan to resolve it.
She said that there were COVID lockdowns in China. She said that Nike was not a different company in China during the quarter.
McShane said that the company plans to work through the higher amount of inventory in the market and that it should be in a pull market by the end of the second quarter.
As the supply chain gets more in balance and demand comes off a bit, there is a chance that there will be more promotions going forward across the board. She said Nike has been cleaning up their marketplace, has been pulling back from undifferentiated retail, and that should result in more full-price selling going forward.
The gross margin declined to 45 percent, an 80 basis point drop, as the company surpasses Wall Street expectations. Nike attributes the plunge to high inventory reserves in China and hefty transportation costs.
China has only started to lift its zero Covid policy this month, and shipping rates in the Asian Pacific remain expensive. The CEOs of DHL Global Forwarding and Ocean Network Express told Nikkei Asia earlier in June that elevated transportation costs will continue to stall international trade, which will lead to higher costs for Nike.
McShane explained that Nike is engaging in full-price selling to address these headwinds.
As the supply chain gets more imbalanced and demand comes off a bit, there is a consensus across the retail industry that there will be more promotions going forward, according to McShane.
There are some hurdles to jump because of the shifts in consumer spending.
McShane says that retail companies like Target have seen growth in beauty, household essentials, food and beverage.