Nike's Efforts to Clear Inventories Hit Profit Margins

Shares of Dow component Nike (NKE) are tumbling after the company released its latest earnings report.

The company beat analyst estimates for earnings and sales, but its profit margins took a hit from markdowns to clear out excessive inventory. Higher freight costs and a stronger dollar also weighed on Nike profits.

The athletic gear giant reported fiscal first quarter net income of $1.5 billion or 93 cents a share. Analysts had expected earnings of 92 center per share. Sales came in at $12.7 billion, compared with analyst estimates of $12.2 billion.

Gross margins at Nike fell to 44.3% from 46.5% a year ago. Nike executives said the decline was primarily in North America as the company had to liquidate excess inventories through is direct-to-consumer sales unit, Nike Direct. Inventories at Nike stood at $9.7 billion, a 44% increase from the year-earlier period because of what executives described as supply chain problems. 

Total sales for Nike in Greater China were down 16% to about $1.7 billion, compared to $2 billion a year ago as sales were impacted by COVID-19 lockdowns. Total sales in North America increased by 13% to $5.5 billion compared to $4.9 billion a year ago, as U.S. demand remained resilient despite rising inflation.

Nike shares fell over 12% in early trading on Friday, leading losses on the Dow Jones Industrial Average. They have lost nearly half of their value so far this year.