Daily Brief: Nike Spread Itself Too Thick, And Now It’s Paying The Price

Daily Brief: Nike Spread Itself Too Thick, And Now It’s Paying The Price

over 1 year ago3 mins

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Sportswear titan Nike gave a disappointing quarterly update late last week.

What does this mean?

A 22% drop in profit is never good news – but set against an uptick in sales, it can leave shareholders especially miffed. See, although a strong US dollar means that Nike’s overseas takings look pretty measly when brought back home, fumbling the bag this badly can’t be blamed entirely on that. And it’s pretty clear where the company took a wrong turn: back when supply chains were hopelessly clogged, Nike had the bright idea to order stock early, giving goods ample time to arrive. That made sense then – but later, when supply chains eased and demand slowed, Nike found itself flooded with gear, and inventory hit levels 44% higher than the same quarter last year. In the end, the company was forced to slash prices in a bid to offload the kicks that were piling up in storage, ultimately denting profit.

Nike inventory
Source: Seeking Alpha

Why should I care?

For markets: It gets worse.

This problem isn’t over yet. Nike’s warned investors that shifting its mountains of extra stock will probably eat away at profitability for the rest of the year. What’s more, the company has doubled estimates of the hit it’ll take from the strong dollar this year, and is now putting the number at a shudder-inducing $4 billion. And investors did shudder – as they sent Nike’s stock plunging a full 10% after the news. Rivals Adidas and Puma suffered too, dropping 4% and 5% respectively, with investors guessing similar inventory problems might be plaguing them.

Nike stock
Source: Google Finance

The bigger picture: Nike’s not alone.

Ballooning inventory and the inevitable discounts they trigger aren’t unusual right now. (In recent months, the big-box retailer Target has faced similar issues.) But Nike’s results are a sign that the phenomenon is spreading and could become a key theme this earnings season. That doesn’t bode well for companies, but lower prices will play well with cash-strapped consumers and might ultimately help put a lid on inflation.

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The Eurozone Euro-Groans At Record Inflation

Eurozone image

Data out on Friday showed that eurozone inflation hit double-digits for the first time ever last month.

What does this mean?

Europe can’t catch a break right now: with Russia squeezing gas supplies harder than anacondas squeeze capybaras, energy prices have headed steadily skywards – seeing a 41% increase last month on the same time last year. That jump played a key role in boosting overall consumer prices, which went up a record 10% last month and outstripped expectations for the fifth month running. But it wasn’t just one thing: even when you strip out volatile factors like energy and get down to what’s known as “core inflation”, the bloc still saw an all-time high. Given that, the European Central Bank will probably have to continue raising interest rates aggressively next month: if investors are right, the region could be facing its second-straight 0.75 percentage point hike.

Eurozone inflation

Why should I care?

Zooming in: Remember the nuances.

Yes, most of the countries in the region saw double-digit inflation. But the numbers actually differed significantly from place to place. Take France: there the government’s subsidies on energy bills brought inflation down to 6.2%, the lowest in the bloc. On the other (less fortunate) end of the spectrum were three Baltic countries – each of which clocked figures in the twenties. Even Germany registered a 71-year high of 10.9%, a figure the government is looking to slash with a whole swathe of measures designed to cut energy costs.

The bigger picture: Look to the future.

Last week, the OECD upped its 2023 eurozone inflation forecast to 6.2%. Makes sense: there’s only so much the central bank can do by hiking rates. After all, the problem’s mainly supply driven and interest rate rises hit demand more directly. That could be why some economists think inflation won’t start easing until the start of next year, when energy prices are finally expected to drop. Here’s hoping.

OECD inflation forecasts
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