Nike analysts warn of inventory, China and Adidas issues

Nike analysts warn of inventory, China and Adidas issues

Nike analysts warn of inventory, China and Adidas issues

  • Nike is still sitting on over $9 billion in inventory.
  • In the last quarter, Nike has finally seen an uptick in sales in China.
  • New Adidas CEO Bjørn Gulden could reignite rivalry with Nike.

In the 1980s, Nike’s first executive, Bob Woodell, described the bloated inventory as “a cancer that was going to eat us alive.”

While Nike executives no longer speak with the founding cast franchise, the core concept hasn’t changed: inventory can be deadly for sportswear companies.

It’s also one of the big questions for Nike heading into 2023. Insider spoke to Wall Street analysts about what to expect from the company next year. Leading stock pickers: Nike needs to reduce inventory and further increase sales in China. Analysts are also wondering how tough Nike will face competition from Adidas under new CEO Bjørn Gulden.

“Inventory levels are going to be key”

In December, Nike reported a 43% increase in inventory, three months after announcing a 44% increase and saying it would cut prices to empty warehouses. Nike now has more than $9.3 billion worth of shoes and apparel on its balance sheet.

In a December call with analysts, Nike executives downplayed the severity of the inventory bloat, noting strong demand for Nike products and the residual impact of supply chain rumbles that have sounded most retailers in recent years.

“Inventory levels are going to be key (in 2023),” Edward Jones senior research analyst Brian Yarbrough told Insider. “Any time you’re very promotional like you are right now, the problem becomes: can you get back to full price?”

“It’s all about China”

China is also a major concern for Nike. The country’s size, rapid growth and savvy consumers make it a critical high-margin market for sportswear brands trying to increase sales.

But Nike’s sales in China in the fiscal year that ended May 31 fell 9% to $7.5 billion. The country accounted for 17% of Nike’s sales, but 28% of its pre-tax revenue.

“It’s all about China,” Poonam Goyal, senior e-commerce and sports entertainment analyst for Bloomberg Intelligence, told Insider. “China is a growth engine for a lot of these sports brands, not just Nike. Where will the next stage of growth come from? It will come from China. If we don’t start to see a recovery there soon , this will prolong their growth profile.”

Ahead of the December earnings report, Simeon Siegel, managing director of equity research at BMO Capital Markets, told Insider that Nike appears to be taking a turn in China.

He called it correctly.

For the quarter ending November 30, Nike reported a 6% increase in sales in China, excluding foreign exchange costs. On the analysts’ call, CEO John Donahoe said the company was successful in making “localized products” for the market.

“We believe China remains a growing market with significant potential to unlock,” he said. “Our team has just done a phenomenal job over the past 10 weeks, but also over the past few years.”

Reinvigorate a rivalry?

Analysts also believe that new Adidas CEO Bjørn Gulden, who previously worked as Puma’s CEO, could reinvigorate the rivalry with Nike.

Nike and Adidas have been rivals for decades, but in recent years Nike has put a significant amount of daylight between itself and its closest rival. In its last fiscal year, Nike had sales of $46.7 billion. Adidas made $21.2 billion in sales in 2021.

But Gulden could put a new charge in the decades-long feud. At Puma, he gave the brand a boost by boosting its relevance with celebrities including J. Cole, Jay-Z, Kylie Jenner, Nipsey Hussle, Rihanna and Selena Gomez. He has also put shoes on the feet of top athletes, including Brazilian soccer star Neymar and NBA player Kyle Kuzma.

He could give Adidas a similar punch.

“How is this tension going to shape the competitive landscape? At Puma, he didn’t have the funding to go big,” Goyal said. “But at Adidas he has a much bigger pocket. It will be an interesting year.”

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