Nike (NYSE:NKE) is the undisputed leader in the sportswear market, holding approximately 12% of the sportswear market according to Statista with $47.1 billion in 12-month revenue, a difficult feat in this highly fragmented industry.

Investors have been questioning Nike’s ability to maintain profitability of late. Nike is one of the most recognizable sports brands in the world, but in recent months, stocks have been under pressure due to inflation, sky-high interest rates and supply chain problems.

Nike is in the middle of a difficult time, and there’s really nothing it can do when the macroeconomic cards are stacked against it. To try to fuel further growth, Nike has launched a Web3 platform to get more revenue from the metaverse, but this has yet to spark much interest from customers or investors. The company’s financial outlook for fiscal 2023 is also disappointing. Overall, I think it’s going to take a while for Nike to turn around.

Nike’s outlook for the coming quarters is disappointing

Nike’s management team said it is pleased with the company’s fiscal 2023 first-quarter financial results and believes they represent a good start. The company has done all it can to return profits to shareholders in this difficult time through $1.5 billion in dividends and share repurchases.

Quarterly revenue of $12.7 billion increased 4% year-over-year, below inflation, but still achieving growth due to its stacked product portfolio, constant innovation and consumer loyalty. However, sales in China were down 16% compared to the same period last year due to strict Covid lockdowns in the country.

In particular, Nike Direct was responsible for most of the revenue growth, with sales of $5.1 billion. The 14% increase on a reported basis for Nike Direct was attributed to the Consumer Direct Acceleration strategy through which the company creates a unique and individual consumer experience.

the story continues

The Covid-19 pandemic created a long-term trend towards online shopping, as it caused a change in the buying mindset of consumers. According to a survey conducted by Prosper Analytics and Insights, 54% of responses indicated that shoppers bought clothing and accessories online, and 26% of people reported that they bought shoes online. Nike Brand Digital has been driving strong growth for the company, which reported a 16% increase in sales thanks to peak times in North America, Europe, the Middle East, Africa and Asia.

However, some points in the earnings report worried investors. Gross profit margin fell 220 basis points, causing a 20% decline in earnings per share. Among other points, Nike has excess inventory, with inventory up 44% year-over-year to $9.7 billion.

In addition, the sportswear giant highlighted that its gross profit margin is expected to decline by 350-400 basis points compared to a year earlier due to excessive inventory liquidation, currency pressure and rising logistics costs. And sent.

Macroeconomic hurdles don’t help

Nike investors aren’t sure how to feel about the company’s high inventory. Many possible factors could affect Nike in the future. In August, Nike ended its $15 billion worth of share buyback program, leaving about $5.6 billion worth of shares to conserve cash.

Due to excess inventory, Nike has had to liquidate the excess and will still need to offer its products at reduced prices to make a profit. Ultimately, this will affect margins and profits in the coming quarters.

Additionally, ongoing inflation has reduced consumer spending power as the cost of essential items rises. Investors are rightly concerned that consumers will spend less on discretionary items, even during the current holiday season, as 43% of consumers feel they own more than they need and 64% don’t feel the need of keeping up with fashion trends according to the EY Future Consumer Index.

Inflation slowed slightly in October, but remains considerably higher than most of the past four decades. In this environment, the launch of the company’s Web3 for the sale of digital products does not seem likely to have much benefit in the short term.

The launch of the Web3 platform is a step in the right direction

As we head into the 2023 calendar, Nike consumers interested in Web3 are getting excited about .Swoosh, Nike’s Web3 platform.

On the platform, customers will be able to purchase digital clothing and accessories for their metaverse avatars, access one-of-a-kind non-fungible tokens (NFTs), purchase real-world clothing, and host meetups with world-famous athletes.

While near-term growth in this segment is likely to be lackluster, as consumer purchasing power is eroding, the long-term outlook looks good, so Nike can get in early. Once the economy gets back on track, consumers are likely to spend a lot of money on their avatars, virtual events, and other digital assets. Swoosh will use Polygon, which offers high speed, minimal fees, and compatibility with Ethereum.

Put off

Nike is a leading brand in its industry and has a strong digital presence, but the company faces some obstacles that should not be ignored at this time. I think it will take a while for Nike stock to have a chance to recover.

This article first appeared on GuruFocus.