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Earnings Results: Nike stock drops 10% as execs predict cheaper clothing for at least the rest of the year

Nike Inc. on Thursday reported earnings and sales that topped expectations, but shares declined in after-hours trading as margins took a hit while higher freight costs, merchandise markdowns and the effects of a tougher foreign-exchange backdrop piled up.

The athletic-gear giant reported fiscal first-quarter net income of $1.5 billion, or 93 cents a share, compared with $1.9 billion, or $1.16 a share, in the year-earlier period. Sales came in at $12.7 billion, compared with $12.2 billion a year ago.

Analysts polled by FactSet expected earnings of 92 cents a share on sales of $12.28 billion. Shares of Nike
NKE,
-3.41%

fell 4.5% after hours, as concerns about margins and inventory weighed on the company.

Prior to the report, analysts following Nike had zeroed in on the impact of the stronger U.S. dollar, the impact of China’s COVID lockdowns, as well as the effects from bigger discounts to sell shoes and other gear that sat around for too long due to backups in the company’s supply chain. The back-to-school season, and competition with the likes of Adidas AG
ADDYY,
-5.21%

were also points of focus for Wall Street.

Gross margins fell to 44.3% from 46.5%. Nike executives said the decrease “was primarily driven by North America, which took measures to liquidate excess inventory through Nike Direct markdowns and wholesale marketplace actions.”

Inventory for Nike stood at $9.7 billion, a 44% increase from the year-earlier period, due to what executives described as “ongoing supply-chain volatility, partially offset by strong consumer demand during the quarter.”

Nike, in June, said it expected “higher promotional activity” in the first quarter, as it tries to sell seasonal items that arrived late, following factory closures last year in Asia, where most of its footwear is made. However, for the full year ahead, management at that time said it was planning for “mid-single-digit price increases.”

Executives also said they were planning to expand sales that go directly to consumers, via its own stores and online. The company over the years has been trying to rely less on retail chains like Foot Locker Inc.
FL,
-6.36%

for sales.

Shares of Nike have fallen 43% so far this year. By comparison, the S&P 500 index
SPX,
-2.11%

is down around 24% over that time.

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