Nike Inc. shares tumbled the most in more than two decades after a glut of unwanted merchandise eroded the sportswear giant’s profitability.

North American inventories surged 65 per cent in the fiscal first quarter ended Aug. 31, and resulting markdowns caused gross margin to miss Wall Street’s expectations. The retailer also cited higher freight costs and foreign-exchange effects in its earnings report, released late Thursday, and downgraded its outlook for the full year.

Nike is the latest company to grapple with an increasingly complex economic panorama that began with supply-chain delays and port congestion. By the time companies were able to get supplies to store shelves, demand shifted as stubbornly high inflation eroded some consumers’ purchasing power. In Nike’s case, shipping woes caused a surge in out-of-season merchandise. On top of this, the dollar’s relentless rise has crimped results from other countries.

Elevated inventories are “driving intense margin pressure,” Wedbush Securities analyst Tom Nikic said in a research note. Nike is going to need “excess clearance activity in order to clean up the marketplace,” he said.

Wedbush was one of several banks that slashed their price targets on Nike shares in the wake of the disappointing earnings report.

The shares fell 13 per cent in New York on Friday, the worst slump since 2001. The stock is now at its lowest level since April 2020, in the early days of the pandemic. Concern about a lack of pricing power weighed on rivals in Europe Friday, with Adidas AG shares dropping 4.1 per cent and Puma SE declining 5.7 per cent.

The company now sees gross margin falling 200 to 250 basis points this fiscal year -- versus a previous forecast that the gauge of profitability would be flat or decline as much as 50 basis points. The margin erosion is expected to be particularly steep in the company’s second quarter. While full-year sales are still expected to grow in a low double-digit range when adjusting for currency, real expansion is now seen in a range of low to mid-single digits. 

Nike in particular has struggled to resolve logistics issues stemming from port congestion and shipping logjams. Overall inventory rose 44 per cent in the most recent quarter compared to the prior year. The amount of merchandise in transit also spiked, even though executives noted that shipping times are improving. 

CHINA RESULTS

China, which has seen its Covid Zero policy weigh on the economy, represents another headache. Nike said sales fell 16 per cent in its Greater China region in the quarter. 

Despite volatile demand, executives have said they still see the country as a long-term growth market and have pledged to continue pumping investment into the region. 

Chief Executive Officer John Donahoe said Chinese consumers are emerging from pandemic restrictions with an appetite to spend and the company expects results to start improving. He added that North America demand also is robust. First-quarter sales in Nike’s home region beat analysts’ estimates. 

Globally, sales rose 10 per cent on a currency-neutral basis in the period. Total revenue was US$12.7 billion, above analysts’ average estimate of US$12.3 billion, but those sales were less profitable amid markdowns. Earnings per share missed expectations.