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Goldman Sachs Equity Analyst and Managing Director Kate McShane joined Yahoo Finance to discuss Nike’s earnings, marginalized pressures, China's COVID-19 lockdown, and the outlook for the footwear manufacturer's growth.
"Honestly, there were some misses here," McShane said on Nike's earnings. "But going into the quarter, speaking to investors, the greatest concern was on China. And I think now that we have the news, in terms of what happened in China during the quarter— sales were down 20%, China EBIT was down 55%— now investors can kind of take stock of what's happened. And Nike's given a game plan on how they plan to resolve it," she said.
She said COVID lockdowns in China were to blame. "It impacted many brands in China during the quarter, and Nike wasn't any different," she added.
McShane explained that the company plans to aggressively work through the higher amount of inventory in the market and the company should be in more of a pull market by the end of its fiscal second quarter.
"There is guidance across the retail industry that as the supply chain gets more in balance and demand comes off a little bit, that you will see more promotions going forward across the board. Nike, though, has been cleaning up their marketplace, has been pulling back from undifferentiated retail, and that should result in more full-price selling going forward overall," she said.
While the company surpassed Wall Street expectations, gross margin declined to 45 percent, an 80 basis point drop. Nike attributes the plunge to high inventory reserves in China and hefty transportation costs.
China has only started to partially lift its “zero Covid” policy this month and shipping rates in the Asian Pacific remain expensive. DHL Global Forwarding and Ocean Network Express CEOs told Nikkei Asia earlier in June that elevated transportation costs will continue to stall international trade, which prolongs higher costs for Nike.
McShane explains that Nike is engaging in full-price selling to address these headwinds.
Nike also has some hurdles to jump given shifts in consumer spending.
“We’re seeing way more purchases in things like beauty and luggage…versus comfortable clothing,” says McShane, pointing out that retail companies like Target have seen growth in beauty, household essentials, and food and beverage.
Yaseen Shah is a writer at Yahoo Finance. Follow him on Twitter @yaseennshah22