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Nike's Web3 Marketplace Platform Fails to Spark a Turnaround

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

Investors have been questioning Nike's ability to maintain its profitability latel. Nike is one of the most recognizable athletic brands in the world, but in recent months, the stock has been under pressure due to inflation, soaring interest rates and supply chain issues.


Nike is in the midst of a tough time, and there's not really anything it can do when the macroeconomic cards are stacked against it. To try and drive further growth, Nike has launched a Web3 platform to bring in 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 underwhelming as well. Overall, I think it will take a while for Nike to make a turnaround.

Nike's outlook for the next few quarters is underwhelming

Nike's management team said it is pleased with the company's first-quarter fiscal 2023 financial results and believes they represent a strong start. The company has gone to great lengths to return profits to shareholders in this tough time through $1.5 billion in dividends and share repurchases.

Quarterly revenue of $12.7 billion was up by 4% year over year, lower than inflation but still ekeing out an increase due to its stacked product pipeline, constant innovation and consumer loyalty. However, sales in China decreased by 16% versus the year-ago period due to the country's strict Covid lockdowns.

In particular, Nike Direct was responsible for the bulk of the revenue growth as its sales were $5.1 billion. The 14% increase on a reported basis of Nike Direct was attributed to the Consumer Direct Acceleration strategy through which the company creates a unique one-on-one consumer experience.

The Covid-19 pandemic created a long-term trend towards online shopping, as it caused a shift in consumers' purchase mentality. According to a survey by Prosper Analytics and Insights, 54% of the responses indicated buyers purchased apparel and accessories online, and 26% of people reported purchasing shoes online. Nike Brand Digital has been driving huge growth for the company, which reported a 16% increase in sales thanks to moments of high demand in North America, Europe, the Middle East, Africa and Asia.

However, a few points in the earnings report had investors worried. The gross profit margin fell by 220 basis points, which led to a 20% decrease in earnings per share. Among other points, Nike has an inventory glut, with the inventory up 44% yearly at $9.7 billion.

Furthermore, the sports apparel giant outlined that its gross profit margin is expected to decrease by 350 to 400 basis points compared to the previous year due to excess inventory liquidation, foreign exchange pressure and increased logistics and shipping costs.

Macroeconomic headwinds are not helping

Nike's investors are unsure 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 share repurchase program with approximately $5.6 billion worth of shares left behind in order to preserve cash.

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

Moreover, the ongoing inflation has reduced consumer spending ability as the cost of essential items rises. Investors are rightly worried about consumers spending less on discretionary items, even during the ongoing holiday season, as 43% of consumers feel that they own more things than they require, and 64% do not feel the need to keep up with fashion trends as per EY's Future Consumer Index.

Inflation slowed down slightly in October, but it is still considerably higher than most of the past four decades. Under this environment, it does not seem likely that the company's Web3 lauch selling digital goods will have much of a near-term benefit.

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

As we come closer to calendar 2023, Nike consumers interested in Web3 are getting excited about .Swoosh, Nike's Web3 platform.

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

While near-term growth in this segment will likely be lackluster as consumer spending power is being eroded, the long-term outlook seems good, so Nike can get in early. Once the economy is running hot again, consumers will likely spend big bucks on their avatars, virtual events and other digital assets. Swoosh will utilize Polygon, which offers fast speed, minimal fees and compatibility with Ethereum.

Takeaway

Nike is a leading brand in its industry and has a strong digital presence, but the company is facing some headwinds that should not be ignored at the moment. I believe it will take a while for Nike's stock to have a chance of recovering.

This article first appeared on GuruFocus.