Nike (NKE) earnings Q1 2023

A woman shops for shoes at the Nike Factory Store at the Outlet Shoppes in El Paso on November 26, 2021 in El Paso, Texas.

Paul Ratje | AFP | Getty Images

Nike said Thursday it had a strong first fiscal quarter despite supply chain issues, as well as declining sales in Greater China, its third-biggest market by revenue.

But Nike’s shares fell in after-hours trading as the company described problems with overstocked inventories and the aggressive steps it is taking to lower them.

Nike and other retailers have faced supply chain headwinds and Covid-related store closure disruptions.

Like other retailers, Nike has faced supply chain headwinds such as: B. an increase in both shipping costs and delivery times in recent quarters.

Here’s how Nike performed in its first fiscal quarter versus Wall Street expectations, based on a poll of analysts by Refinitiv:

• Earnings per share: 93 cents vs. 92 cents expected
• Revenue: $12.69 billion versus $12.27 billion expected

As delivery times and consumer demand increased this year, retailers responded by ordering stock earlier than usual. As shipping times began to improve rapidly during transit, this led to rising inventories, according to Nike CFO Matthew Friend.

The Nike exec noted that promotional activity has accelerated across the market, especially for apparel brands, mixed with consumers facing greater economic uncertainty.

“As a result, we are facing a new level of complexity,” Friend said when speaking with investors on Thursday, adding that Nike will seek to clear inventory for certain bags of “seasonally delayed products,” particularly apparel.

Nike executives said inventories in North America alone are up 65% year over year, reflecting a combination of late shipments over the past two seasons and early Christmas orders, which are now expected to arrive ahead of schedule.

This has resulted in a couple of seasons’ worth of goods being available at once. Because of that, Friend said, “we decided to take this stock and liquidate it more aggressively so we can bring consumers the latest and greatest stock in the right places.”

Nike reported that net income for the three-month period ended Aug. 31 fell 22% to $1.5 billion, or 93 cents a share, compared to $1.87 billion, or $1.18 a share last year.

Revenue rose 4% to $12.7 billion during the period, compared to $12.2 billion a year earlier.

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Recently, Nike has changed its strategy, trying to sell its sneakers and other merchandise directly to customers and reducing sales from wholesale partners like Foot Locker. The company said Thursday that its direct sales rose 8% to $5.1 billion and sales of its digital brand rose 16%. On the other hand, sales at Nike’s wholesale business rose 1%.

In the fiscal first quarter, Nike said on-balance sheet inventories rose 44% from the same period last year to $9.7 billion, which the company said was due to supply chain issues and in part strong consumer demand has been balanced.

Total sales in Greater China fell 16% to about $1.7 billion, compared to nearly $2 billion a year earlier. The company has faced disruptions to its business in the region, where Covid lockdowns have impacted its business. Nike said in the previous quarter that it expects issues in Greater China to weigh on its business.

Total sales in North America, Nike’s largest market, rose 13% to $5.5 billion in the fiscal first quarter, compared to about $4.9 billion for the same period last year. The sneaker giant has consistently emphasized that despite inflation, consumer demand, particularly in the US market, has not waned.

The company said Thursday it expects fiscal second quarter revenue to grow in the low double-digits despite supply chain and exchange rate headwinds on strong consumer demand.

Read the company’s earnings announcement here.