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The legendary footwear brand NIKE Inc. is fighting both growing prices and recessionary challenges
Even the mightiest falter from time to time, and NKE's stock is set to crash in 2022. Shares are down more than 34% since the beginning of the year, making it the Dow Jones Industrial Average index's worst-performing stock.
NKE's stock had been falling for a long time before its fiscal 2022 fourth-quarter earnings report was released at the end of June and the news sent shares plummeting. The primary worry was inventory accumulation because soaring inflation, high fuel costs, increasing interest rates and a potential recession all led to people cutting back on discretionary spending.
NKE's statistics reflected this, with inventory increasing by 23% despite a 1% drop in sales and a 3% drop in per-share profits. More concerning was NKE's warning that it will need to be more promotional to attract customers as a method of cutting inventory, implying that earnings will be put under more pressure in the coming quarters.
NKE will undoubtedly see margin pressure for some time, as the clothing company expects gross margins for fiscal 2023 to be 50 basis points lower than in 2022, which itself was 80 basis points lower than in 2021.
Although it expects greater pricing and a further transition to a more direct-to-consumer (DTC) business to enhance earnings, NKE's shipping expenses alone will cost it 100 basis points. Furthermore, firms with considerable foreign market exposure, such as NKE, would suffer as a result of the high US dollar, which will affect currency exchange rates. According to NKE, foreign currency rates would reduce profits by 30 basis points this year.
NKE is a renowned brand; in fact, according to Brand Finance, it is the most valuable apparel brand in the world and has been since monitoring such values began. So, while its stock should definitely be valued higher, paying 29 times trailing profits, 23 times next year's expectations and 36 times free cash flow seems a touch excessive.
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