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Nike stock surges as its biggest problem may be vanishing

Nike (NKE) is getting its inventory bloat under control, much to the delight of investors.

Shares of the apparel and footwear giant surged 12% in pre-market trading on Wednesday as better-than-expected sales and earnings quieted — for now — concerns that Nike would be hammered by sluggish global economic growth. The stock is the top trending ticker on Yahoo Finance as of 5:30 a.m. ET.

But the real standout from Nike's fiscal second quarter was the company noticeably working down its excess inventory — caused earlier this year by the economic pullback — compared to three months ago. It's an issue that has plagued profit margins (due to Nike aggressively liquidating merchandise) and the stock price, analysts have contended.

Nike's inventory fell 3% sequentially, spurred by a high-single-digit percentage drop in units. Total inventory units are down by a double-digit percentage compared to the first fiscal quarter.

Management told analysts on an earnings call it continues to focus on clearing inventory, particularly through off-price retail stores. Further progress is expected into calendar year 2023, including a more cautious approach to buying new inventory.

"We believe the inventory peak is behind us actions as we're taking in the marketplace are working," Nike CEO John Donahoe said.

The inventory improvement sets the stage for better profit margins for Nike in coming quarters, provided the global economy doesn't fall off a cliff.

Yahoo Finance Analysis: Nike's Earnings

The Good

  • Sales, gross profit margins, and earnings beat analyst estimates.

  • Inventory levels fell in units sequentially.

  • Management called out strong online sales in November.

  • Sales strength has continued into December, execs said on the conference call.

  • Fiscal-year sales now seen up by a low-teens percentage, up from a low-double-digit percentage previously.

The Not So Good

  • Inventory still increased 43% year over year.

  • Gross profit margin fell 300 basis points year over year due to increased markdowns.

  • Fiscal year gross profit margins still seen falling 200 to 250 basis points year over year.

  • Sales in Greater China declined 10% year over year.

What Wall Street Is Saying

"We believe Nike's 2Q performance proves the brand remains strong, margin drivers are intact (Direct to Consumer / Digital) and global demand is healthy. Looking ahead, we expect inventory and China-related issues to subside, driving margin improvements. We move our estimates higher and recommend purchasing Nike shares and selling Lululemon shares." -Jefferies Randal Konik (Buy rating; $140 price target)

"Going forward, we expect GM guidance to again prove conservative and flag that unlike the majority of retail seeing the pandemic revenue pull-forward weigh on top-line, NKE's seeing material N.A. strength, with wholesale an interestingly positive call-out this quarter. With top-line momentum and China improving into materially easing compares." -BMO Capital Markets Simeon Siegel (Outperform rating; $120 price target)

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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