A margin warning from Nike (NYSE:NKE) is pushing down retail stocks today, particularly those who deal in athletic wear. The undisputed sneaker king recently reported earnings, revealing a quarter with mixed results. While this quarterly report demonstrated 4% growth in quarterly sales, it also included a 22% decrease in earnings.
NKE stock fell 12% in pre-market trading today and shows no signs of improving. This disappointing performance is primarily due to the company’s excess of inventory, a trend that has posed significant constraints for retail stocks throughout the quarter.
Nike is a leader in the retail sector, but it is not the only stock to fall today. Its peer Under Armour (NYSE:UAA) is down more than 6%, though it rebounded slightly after plunging this morning. Both Lululemon Athletica (NASDAQ: LULU) and Dick’s Sporting Goods (NYSE:DKS) have fallen almost 5% as of this writing, displaying patterns similar to UAA. LULU stock has been turbulent since it received an analyst downgrade one month ago due to anticipated weak projections.
What can investors expect from retail stocks in the months ahead as the holidays approach? Let’s take a closer look.
What the NKE Stock Earnings Mean for Retail Stocks
This grim earnings report suggests NKE stock should prepare for some turbulence in the year’s final quarter. This will likewise pose difficulties for LULU stock and its athletic apparel peers. When a sector leader is pushed down by an industrywide trend, it should serve as an economic bellwether for its entire field. Investors were already nervous about the current bear market. Now their confidence in the retail sector is likely to be compromised even further.
Is Nike’s problem unexpected? Not according to Michael Burry. The “Big Short” investor warned of the bullwhip effect earlier this year. That scenario refers to the problem posed to retailers who have acquired a surplus inventory and find themselves unable to sell it without offering discounted rates. As InvestorPlace writer Eddie Pan summarizes:
“If retailers have too much inventory on hand, then they may lower prices to attract more demand. Remember, storing items isn’t free; more items stored equates to more maintenance and utility costs. This means that retailers are incentivized to reduce their inventory as quickly as possible.”
Summer 2022 saw big box retailers such as Target (NYSE:TGT) and Walmart (NYSE:WMT) fall victim to the bullwhip effect. While the discounts offered by these companies might have pleased consumers, Nike’s earnings report is a good reminder of why they made Wall Street very uncomfortable.
Excessive inventory often renders companies unable to move forward without taking a loss. But for companies that deal in more expensive items, such as Lululemon’s pricey yoga attire or Under Armour’s high-performance sneakers, the economic landscape could be even worse. If either company has overbought on inventory, it will likely report losses as bad as Nike’s in the coming months. Both are scheduled to report earnings late in 2022.
The Bottom Line
The future may not be so grim for LULU stock. The company reported generally positive Q2 earnings in early September, beating Wall Street expectations. However, Under Armour has been struggling since it received an analyst downgrade in May after its CEO resigned.
On top of it all, a holiday sales slump is predicted, and NKE stock will likely be among the losers. If Nike continues falling, UAA stock will follow.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
