A warning from Nike (NKE) in its first-quarter earnings report has given us some serious insights into a handful of consumer stocks in the portfolio. We call them “readthroughs”: valuable investment clues we find by sifting through financials and comments from other companies, including ones not owned by Jim Cramer’s Charitable Trust, the portfolio we use for the Club. While it’s a never-ending process, quarterly results and earnings calls are gold mines for these readthroughs. TJX Companies The biggest takeaway in Nike’s quarter — and not just for us, but for Wall Street overall — is that the apparel giant has a major inventory problem in North America. Its shelves in the region swelled 65% in the first quarter compared with the same three-month window last year. The cause is understandable: pandemic-induced supply chain complications, such as late deliveries over the past two seasons and early holiday orders. Nike is not an outlier in experiencing this. The effect is good news for TJX Companies: Nike is taking “decisive action to clear excess inventory,” according to Nike CFO Matthew Friend. Retail’s inventory glut is a key reason why we started a position in TJX , the parent company of Marshalls and TJ Maxx, in late August. Apparel makers and sellers don’t want to hold onto excess goods, especially when more seasonally relevant clothes are on their way. They want to get rid of it, even if it means taking the kind of short-term hit to profits that Nike said it’s likely to experience. Off-price retailers such as TJX are the beneficiary of these industry dynamics. Here is the company in its own words, in its 2021 annual report: “With many retailers continuing to close stores and with congestion in the supply chain, we offer vendors an attractive solution for clearing inventory,” TJX wrote, adding later that it is “in a great position to take advantage of the plentiful off-price buying opportunities in the marketplace.” Nike is likely utilizing multiple approaches to get rid of its excess inventory, including markdowns in their own stores. However, Nike’s quarter makes it clear the “plentiful off-price buying opportunities” that TJX Companies has seen have not disappeared yet. TJX shares were up more than 1.5% Friday, while Nike shares slumped more than 10%. Starbucks & Apple Nike’s negative China sales serve as a reminder about the current complexities of doing business in the world’s second-largest economy. Nike’s sales in China were $1.66 billion in the first quarter. While that met Wall Street’s tempered expectations, it still represented a 16% year-over-year decline. Nike’s earnings before interest and taxes (EBIT) in China also fell compared with a year earlier, down 23% to $541 million. We had not forgotten about Beijing’s attempts to enforce its so-called “zero Covid policy” and the economic problems associated with rolling lockdowns in major cities. Nevertheless, Nike’s results are worth considering in the context of Club holdings…
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