Argus Research analysts downgraded retail and manufacturing giant Nike Inc. (US:NKE) to hold from buy. They said the company would have to discount inventory it overstocked, which would eat away at gross margins.

The downgrade follows Nike’s generally positive results for the fiscal first quarter, including revenue and earnings per share above Wall Street’s consensus estimates. The revenue beat by $400 million and came in at $12.68. better-than-expected North American sales offset weak China sales.

“Nike Direct sales rose 8%, while reported revenue in China fell 16%. The reported gross margin fell to 44.3% from 46.5%, reflecting higher transportation and logistics costs, an increase in markdowns, and foreign exchange headwinds, offset partly by higher selling prices. The consensus estimate had called for a gross margin of 45.3%,” the report noted.

Nike also resumed share buybacks and repurchased $1.0 billion of its stock in the fiscal first quarter.

According to Argus, the company is also facing rising costs and foreign exchange headwinds.

The analysts are more sanguine about Nike in the long term. They believe the company still dominates the sports clothing and shoe market and holds a substantial advantage via its deep roster of athletic stars’ endorsements.

“Although the industry remains fiercely competitive, we expect the company to build on its dominant position through its globally recognized brand, innovative products, economies of scale, and rapid growth in emerging markets,” the analysts wrote.

Bottom line: some pain is on the way.

Based on Argus’s that Nike has to cut prices to clear inventory, the firm lowered its full-year fiscal 2023 earnings per share estimate to $4.00 from $4.05, and Fiscal year 2024 to $4.30 from $4.40.

“Over the long term,” the analysts wrote, “we expect growth at Nike to be driven by the Jordan Brand, which represents more than 12% of sales; continued innovation; expanding e-commerce sales, and renewed growth in China.”

The report said Nike has a strong balance sheet with only moderate debt and enough cash to cover current obligations.

Long-term debt stood at $8.9 billion and quarter end, giving it a 36.0% debt to capital ratio.

Cash and cash equivalents and short-term investments fell to $11.9 billion at the end of 1Q23 from $13.7 billion a year earlier. Inventories rose 44%  from a year ago.

NKE shares are trading at 21-times Argus’ FY 2023 EPS estimate. It notes that it’s near the bottom of their five-year historical range of 20-39 and below their peer average.

“We believe that the current multiple adequately reflects prospects for narrower margins, elevated transportation costs, and foreign exchange headwinds,” Argus researchers concluded.

Nike shares rose more than two percent on Monday, but gave back a penny in after-hours trade to $85.39, closer to its 52-weel low of $82.22 than its $179.10.

This article originally appeared on Fintel

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