Nike's Air Freighting Raises Questions on Inventory Management

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Nike ( NKE ) is the largest global manufacturer of athletic footwear, apparel and equipment by sales volume, and competes with Sketchers ( SKX ), Adidas AG ( ADS ), Steven Madden ( SHOO ) and K-Swiss ( KSWS ) in the global footwear market. It sells its products under several brands including Nike, Nike Golf, Converse, Cole Haan, Umbro, and Hurley. Our price estimate for Nike stands at $77.52 , which is about 13% below the current market price.

Nike's supply chain relies on overseas production, reliable shipping and inventory management. Nike and other retailers are looking to add more air freight to shorten delivery times and manage inventory. What does this imply for Nike?

Potential Impact for Nike

Air freight is a very small portion of overall goods transportation at around 2-3% of total as the majority of it is done by water. Air freight is more expensive though it gives the company more control on its inventory. So why does the company, and others like Costco (COST) and Lululemon (LULU) want to ship more by air?

According to Kevin W. Sterling of BB&T Capital Markets:

"Retailers like the flexibility that air freight gives them. Air freight is more expensive, but you don't have to pay the warehousing or the inventory costs. Product can make its way from China to the U.S. in 12 hours."

Essentially it seems like one of the reasons behind moving to air freight is to have a leaner inventory. During the recession, many retailers built up inventory while sales slowed, and this resulted in inventory markdowns and deeper discounting to empty it. Even as the economy is recovering, retailers are being cautious and so air freight gives them some flexibility on inventory. Earlier this week, Urban Outfitters (URBN) caught analysts off guard by reporting weaker gross margins due to discounting and inventory issues.

Another reason is that Nike is an innovation driven company. Given that Nike continuously introduces newer and more innovative products, it makes sense to keep leaner inventories to provide scope for selling newer products and switching out styles that don't sell. On the other hand when certain styles sell really well, Nike wants to ramp up production of these styles and bring them to market quickly.

But this begs the question as to whether increased air costs will be offset by reduction in inventory management costs and increased sales from successful styles? The company expects that it will be able to do so in 2011.

Do you think that Nike will be able to offset cost pressures with this move or will it weigh on its margins?

You can modify the gross margin driver above to reflect your opinion and see the impact on Nike's price estimate. The above relates to a gross profit margin for the company that is applied to footwear.

See the complete $77.52 Trefis price estimate for Nike's stock.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: ADS , KSWS , NKE , SHOO , SKX

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