) is the largest global manufacturer of athletic footwear, apparel
and equipment by sales volume, and competes with Sketchers (
), Adidas AG (
), Steven Madden (
) and K-Swiss (
) 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
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
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
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
the complete $77.52 Trefis price estimate for