Nike (
NKE
) is the largest global manufacturer of athletic footwear, apparel
and equipment by sales volume, and competes with Sketchers (
SKX
), Adidas AG (
ADS
), Steve Madden (
SHOO
) and K-Swiss (
KSWS
) in the global footwear market. The company recently announced its
Q3 2011 results. Although Nike's revenues increased 7% to $5.1
billion, the gross margin declined 110 basis points to 45.8%
compared to same period last year. The decline in margin was
basically because of higher product and freight costs. We have
highlighted these factors in our earlier note titled:
Nike's Air Freighting Raises Questions on Inventory
Management
.
Nike has a strong brand identity that it can leverage to raise
prices, thereby offsetting higher costs. Nike is also focusing on
expansion plans, particularly in emerging markets, which has shown
strong demand for Nike branded footwear. We expect higher volumes
and effective supply chain model by Nike will plug any further
margin declines.
While we anticipate Nike's footwear gross margin will be
relatively stable at around 46.4%, Trefis members predict the
margin approach 52%, implying an upside of 5% to our price estimate
for Nike's stock. We currently have a
Trefis price estimate of $77.52 for NIKE's stock
, ahead of the current market price of $75.57.
Nike Could Raise Prices to Offset Costs
While the impact of rising commodity and transportation costs
are likely to weigh on all footwear and apparel manufacturers,
Nike's status as market leader would allow the company to withstand
these pressures more effectively. The company can manage its profit
margins by raising prices on select items and by using a more
flexible inventory and supply chain model to respond to cost
pressures and new opportunities as they arise. According to an
analyst for Credit Suisse, Nike sets apparel prices a few months in
advance of distribution, so any near-term price declines could stem
from misjudgment of input cost increases.
In addition, being an established brand, Nike can utilize its
bargaining power with suppliers, reducing the impact of
industry-wide input cost increases and sustaining profit margins.
(See:
Nike's Capacity to Raise Prices Can Neutralize
Impact of Rising Input Costs
)
Nike to Profit from Emerging Markets
While China is contributing to increased production costs for
Nike, it also presents expansion opportunities.
Nike's management has indicated that the company sees a significant
market potential for branded sports products in China, Brazil and
other developing countries.
At the end of FY Q3 2011, the company reported overall future
orders (scheduled for delivery from March-July 2011) of $7.9
million (up 11% from last year) for Nike brand athletic footwear
and apparel. The highest growth from the total amount of orders
came from emerging markets (up 21% from last year). This is an
indication that Nike is taking its business from emerging markets
seriously. We expect higher volume sales from these regions to
offset higher input costs.
See our full analysis for Nike's stock
.