Nike’s ongoing focus on innovative products and super brand image creation continues to drive outperformance in North America and is allowing the European business to hold up despite a tough macro environment. The popularity of the brand and Nike’s global athletic brand icon creation are as strong as ever and support the wide economic moat rating, denoting that the firm’s superior returns on capital are sustainable.
The company is still working aggressively to fix its business in China, cleaning up inventory and cutting back on retail partners lacking strong sales trends. At minimum, the impact in China appears to be lessening, and the brand has not suffered a blow from which it cannot return. After shrinking sales again in the recent fiscal third quarter, the China region showed growth in the futures order book, but the situation still has management cautioning that actual sales results on the mainland may continue to be soft relative to the futures book, which also encompasses Hong Kong and Taiwan.
Most notable in the quarter was the return to gross margin improvement (up 30 basis points to 44.2%), as roughly two years of cost pressures from commodities inputs, labor costs, shipping, and mix have been affecting gross margins for a time that may seem fatiguing to some investors. While management still believes labor costs are rising, carefully managed, selected, and gradual price increases are working through the global system, markdowns are being controlled (apart from China), and input costs are finally becoming a tailwind.
Further strength in the dollar versus the euro or the yen could be a further gross margin headwind, but strengthening of the dollar would be positive for input costs. Looking longer term, the company continues to see positive uptake of its Flyknit platform, which could eventually change the balance of manufacturing and input costs to a much more flexible and global model. Although not mentioned on the call, the license takeovers and signings such as England soccer and the NFL, both of which might create tough comparisons when lapped in fiscal 2014, actually are important to the ongoing brand building that is so integral to Nike’s economic moat.
Stacked up with the importance of Brazil 2016 Olympics, the 2014 World Cup (Nike has the all-important soccer team while rival adidas has the general sponsorship of the 2014 FIFA World Cup), the brand is well positioned to be ingrained in some of the most important sports moments of the decade for the fastgrowing South American market.
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