Nike: The Year 2013 In Review

by Trefis Team
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Sports giant Nike (NYSE:NKE) recorded a strong year in 2013, with its stock price rising nearly 60% since the start of the year. The surge in stock price was driven by strong performances across all divisions, product types and geographies, including China which was previously seen as a critical area for the company to turn around. Below we briefly highlight the factors which drove Nike’s growth in 2013 and look ahead to see how the company has positioned itself to capitalize on major sporting events such as the FIFA World Cup 2014, the Superbowl and the Winter Olympics in Sochi.

See our complete analysis for Nike

Running, basketball and football represent the key growth categories for Nike

Basketball and football are the key categories that are helping Nike maintain its strong growth momentum. Q2 FY 2014 represented the largest revenue quarter for basketball since Nike’s entry into the space. The basketball category is being driven by partnerships with leading basketball players and participation in major tournaments across the world. Nike’s football business also continues to accelerate. With 10 teams sponsored by Nike participating in the 2014 FIFA World Cup and a new line up of products, we expect growth in this category to accelerate further. [1]

North American results continued to outperform in 2013

North America is the biggest contributor to Nike’s revenues, with nearly one-fourth share. Strong growth in basketball, men’s training sportswear and running are driving high demand in this geography. Nike’s strong run in this market continues to be fueled by its category offense (focusing on discrete categories), superior innovation, strong marketing and premium distribution. With a reported futures orders growth of 11% in the region, it seems that category offense remains a powerful strategy for driving growth and profitability in North America.

Turnaround in China

Previously hamstrung by excessive inventory buildup and weak sales in China, the company’s efforts to reposition itself in the region began to reap fruit in late 2013. Nike brand revenues in Greater China saw 5% annual growth on a currency neutral basis in Q2 as compared to a 3% decline in the previous quarter. The company had been aggressively taking steps to return to growth in this region by reducing its inventory, enhancing its marketing activities, creating differentiated product portfolio, and improving the productivity of its store base in China. The results for Q2 and a reported future orders growth of 4% in the region show that these efforts are bringing in progress and putting the company on the path to sustainable growth in China.

Looking Ahead to 2014

1) Upcoming FIFA World Cup 2014: Adidas has an edge over Nike in this category for the following reasons:

a) Adidas is one of the six official partners of FIFA

b) Every match will be played with an Adidas ball.

On the other hand, Nike has been taking steps to close the gap with Adidas. The company will introduce new kits for its sponsored teams, which includes the host country Brazil. It also plans to sell world cup Nike merchandise in a mobile application. Nike has also partnered with Reddit for facilitating the ask me anything, or AMA, platform which will give application users the opportunity to ask questions to Nike sponsored football stars. [2] The company expects these efforts will attract football customers’ attention towards Nike products and will lead to enhanced sales. [3]

2)Rising Costs: In the earnings call for Q2 FY’14, Nike’s management sounded a note of caution: “We will be facing new pressures as raw material costs shift from tailwinds to headwinds and we increase discounts to clear pockets of excess inventory. We also expect to face continued pressure from labor costs and foreign exchange.” Given these rising cost pressures, we expect gross margins to contract in the coming periods. [4]

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Notes:
  1. Nike 8K Q2 FY14 []
  2. Nike Make History Campaign []
  3. Nike, Adidas gear up for World Cup 2014 []
  4. Nike’s 2014 Q2 Earnings Call Transcript, Yahoo, December 2013 []
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