Nike (NYSE:NKE) is the world’s largest manufacturer (by sales) of athletic footwear, apparel and equipment. The company competes with the likes of Adidas (PINK:ADDYY), Puma (ETR:PUM) and Reebok. We recently raised our price estimate for Nike to $77.52, which still implies nearly 8% downside to market price. The company’s value is primarily derived from its Nike branded footwear and apparel businesses which account for 45% and 25% of total company value respectively.
Nike recently indicated that it could experience margin pressure due to rising input costs in 2011. Our prior analysis examined one way to mitigate the cost impact – capitalizing on expansion opportunities in China (See Nike’s Commodity Costs Rising, but Expansion Opportunities Could Lift Stock). However, Nike could also counter the rising costs in a more direct way – leveraging its market position, brand name and buying power to raise prices.
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Nike Can Utilize Price Increases to Combat Rising Input Costs
According to an analyst from Piper Jaffray, the average selling price of apparel in the U.S. has declined in 10 of the last 11 months despite increased costs of imported apparel.  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 could allow the company to withstand these pressures more effectively.
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.  Going forward, Nike can leverage its brand recognition to raise prices and offset further cost increases.
Nike has an established global presence and has consistently maintained strong demand for its products through innovation and effective marketing. Additionally, the company can utilize its substantial bargaining power with its suppliers, reducing the impact of industry-wide input cost increases and sustaining profit margins.
Limited Downside to Profit Margins
Not many retail players currently have the leverage to pass on increased input costs, and due to its capacity in this regard, Nike will likely be one of the retailers least affected by rising costs. We currently project slight decline in Nike’s gross profit margins during 2011, to be followed by a gradual increase during subsequent years. Nike’s ability to raise prices can limit this downside impact in the year ahead and sustain margin growth potential going forward.
To see the impact of different profit margin trends for Nike’s footwear division on the company’s stock value, drag the trend line in the modifiable chart above. Click on other product segments in the display below to see the impact that various profit margin scenarios could have on Nike’s stock value.Notes: