Nike’s Earnings Re-Iterate Gross Margin Pressure

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Nike (NYSE:NKE) recently released its fiscal Q3 2011 earnings, and based on continued pressure in gross margins and other evident trends, we have updated our price estimate for Nike to $76.52, which is roughly in line with market price. Nike remains the largest global manufacturer of athletic footwear, apparel and equipment by sales volume, and competes with Sketchers (NYSE:SKX), Adidas AG (ETR:ADS), Steven Madden (NASDAQ:SHOO) and K-Swiss (NASDAQ:KSWS) in the global footwear market. It sells its products under several brands including Nike, Nike Golf, Converse, Cole Haan, Umbro, and Hurley.

Nike Sees Expansion Opportunities, but Expects Continued Gross Margin Pressure

Nike has mentioned that two geographies remain very important for revenue expansion – North America and China. North American growth will be driven by consumers’ continued loyalty to trusted Nike brands as the economy improves. While China also presents notable opportunity for revenue growth, costs could become an issue for Nike.

The company recently stated in its earnings transcript: [1]

“As we look to the next few quarters, we expect continued strength in consumer demand as well as intensifying gross margin pressure from input cost inflation and from airfreight… For the full year FY ’11, we continue to expect gross margin will be at least 50 basis points below the prior year.”

As a result of these concerns, we have maintained our gross margin expectations for 2011, expecting a decline of about 0.5%. We think that gross margins will take another year to recover as Nike gradually implements price increases to offset the impact of added costs.

The chart above lets you examine how your own forecasts for Nike brand footwear gross profit margin affects the company’s stock value. Check out our full model and apply your forecasts to other product segments to see how broader changes to Nike’s gross profit margins could impact the company’s stock value as well.

For further detail on the factors described above, see our previous articles titled Nike’s Commodity Costs Rising, but Expansion Opportunities Could Lift Stock and Nike’s Capacity to Raise Prices Can Neutralize Impact of Rising Input Costs.

See our full analysis and $76.52 price estimate for Nike stock

  1. Nike’s Q3 Fy 2011 earnings transcript []
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