Last quarter Nike (NYSE:NKE) reported a decline in its gross margins despite growing revenues. The reason behind this decline was the higher input costs (material and labor) and a shift in mix to lower gross margin margins in addition to rising fuel costs. In an effort to improve its planning and operating costs, Nike has recently acquired a minor stake in LLamasoft Inc., a supply chain software company.  With this partnership, the retailer will look to develop a product in order to make its global supply chain more efficient.  Along with the lower cotton prices, this will help Nike in improving its gross margins.
With Rising Transportation Costs, Nike Is Looking To Optimize Its Supply Chain
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Nike was earlier a client of LLamasoft Inc., but it recently decided to partner with the software company to create effective supply chain software.  This software will create simulation models of the supply chain system. The retailer will be able to make changes to the supply chain and see the corresponding effect on the parameters such as risks, performance, costs and services.  This way it will be able to select the most viable option for the entire supply chain and transportation system. With rising fuel costs leading to higher transportation costs, an efficient transportation system has become a necessity for retailers. This software will eliminate the additional expenses incurred due to trying out the different changes to the supply chain.
Nike has been moving towards air freight in order to be more responsive about its inventory requirements. This mode of transportation is much more expensive than water freight and it further adds significant transportation costs. Nike has also reduced the transportation volume to maintain tight inventory, and the retailer has been reducing its packing weight thus minimizing the costs associated with it. 
We believe improved planning and cost savings from LLamasoft technology in addition to easing cotton prices could help its cost structure moving forward.
Our price estimate for Nike at $109, implying a premium of about 20% to the market price.Notes:
- Nike acquires minor stake in supply chain software company, Business Journal, Oct 23 2012 [↩] [↩] [↩] [↩]
- The future of supply chain: Nike’s near shoring and its new technology, The Loadstar, June 14 2012 [↩]