Nike’s Gross Margin Outlook a Key to This Week’s Earnings Announcement

by Trefis Team
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Nike (NYSE:NKE) is expected to announce its 3rd quarter fiscal 2011 earnings on March 17th. [1] We take this opportunity to look at what are some of the key aspects to look forward to with regards to upcoming earnings. Nike is 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. Our price estimate for Nike stands at $77.52, which is about 11% below the current market price.

Stay Tuned for Nike’s Gross Margin Outlook

Some of the developments in the global markets have created uncertainty around Nike’s gross margin outlook and the company has acknowledged these risks. Thus we believe that margin impact will be one of the key aspects of Nike’s upcoming quarterly results that investors and analysts will eye on. We bring to our readers a brief recap of the crucial factors that can potentially impact Nike’s profitability.

Rising Input Costs the Culprit

Rising commodity and labor costs have been a concern. Cotton prices have increased as a result of heavy buying from China. In addition to this, labor prices have increased in China adding upward pressure to the cost of production. The devastation of Pakistan’s cotton crop due to floods has led to shortage concerns and upward pressure on prices as well. Nike is relying more on air freight shipping in order to create greater flexibility in supply chain, maintain leaner inventory and meet the rising demand for some of its products. Air freight shipping is more expensive and will lead to shipping costs. We discussed this in a recent article titled Nike’s Air Freighting Raises Questions on Inventory Management.

Mitigating Factors to Cost Pressures

Nike’s manufacturing facilities are spread across several Asian countries now so that the risk posed by higher labor costs in one particular country, like China, is limited as the company can reallocate production to other countries. The company can also manage its profit margins by raising prices on select items and by using a more flexible inventory and supply chain model to respond to cost pressures and new opportunities as they arise. We discussed some of the factors in recent 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.

We will look for clues on this in the pending earnings release later this week.

See full estimates for Nike.

  1. Nike’s Investor Relations Web Page []
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