Growth Expert Steps up to Nike

08/07/2019 5:00 am EST

Focus: CONSUMER

Kuen (Scott) Chan

Editor, Investing Daily's Real World Investing

Despite challenges from the likes of Adidas (ADDYY), we believe Nike (NKE) remains the undisputed No. 1 in the athletic apparel market, thanks to its dominance in footwear categories like running shoes and basketball shoes, notes Scott Chan, contributing editor to The Complete Investor.

Nike’s strong brand identification allows the company to charge premium prices while enjoying leading market share. In the latest quarter (fiscal 2019 fourth quarter), revenue increased 4% year over year. However, the growth was understated due to foreign-exchange headwinds.

On a currency-neutral basis, revenue growth was a strong 10%. China was once again a key growth driver, with revenue in the Greater China region (consisting of China, Hong Kong, and Taiwan) increasing 15.6%. Adjusted for currency headwinds, the growth was 22%.

It’s evident the ongoing trade tensions between the U.S. and China haven’t significantly affected Nike’s popularity in the Middle Kingdom despite rising nationalism. Ironically the tariffs could have the greatest impact on U.S. consumers.

In a letter to the White House signed by more than 170 footwear companies, Nike warned that U.S. consumers would bear the brunt of higher costs because tariffs would push the average retail price for sneakers from $48 to $61.

However, we aren’t overly concerned about the impact of tariffs on Nike. Only 26% of its sneakers and apparel are manufactured in China, according to the latest public disclosure.

Moreover, Nike already charges a high premium on its shoes and has no problem selling them, because consumers buy Nike for the brand image, not for value. A jump in average selling prices is much more likely to hurt lower-end sellers whose selling point is value. That’s the power of a top-notch brand and why Nike works hard to protect it.

The company holds endorsement deals with more than half of Forbes’s 2018 list of the world’s highest-paid athletes, appealing to the myriad fans of such stars. It is one of the most widely followed brands online and has expertly leveraged social media to market and enhance its brand.

Another way Nike enhances its brand is to forego the middleperson and interact directly with customers. It is opening more stand-alone Nike-branded retail stores, and even in department stores like Nordstrom, Nike now has its own section manned by its own employees. This enables Nike to better control the brand message.

The retail store initiative is part of the company’s “Triple Double” (a basketball reference) strategy, which is paying off. Besides the more direct connection to consumers, Nike seeks to double its pace of innovation, double the speed of introducing new products, and double the direct connection with consumers – coming up with new products faster and reducing the production cycle time.

As part of the strategy, Nike has reduced its styles by 25% while deepening the selection available for its most popular styles. While obviously it makes sense to make more of the popular products, from a brand-protection perspective this also makes sense because shelf warmers aren’t a good look for a brand. We expect Nike, backed by its valuable intangibles, to remain one of the surest growers in the retail industry.

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