Increased inventory was one reason Nike gave for declining margins in recent quarters. Here’s how Nike is combating it, and why concerns about it could lead to a buying opportunity.
While sneakerheads are not really concerned about the stock prices and aren’t doing more to understand the business they love outside of what the dopest colorways are, there is a section of sneakerheads who are getting older and looking to stay involved in kicks via investing or even starting their own small consignment shops or online shops. The Business Talk/Insider Ties/Should You Buy To Flip? posts are for those sneaker heads. Now that I have this intro out of the way, take a second to click through and read this report discussing Nike’s Inventory challenge. In short Nike is seeing decreased margins due to a massive amount of stock. Before I jump into why there isn’t a reason to panic, I’ll start with two reasons the inventory is so high.
- Poor basketball sales. I follow NPD’s Matt Powell. He has stated over and over that basketball sales are down across the board. This is a big deal at Nike because both the KD8 and LeBron 13 were “flops”. Sales were low and the increase in prices hurt the sale prospects. This increased rtvs and is why Nike is flooded with inventory.
- Jogger pants. How in the hell are jogger pants the reason for Nike’s inventory increase and margin decrease? Joggers are a part of the athleisure/casual athletic trend that has seen soccer moms trade jeans for yoga pants. It’s also seen professional attire get replaced by stylish joggers capable of being worn with more professional attire. In short, there has been a swing in the style of clothing worn and the shift in clothing plays off of older style cues. I’ve written several articles recently on KITH’s offering of 90s inspired wear. That fashion is more in line with running shoes and any sneakerhead realizes that running shoes are hotter than basketball shoes right now. So I’m blaming jogger pants, but realistically it’s the retro inspired shoes that are dominating.
Now that we have the groundwork let’s get to the 5 reasons Nike is actually okay.
- Nike’s inventory problems and decrease in margins are actually a reflection of their expenditures on opening new retail and warehousing facilities. Nike built a second gigantic distribution center in Memphis. In 2014 Nike had 858 retail stores (in different divisions and brands Hurley, Converse, etc.). In 2016 Nike has more than 931 retail stores.
- This increase in stores cuts into margins and obviously the poor basketball division sales hurt, but in order to grow their direct to consumer market Nike has been trimming wholesale accounts to mom and pop accounts and consolidating its wholesale with larger vendors. Nike is aligning itself with Footlocker even more and saying good buy to small 1-5 store accounts. By diminishing the number of accounts Futures took a hit. So for the last year Nike has seen some spikes, but it’s share price has dropped as low as 51. Nike is basically losing in the short term to win in the long term. Having more retail outlets increases the profit margins and even in this Motley source article DTC is discussed as the main reason for optimism.
- Nike will follow Apple, Wal-Mart, Home Depot and Lowes. This is my own idea that I see happening so no research has been done, but the growth of DTC with Nike is going to become as important as their marketing campaigns. What has Apple and Home Depot done? In areas where they have physical locations, their e-commerce has become a streamlined approach where the customer can find a product online, place the order and walk into a local store to pick it up. Nike is building enough stores in major cities in the US that I can foresee launch shoes (Jordan retros) being carried in Factory stores, and Clearance stores providing buyers located near Nike stores the ability to walk in and pick up their orders. Consider that Nike has increased revenue due to DTC and the margins, although important, become less of a worry because more DTC means more revenue.
- Nike ships faster than any retail business in footwear. As customers are becoming more adjusted to buying online, shipping speed becomes more important. Nike’s Memphis distribution allows them access to the fastest shipping in the country. I discussed this here with a source article: http://www.arch-usa.com/insider-ties-nike-keeps-winning-financial-post/
- While retro running is king, Nike Basketball will improve this year because the NBA finally has a new villain and the storytelling will engage the market and create more branding opportunities. Nike also decreased the price of the shoes worn by its signature athletes. This decrease has already improved the sell of the KD9 and as the NBA gets into full swing, there will be a marketing war between the big three like we haven’t seen in years. Basketball may not be important right now, but by All Star weekend, I have a feeling that basketball shoes will be the main story and sales will pick up again.
Check out the source articles and let me know what you think.