Originally posted on ARCH-USA
Current Share $63.49
2017 Recap: Nike saw it’s share prices dip as low as $50/share during 2017. The Swoosh was faced with a surging adidas and their own self inflicted problems. The investment into building the infrastructure for DTC and the accumulation of inventory due to pushing far too much product into the market without any regard for maintaining the aura of unattainability that helped to create the cache with fans, are two straightforward reasons for Nike’s up and down year. I explained these issues consistently over the last few years as Nike established their DTC. This year everyone discovered what that meant as the brand released the official term for the DTC movement, Consumer Direct Offense. In a sprawling Investor’s Day the brand laid out their Key Cities initiative and explained the process in which they would begin to drive consumer connectedness through their NikePlus Memberships. The Investor’s Day led to the rebound of the stock and Nike obviously played to their strengths during the holiday season by launching the Air Jordan 11 in three distinct colorways. This focus on Jordan Brand affected the entire sneaker ecosystem as every brand releasing a holiday shoe found itself on shaky ground as the market was all about Jordan Brand. While a number of the releases have sat (Altitude 13, Jordan 6 White/Orange, Retro 13GG), the launch of the Kyrie 4 and the recent Gatorade Pack from Nike have maintained the focus squarely on the Swoosh to finish out 2017.
2018 Analysis: This is not a new statement, with CDO implemented and a strategy which includes a return to scarcity, Jordan Brand will be as coveted as it has always been. The limited numbers could affect the overall sales, but what everyone has to remember is that without Futures and doors where the footwear is being sold, Nike has basically almost doubled their margins. What does this mean? Let’s say a shoe was once a wholesale release of 100,000 at 190 retail. Wholesale would be 95.00. Nike would have earned 9.5 Million. If Nike has reduced the number of shoes to wholesale accounts to 50,000 pair they would get 4.75 Million from wholesale. They would then take the other 50,000 and through CDO they would earn 9.5 Million. That’s a combined 14.25 Million. In other words even if Nike didn’t make 100,000 pair and only made 50,000 and sold half wholesale (25,000 pair) that would be 2.375 Million and the other 25,000 would be sold CDO and earn 4.75 Million.
On 50,000 shoes made (Scarcity) Nike would still earn 7.125 Million. That’s only 2.375 Million less than when the brand made 50,000 more shoes!!!
As exciting as this sounds, Nike has yet to figure out the performance model as they continue to pump out Signature releases and performance running that hasn’t converted to casual wear. The VaporMax is not performing as expected. What will begin to happen this year is what I see as a bastardization of classic models. Nike will begin to build hybrid models featuring VaporMax and this won’t work well. There are also new releases Nike is high on like the new Shox and Air Max 270, that I don’t predict to perform as well which will lead to an impact on inventory. The brand does have a new tech to implement, but they will have to work on more street ready styles which is very hard for Nike as they are all in on performance as casual. The Nike React tech for running could be a game changer in the same way that BOOST helped adidas. That is if they brand will sit down and make a shoe that is aesthetically appealing which seems to be a difficult task for the Swoosh lately.
What Nike does have at its disposal for the year is their reach into APLA and Greater China. Nike will see consistent growth in China due to their alignment with the NBA. While sport is declining in North America, it’s growing there. While many analysts remain worried about North America Nike has taken the time to deliver growth internationally to offset the losses in the US.
2018 Prediction: North America will remain sluggish for Nike unless they can reignite interest. I think that will happen with React in running shoes and the focus on customer experience and a more engaging shopping environment. While sales in North America will be flat, because I think there will be a focus on Shox and 270 as well as a slow rollout of VaporFly and Zoom X, the international market for Nike is going to skyrocket because of Nike’s Q3 and the NBA All Star game which will be in Los Angeles this year. That event alone will drive the world to be focused on the NBA liked they have never been. As Nike’s Fiscal Year ends in the summer during Q4 I predict that interest in the brand will be high and that sales will increase overall pushing Nike to around 34 Billion for 2018. The share price will hold and this slow time that every brand has had to gain ground will be over. The promotional environment which will continue to affect North America will not shape Nike as much because of CDO. I think Nike will benefit from an unseen benefit in marketing via the eLeague for the NBA and the WNBA will gain a higher profile as Nike takes over uniforms this year. The NBA Finals and the Superbowl are both marketing factors for the brand and communal sports like Crossfit and non-traditional sports are already being targeted with the Metcon 4. Nike’s ability to launch more shoes than any other brand in more areas will no longer hurt them as they transition to controlling more of their market. They will have to dump a lot more into marketing and this could be an issue as the marketing from Nike fluctuates from brilliant to confusing. Overall I see the brand growing from 32 Billion to 34 Billion as I said and that’s a good thing… although margins won’t be very strong.