How Nike’s Business is Doing it Just Right Overseas
While “Just Do It” has been the company slogan for as long as we can remember, Nike’s (NYSE:NKE) corporate strategy may entail a more thoughtful approach. The company continues to flourish amidst a cooling global economy and inflated commodities (NYSE:RJI) prices, and has investors and competitors bedazzled by its ability to continue to churn out profits (alleged human rights issues aside).
The Oregon based company, which employs over 34,000 individuals worldwide, reported its latest earnings that topped analyst estimates by a solid margin ($.08 per share) amidst a very difficult global environment for retailers. Commodity costs surged in the first quarter this year with cotton prices up over 33% in January-March, and high energy (NYSE:XLE) prices also conspiring to raise expenses. Nike continued to whether the storm of volatile market conditions, reporting an expected 15% growth in future orders.
The secret to Nike’s success can be reduced to this: just do it, overseas. International sales accounted for 57% of the company’s revenues last quarter as the retailer has continued to make up for lagging margins on domestic sales and higher expenses by boosting its presence in emerging markets (NYSE:EEM). China (NYSE:FXI) in particular has been a huge boon to the company’s balance sheets, as last quarter apparel sales in China (NYSE:FXI) rose 15%, breaching a total $2 billion in volume. Future orders in China were also up 24%, compared to overall emerging markets orders up 25%. Nike’s growth binge in China may just be getting started, as SeekingAlpha reports, “by 2025, as many as 600 million Chinese, roughly 40% of the expected population will be middle class consumers…Nike expects its sales in China to double over the next few years. The company recently boosted its 2015 revenue guidance to $28-$30 billion…It’s expanding its China distribution with a mammoth 120,000 square meter new logistics center.”
Not only is China one of the hottest growth areas for Nike, it is among the markets generating the best net profits, with earnings before income and taxes (EBIT) up 22% for the company in the latest quarter. Another reason Nike and other American sportswear retailers such as Under Armour (NYSE:UA) continue to succeed abroad is due to massive infighting among domestic Chinese retailers. MarketWatch reports that China’s leading apparel brands are pitted in a massive price war as they fight to establish a foothold among the country’s quickly rising middle class. Check Out: Under Armour, Inc. Earnings Cheat Sheet: Beats the Street on Profit Rise.
“‘The overcrowding of stores is beginning to cause cannibalization of sales and [a] price war,’ said UOB KayHian analyst Ken Lee…The problem, Lee said, can be traced back to the initial-public-offering boom in Hong Kong during recent years, when mainland Chinese (NYSE:FXI) consumer-related themes were able to raise funds easily to fuel ambitious growth plans…But what followed was a retailing arms race that outpaced consumer spending power.” Now, analysts say, the leading names in Chinese sportswear may be forced to downsize or merge with one another if they want to stay in business. The struggles of domestic retailers have not extended to international brands, who continue to gobble up more market share in the region while local names are locked in widespread infighting.
Outside of China, Nike has pinned hopes of its future across an expansive of emerging market economies, “Emerging markets, led by Brazil (NYSE:EWZ), Argentina and Mexico (NYSE:EWW), are increasingly important, too. They generated some $2.7 billion in sales last year. Emerging market footwear sales were up 30%.” With the 2014 olympics set to be held in Brazil, Nike is poised to up its presence in the region in time for the main event in world sports, expecting to take in over $1 billion in sales in the nation alone that year. With cotton (NYSE:RJA) costs having leveled off in the second quarter, and transit and energy costs seeming more stable, Nike (NYSE:NKE) might just be doing a whole lot more profiting in the second half of 2011.