Nike. Whats Going On Amidst Conflicting Reports


Nike is beginning to raise the interest of the industry in quiet but significant ways even as it has faced spectacular drops in its brick and mortar North American retail sales over the past month.

Those retail sales drops–directly attributable to pretty hard core, go-for-the-jugular moves from competing brands and the Mordor like shadow of have been somewhat masked by its increased international sales. The net effect has to make the brand’s sales seem flat. At least from the point of view of investor reports.

Underperforming stores in the US and Canada, but overperforming stores in Europe and Asia. This would seem like a routine shift in the nature of retail were it not for the looming possibility of a zombie apocalypse in retail resulting from the spinning black hole of online purchase and delivery.

This is against the backdrop of wild eyed optimism just two years ago. In 2015 the company announced the goal of literally doubling the total sales of Nike products by 2020. At the time, Nike was working with a fairly robust 10% annual growth in all the years since the Great Recession. The prospect of leaping from a mere 25 billion dollars in 2015 to a more commodious $50 billion in only five years seemed based on reasonable math.

Since then, anticipated structural changes in retail –including drones and the creeping Amazon Borg market– have cast uncertainty across the market

Every sector of the industry therefore has been paying quiet attention to Nike strategy.

Especially following a catchy 12% drop in sales in August. One steep enough to cause Lululemon CEO Laurent Pontdevin to cluck sympathizingly at their losses while crowing smugly about Lululemon’s contrasting increase on CNBC 

Of course, the stock hasn’t exactly been inspirational lately either.

First there was the noisy introduction of ‘Flyleather’ the company’s newest ‘supermaterial’,

The partially synthetic leather product is part of a strategy that was also announced in 2015: A ‘moonshot goal’ of cutting the environmental impact of Nike products in half.

Nike unveiled Flyleather at the kickoff of Climate Week in NYC in a pretty high profile event. Publicity material gave a riveting description of the material

Flyleather is made with recycled leather fibres that are melded together with a polyester blend, allowing for more flexibility than traditional leather. Leather waste — scraps and the like — is crumbled into fibres, then formed into a paste with the power of water jets. That paste is then rolled into sheets of leather, and any scraps that remain after cutting are added back to the scrap heap, creating a closed-loop cycle.

Nike FlyLeather
Nike FlyLeather

Flyleather boasts a carbon footprint that’s 80 percent smaller than traditional, full-grain leather and needs 90 percent less water to produce, according to Nike.  It was engineered specifically with the company’s long-term business and sustainability goals in mind, and manufactured in partnership with UK-based firm E-Leather.

“If you look at our entire environmental footprint, 60 percent is linked to the materials that we use,” says Hannah Jones, Nike’s chief sustainability officer and VP of innovation. Leather, in particular, has “disproportionate” environmental consequences, says Jones. While it is only Nike’s tenth most-often-used material, it has the second-highest negative environmental impact.

Tenth most used or not, Leather has always been a “thorny issue,” for Nike, according to Jones. Athletes — soccer players most notably — are reluctant to abandon it.

“Whether it’s your handbag or a pair of brogues, it wears nicely. It wears to you; it has a smell and a feel. It’s premium,” says Tony Bignell, Nike’s VP of footwear innovation.

In the end, its a way of reducing traditional leather waste to zero, a not insignificant factor in cost for the leather dependent company.

“Figuring out zero waste is critical, but at the end of the day, the question is: How can we obsolete the past?” says Jones. “We can never put something into the market that we think compromises performance or aesthetic or price, because we believe to do that is to do a disservice to sustainability.”

Aside from the advancing success of Lululemon, Nike faces nasty competition from rivals like Adidas and Under Armour–who also experienced steep sales drops for all the good its done them.

Nike is planning on concentrating on their online sales. They also plan to sell certain products directly through Amazon and Instagram.

The company has offset a lowered revenue by cuts in the cost of sales, after a spike in those costs worried analysts even as sales were declining.

In June 2017, the company announced it is cutting 2 percent of its global workforce, — 1,400 jobs. It also aims to cut the average cycle time for creating a new design in half.

In its 2017 fiscal year, Nike generated $34.4 billion in revenue, which is only up 6 percent distressingly less than its 10% annual growth spurt.

Although earnings per share up 16 percent and the return on invested capital up nearly 35 percent.

To say it mildly if the company plans to reach that $50 billion goal, Nike’s sales will need to double that growth rate over the next three years.

That said, the company continues to deliver reliable dividend growth.

While the cost of sales was worrying in the past quarter as sales were flat, the company did see lower administrative costs, which is a plus.

According to Seeking Alpha the company is still a good buy for investors.

“While the present Q2 could see some higher levels or promotional activity as the company completes its realignment, we believe that the moves put in place will boost sales, especially as the company is focused now on a much more granular level. Nike is not known for its dividend, but in this time of pressure on the stock, it is worth understanding that the name is a quiet dividend growth name. We like the stock at $50.”

Our takeaway is that Nike seems to be showing all the signs of a company in transformation which seems to be positioning itself for the future, both in terms of the disruption based retail market, and consumer demand for such things as sustainability goals (which by definition are leaner and more parsimonious–always good business goals) and more adaptability to season.