Margins Are Declining
Nike’s gross margin declined from 44% in the year earlier period to 43% this quarter. Average sales price was offset by an increase in product costs. Secondly, Nike is rapidly growing its digital platform. I previously assumed the Nike brand would pull customers through the sales channel, regardless of whether it had a major digital presence. Now Nike wants to sell product where ever customers want to buy. Its new Consumer Direct Offense offers customers a direct connection Nike. Its emphasis is on the company’s top 12 city and 10 key countries. As more product is sold through the direct channel, Nike’s gross margins will likely become even more compressed.
SG&A was up 10% Y/Y, outstripping revenue growth. The increase was primarily driven higher sports marketing, a new NBA partnership to launch digital and retail experiences in key cities, an greater investment in Nike Direct businesses. The company’s EBITDA margin slipped to 15% from 18% in the year earlier period. As more investment is made to promote the direct channel I expect EBITDA margins to continue to decline.
Conclusion
Nike made some headlines last week after rumored CEO-in-waiting, Trevor Edwards, exited the company amid complaints about workplace behavior. There could be some questions on the earnings call about who will replace Edwards’s role as head of worldwide sales across multiple distribution channels. NKE is up 20% Y/Y and has a 29x p/e ratio. The contraction in revenue and earnings could eventually weigh. Avoid the stock.
