Flex Deal And New Product Launches To Drive Nike Stock Going Forward

  • Nike reported Q3 16 earnings where they missed on the top line but beat on the bottom line.
  • Management attributed the shortfall to the currency headwinds and higher warehousing costs.
  • But there are two tailwinds that I believe that will help Nike in Q4 16 and beyond.

Late last year, Nike (NYSE:NKE) partnered with Flex in an effort to have a quicker response time to consumer requests for customization and waste reduction. According to Nike's press release, Nike chose Flex because of Flex's "impressive work" and "automated material management with automated laser cutting which can reduce waste by up to 50%." Flex's ability to innovate and "accelerate delivery times from weeks to days" makes it a great and an ideal partner for Nike moving forward.

Based on Nike's earnings report on 03/22/2015, I expect the Nike and Flex relationship to help Nike avoid the costs associated with carrying too much inventory.

First, Nike has an inventory problem.

"As of February 29, our inventories were up 8%, driven by a 4% increase in NIKE Brand wholesale units, growth in our DTC business and increases in average cost -- product costs per unit, partially offset by changes in foreign currency exchange rates." - Andy Campion during Nike's Q3 16 Earnings Call, 03/22/2016.

Excess inventory has a lot of disadvantages: Nike might need to discount products to create storage space for new inventory. In addition, excess inventory increases storage costs and it also increases the probability of throwing out excess inventory that perishes.

The Nike and Flex partnership can help Nike reduce inventory and expand margins because of Flex's Elementum. Flex has an 80% stake in Elementum. Elementum is a start-up that was developed at Flex to organize real-time information so as to follow goods flowing across multiple vendors, tracking where products are in transit and their expected arrival times. Elementum was developed to fill a void that top supply-chain software vendors such as Oracle and SAP left in the market. The power and potential of Elementum can be seen from Flex itself. Through Elementum, Flex believes that it will be able to add $65 million per day back to its balance sheet by reducing its supply chain cycle from ~55 days.

Because of Flex's supply chain efficiency and global presence, Nike can now produce faster as demand will arise because of Flex's ability to deliver goods quickly. This delivery speed means that Nike does not necessarily needs to carry a lot of inventory to meet projected demand because they can now produce goods faster with Flex. As a result, having a faster delivery time can help Nike reduce storage cost and the number of damaged inventory.

Nike's Lucrative Product Pipeline

During Nike's Q3 FY16 Earnings Call, Mark Parker said that Nike "gave the world a view into just some of what we've in that pipeline for 2016 and beyond." This was in reference to Nike's product launch a week ago at the glitzy event in New York.

Among the products unveiled during Nike's product launch are: the HyperAdapt 1.0, anti-clogging cleats and the addition of a personal trainer to the Nike+ app. This rich pipeline is going to sustain Nike's growth momentum moving forward.

"Our relentless flow of innovation is one of the reasons I remain so confident in NIKE’s future. You know I’d like to talk about the innovation pipeline and often all I can say is stay tuned." - Mark Parker, during Nike's Q3 16 Earnings Call, 03/22/2016.

In order to grow beyond its ecosystem, Nike has been attempting to bring its brand to the masses. Nike has earned a reputation as a high-quality athletic gear retailer whose brand power and recognition spans geographies and generations. But with increased competition from competitors such as Under Armour and Adidas, Nike has continued to re-innovate so as to remain relevant and profitable moving forward.

Conclusion

During its Q3 16 Earnings Call, Nike missed on the top line but delivered a beat on the bottom. Revenues were up 8% to $8 billion and missed estimates of $8.2 billion. But once you exclude currency changes, revenues were actually up by 14%. Also, Nike posted earnings per share of 55 cents, which were 6 cents higher than anticipated. What was also exciting about the earnings call was Nike's worldwide future orders which were up by 12% and 17% excluding currency changes.

Management attributed the top line shortfall to "unfavorable changes in foreign currency exchange rates, higher warehousing costs, and the impact of clearing excess inventory in North America."

But from the aforementioned tailwinds emanating from Nike's partnership with Flex, I believe that Nike will be able to reduce its warehousing costs in Q4 15 compared to Q3 16. In addition, the partnership will also allow Nike to minimize on excess inventory clearing costs because of Flex's shorter delivery time.

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