It’s Good to be on Nike’s Team
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last week shares of Nike (NYSE: NKE) and Foot Locker (NYSE: FL), the top players in sports apparel manufacturing and retailing, respectively, both leaped to one-year highs. This was no coincidence -- the two companies are tied strongly together and, especially in recent times, what’s good for one has also been a boon for the other.
Nike has been winning a lot lately. It successfully managed to pass increased input costs from its suppliers along to its customers, never an easy move to make. This underscores the company’s ability to make quality products and market them expertly, sustaining high demand and thus price elasticity. Net profit continued its smooth rise for the ever-sprinting company, increasing 11% year-on-year in 2011 to $2.1 billion. Revenues clocked in even better; those numbers totaled 15% and $20.9 billion for the year.
No stock trades at its one-year max purely on its company’s history, of course. Among the many things Nike investors can look forward to in the near future is their firm’s new gig as not only the NFL’s official uniform provider, but also its purveyor of fan apparel. That’s a lot of jerseys and sweatshirts, sports fans. Also, in the short term Nike will make a nice dollar or two on continued sales of merchandise linked to Jeremy Lin, the rookie NBA phenom whose popularity looks like it’ll last all season, at least.
Nike is far and away the all-star of the sports apparel world. No other company approaches it. Take the firm it replaced as NFL outfitter -- Adidas (NASDAQOTH: ADDYY), in the form of subsidiary Reebok. Those nice double-digit margins Nike enjoyed in its most recent fiscal year were more than two times higher than its European rival, while it enjoys an immense and nearly insurmountable domestic market position in America, by far the most lucrative sports apparel market. Again, we’re in double territory here with Nike taking in over $7.5 billion in sales on this continent in fiscal 2011, compared to Adidas’s $3.7 billion in that firm’s most recently reported full-year figures.
It’s always at least a little risky for one company to tie its fortunes so tightly to another. Of course Foot Locker sells products by other manufacturers, but look in most of its 3,400+ stores and the line that’ll be most prominently on display is Nike. So with a strong and still-growing supplier behind it, FL can confidently drive ahead with its big ambitions for expansion. This just-announced game plan involves hitting a revenue target of $7.5 billion within the next five years (from the current $5.6 billion) and widening net margin to 7% from just under 5% at present.
It’s a good time to run up the score. Not only do retailers like Foot Locker have positive trends in sports and demand in related apparel going for them, they have a manufacturer that knows its market cold and is excellent at selling to it. Nike’s going to do well in the foreseeable future, and so are its key partners -- the stronger the relationship, the better.
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