The Demon of High Cost Grips this Footwear Giant
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While going out for shopping a year ago, nobody knew that cost inflation is going to hit almost every one of us pretty hard. In fact, even the companies are in a fix as they are feeling the pinch of rising raw materials costs and customers’ reaction over it. From a company’s standpoint it becomes difficult from both sides. Rising input prices shrink their profits and if they raise their product prices, the customers keep themselves away from their products becoming more budget conscious. This is the situation with almost all retailers and is pretty much reflected in their results this quarter.
For example, G-III Apparel (NASDAQ: GIII), a retailer that offers apparel and accessories, was hit hard with increased input costs so much so that it washed away its bottom line registering a loss of 4 cents per share. Surprisingly, this came even when the top line surged 16.5%.
A similar situation was faced by popular footwear retailer, Nike (NYSE: NKE) which posted its fourth quarter results towards the end of June and failed to please the market.
A Look at the Numbers
Though revenue figures were 12% up, reaching $24.1 billion, the same was not reflected in the bottom line which dropped 5.6% to $1.17 per share. The company was knocked down badly by increasing commodity prices and higher tax rates so much so that the cost saving efforts did not work for Nike.
Adding to the costs was the increased spending on advertising in relation to a number of sporting events such as the Summer Olympics and the European Football Championships. Though the advertising costs of $2.7 billion, an increase of 11% over last year’s quarter had an adverse effect on the earnings for this quarter, the reason for the costs are expected to help the company reap great profits in the coming months. A problem which might hinder this bright possibility is the soft European market which has been affecting a number of retailers such as Foot Locker (NYSE: FL), an athletic footwear retailer, which posted great first quarter results but the growth was pulled down to some extent by its European division without which Foot Locker would have showcased an even better picture. In fact, Wolverine World Wide Inc. (NYSE: WWW) witnessed dropping revenue with low volumes on account of sluggish demand in Europe in its recent quarter.
To fight this severe problem, Nike has decided to restructure its Western European business which might help the footwear retailer to some extent. On the flip side, the cost of revamping the European business of $24 million might just be a costly affair for the company if the economic environment becomes worse.
New Product Launches
Nike has always been a very prominent player in the industry with its popularity among the general public, mainly because of its marketing and use of products in events like the Olympics and the Superbowl. The retailer put in a lot of efforts in innovating new products such as Nike Free and Lunar and digital products such as FuelBand and Nike+ for Basketball and Training. It has also launched a new shoe manufacturing technology called Flyknit. Moreover, it had a new range of uniforms for the NFL teams. The company is really pulling up its socks to make its products even more wanted to the customers.
With a range of new products in its kitty, Nike has also divested its Cole Haan and Umbro business since these were negatively impacting its earnings. With this the company looks all set to have a bright future with the removal of all the underperformers and addition of all the potential stars in its team.
The footwear giant has been making smart moves in order to highlight healthy results in each of its segments. In order to grow holistically, it has divested its unprofitable business. Apart from cutting costs in order to boost its bottom line, it is also planning to use the savings in promoting its products and innovate further. With further increase in prices estimated to take effect in the coming months, Nike is expected to strengthen its profits. But until everything falls into place with the European division turning around and commodity inflation moderating from current levels, it’s a better idea to watch the company making shoes from the sidelines.
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