Adidas has just reported a gross margin of over 50% in its recent first quarter. This was possible due to new more profitable products and better pricing power. Under Armour has also improved its gross margin to 45.9% in its first quarter on account of lower input costs, which offset a negative mix and higher freight costs.
Not to be outdone, Nike is focusing on long-term strategies to boost its gross margins. It is striving to improve manufacturing efficiencies by using more sophisticated techniques that reduce labor components in the process. Rising labor costs are the key threats to margins.
NIKE, Inc. (NYSE:NKE)’s Flyknit technology is an excellent example of its manufacturing efficiency. This enables the entire upper part of the shoe to be made from a single thread using a computerized process. This is revolutionary if we consider that the traditional shoe-making process involves stitching scores of small parts together. In addition to saving labor costs, it also creates two-thirds less waste than ordinary running shoes.
Nike has big plans of introducing this technology in other shoe categories and even in apparel. The savings potential from this is phenomenal.
Meanwhile, the company is enjoying better pricing power and has raised prices in several markets. It also benefiting from lower input costs. This together with lower discounting in China and easing currency headwinds are expected to boost margins by 25 basis points in the current fiscal.
China update
NIKE, Inc. (NYSE:NKE) has not yet recovered in China and sales excluding currency fluctuations were down 1% in the fourth quarter. The company is trying to set things right by rightsizing inventories and hopes to see improvements in 2014. Future orders in the country are up 3%.
What will be critical in this market is whether Adidas, which is becoming more popular in the country, is able to topple Nike from its top-spot. Adidas’ sales were up 6% in the first quarter on constant currency basis.
Under Armour Inc (NYSE:UA) has also been testing waters in China and has about four stores in the country. But, it is stepping up its international game and China is obviously an area of focus. Nike would need to tie its loose ends before Under Armour can seize an opportunity.
Last word
For Nike, US will be the growth driver. Demand will increase as new products hit the market, while margins get better. The weakness in China will be troubling but it will be offset by the strength in the US. Overall, investors can expect to see the company growing its revenue and earnings over the coming periods, which would to drive the stock higher.
The article Nike’s Winning Game on Home Ground originally appeared on Fool.com and is written by Gaurav Basu.
Gaurav Basu has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Gaurav is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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