Future High-Performance Markets For NIKE
Greater China: High-return, high-performance markets for NIKE
Greater China made up ~8.5% of NIKE Inc.’s revenues in 1Q15. The segment’s revenues grew at a CAGR (compounded average growth rate) of 10.6% over the fiscal year period between 2010 and 2014, to ~$2.6 billion in fiscal year 2014. At an operating profit margin of 31.4% in 2014, Greater China has the highest return on sales among NIKE’s segments.
Although margins are high, they’ve taken a dip recently. NIKE, Inc. (NKE) is now re-positioning itself in the Chinese market. It’s trying to create a more differentiated product portfolio.
Overhead has increased with the company’s strategic investments in direct-to-consumer and new headquarters in Shanghai. Higher discounts and closeout sales have also been factors. The company’s objective is to increase retail profitability and build a more segmented market. Key growth categories include Running, Basketball, and Women’s Training.
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Macro tailwinds in China
The Chinese segment should benefit from the Chinese government’s efforts to increase consumer spending. Consumer spending makes up just ~34% of Chinese GDP (gross domestic product). This is low when you compare it to India’s ratio of 62% or South Korea’s 52% ratio. Faced with a slowing economy, the Chinese government is looking to raise the level of consumption.
Consumer spending is likely to be a crucial growth driver in China going forward. This would benefit consumer discretionary (XLY) companies like NIKE, especially considering the boom in sports and sports marketing in China. Some of NIKE’s major initiatives in China include the endorsement of athlete Li Na and the opening of its second women’s-only store in Shanghai, on November 29.
Converse: An iconic brand presenting unique opportunities
NIKE acquired Converse in 2003. The Converse brand made up ~7.2% of NIKE’s revenues in 1Q15, down from ~8.8% in 2Q12. The company expects to achieve $3 billion in revenues for the segment through fiscal year 2017. It’s in the process of converting licensees to a direct distribution model. This should provide opportunities for growing revenues. Licensees make up about 50% of the global market. NIKE also plans to leverage Converse brands such as CONS or Jack Purcell, and increase new apparel offerings to fuel growth.
These initiatives appear to be paying off for Converse. The segment’s operating income margin spiked sharply to 32.3% in 1Q15, overtaking China’s 32.1% margin.
Read about the markets that could provide cause for concern, next.