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Can Nike Deliver Better Margins in the Coming Quarters?

Victoria Dean - Author
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Nov. 8 2018, Updated 7:32 a.m. ET

Recent numbers

Nike’s (NKE) margins have been improving due to increases in full-price selling and its higher average selling price. The company’s focus on product innovation is leading to higher full-price selling. Higher sales through the DTC (direct-to-consumer) channel are also aiding its margin expansion.

In the first quarter of fiscal 2019, Nike’s gross margin expanded 50 basis points to 44.2% due to the factors mentioned above. However, Nike is continuing to invest in marketing and the DTC business, which is leading to higher expenses.

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As a result, Nike saw a 7% rise in selling and administrative expenses. However, as a percentage of its revenue, its selling and administrative expense rate decreased 70 basis points to 30.8% due to higher revenue. The company’s demand creation expenses surged 13% to $964 million in the first quarter.

In fiscal 2018, Nike’s gross margin contracted 80 basis points to 43.8% mainly due to foreign exchange volatility. For the year, Nike saw a 9% rise in selling and administrative expenses. Also, as a percentage of its revenue, its selling and administrative expense rate rose 80 basis points to 31.6%. The company’s demand creation expenses surged 7% to $3.58 billion.

Will Nike’s margins improve?

Nike expects to deliver an improved margin performance in fiscal 2019. Growth in Nike Direct, product innovations, and its top line could cushion its margins. For fiscal 2019, Nike’s gross margin is expected to expand 50 basis points. However, its selling, general, and administrative expense growth rate is expected to be in the high single digits. Its other expenses are expected to increase in the range of $100 million–$125 million.

For the second quarter of fiscal 2019, Nike expects its gross margin expansion to be the same as it was in the second quarter of fiscal 2018. Its selling, general, and administrative expense growth rate is expected to be in the low teens. Its other expenses are expected to increase in the range of $30 million–$40 million.

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