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What Drove the Expansion in Nike’s Q3 Gross Margin

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Impressive expansion in gross margin

Nike’s (NKE) gross margin expanded in each of the first three quarters of fiscal 2019. In the third quarter, which ended on February 28, Nike’s gross margin increased over 130 basis points on a year-over-year basis to 45.1%. The gross margin expansion in the third quarter was driven by a rise in average gross selling prices, higher full price sales, and strong growth of the NIKE Direct business. The company’s NIKE Direct business carries a higher margin than its wholesale business. Higher product costs hurt the third-quarter gross margin.

Nike’s Q3 operating margin

Nike’s operating margin was almost flat at 13.0% in the third quarter as the impact of a higher gross margin was offset by a rise in the SG&A (selling, general, and administrative) expense rate.

Nike’s SG&A expense rate increased to 32.2% in fiscal 2019’s third quarter, compared to 30.8% in fiscal 2018’s third quarter—mainly due to higher operating overhead expenses. Nike’s overhead expenses increased in the quarter due to continued investments in the company’s digital transformation and higher wages.

Margin outlook

Nike expects its fiscal 2019 fourth-quarter gross margin to expand by about 75 basis points. The company’s fourth-quarter gross margin is expected to benefit from continued momentum in full-price sales and strong growth in the NIKE Direct business. However, the fourth-quarter gross margin is likely to take a hit from increased input costs, forex sourcing headwinds, and a shift of supply chain investments from the third quarter to the fourth quarter.

Nike’s operating margin might be under pressure because of a forecast high-single-digit rise in SG&A expenses relating to the company’s strategic initiatives.

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