Nike Squeezes Higher Revenue Out of Shrinking Inventory

7/3/2013
Strong performance by its North American direct-to-consumer business drove Nike’s revenues 8 percent higher to more than $25 billion in fiscal year 2013, CEO Mark Parker told analysts on a recent earnings call.

"It took us 18 years to get to our first $2 billion in revenue and we added about that much in just the last 12 months," he said.

Revenue for Nike’s North American direct-to-consumer business — including outlets and full retail stores — jumped 20 percent to $2.5 billion, while e-commerce revenue grew 30 percent.

Despite the double-digit revenue improvement, inventory levels in the North American business climbed by a mere 13 percent. "At Nike when profits grow faster than revenue and revenue grows faster than inventory, we call that the financial Triple Crown," said Charlie Denson, Nike’s departing brand president who recently announced his retirement after more than 30 years with the company.

Apparel and footwear performed well in the fourth quarter, growing by 20 percent and 8 percent, respectively. Comp store sales climbed 11 percent for the quarter — the 14th consecutive quarter of double-digit comp growth for Nike’s North American full-line stores. The company closed the fiscal year with "historically low levels" of closeout inventory, added CFO Don Blair.

Like other top athletic apparel firms, Nike has been making significant investments in "manufacturing innovations" to maximize production efficiency. "As Mark [Parker] often says, 'We believe our opportunities are unlimited, but we realize our resources are not,’" Blair said.

As e-commerce becomes a significant revenue stream, engaging shoppers online extends beyond the basic transactional experience. Nike’s collection of brand sites and digital experiences aimed at consumers creates a "multiplier effect" for its web business that "most pure-play e-commerce players can’t match," Blair explained.

With wages creeping higher in many apparel manufacturing markets around the world, Nike has searched for ways to control costs and keep consumer prices from rising significantly. Tinkering with prices a bit may help in the short term, but the long-term solution, explained Denson, is to leverage technology and innovation, thereby "engineering the labor [cost] out of the product."

Nike’s FlyKnit running shoe, which features an upper made of machine-knitted yarn, is one example of a product that relies on new technologies and innovative design. "We are just scratching the surface in terms of the potential that [Flyknit] offers from a performance and an aesthetic standpoint, let alone the manufacturing capabilities that it brings us," Denson said, adding that plans are in place to scale the Flyknit manufacturing process across price points and product categories.
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