Nike Jumps on a New Track
China's enormous emerging economy presents an immense opportunity for global players, and Nike (NYS: NKE) is among the names making a sprint into this market. The athletic footwear and apparel giant has expansion plans in the promising Asian market to keep its top line running strong.
A look at the numbers
In the first quarter of 2011, gross margin declined by 2.7% to 44.3% because of an increase in the cost of raw materials. But net income increased by 15% to $645 million on higher demand, especially from emerging economies. The company expects 27% growth in future demand from the Chinese market, compared with 16% globally. Its inventory level stood at $3.1 billion, up by 41% compared with the same period last year.
Nike has a presence practically all over the globe, and that has ensured healthy top-line growth amid sluggish and uncertain economies in developed markets. A major part of its revenue growth was attributable to developing economies, especially China.
China has become one of Nike's largest markets, and the company is looking to ramp up investment and double revenue in the country to $4 billion by 2015. Nike currently operates through 7,500 stores in China and is planning to open new ones and increase production.
An uphill task
The company is trying to find ways to make the Chinese take to its products the way, for example, Americans have, and it's had to sweat it out against brands such as Gap (NYS: GPS) . With decreasing American sales, Gap, too, will become more reliant on the Chinese market. Coach (NYS: COH) , too, is concentrating on the Chinese market to boost global sales. The increase in purchasing power of the Chinese people and their growing affinity for international brands means that Coach is eyeing annual sales of $500 million from China within the next three years.
Nike faces another challenge in China. According to Chief Financial Officer and Vice President Don Blair, "China has one of the biggest populations who are tuned in to sports, but they aren't yet participants." To penetrate deeper into the market, Nike will have to expand its reach, popularize recreational sports like running and snowboarding, and focus on local brand ambassadors such as Chinese Olympic track-and-field star Liu Xiang and Chinese tennis player Li Na. One step toward that goal has been to open its first action-sports outlet in Shanghai, which will sell skateboarding and snowboarding gear.
Nike, with its wide customer base and new investments in developing economies, is expected to keep its growth momentum on track. With plans to enter deep into China and get more people familiar with the brand, the management has set high goals for itself, goals that I think will bear fruit. The stock is worth watching.
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At the time this article was published Fool contributor Abantika Chatterjee owns no shares of any of the companies mentioned in this article. The Motley Fool owns shares of Coach and Gap.Motley Fool newsletter serviceshave recommended buying shares of Nike and Coach and creating a diagonal call position in Nike. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.