Nike Looks to Capitalize on Freight Rate ‘Buyers Market’
Margin pressures hit Nike in the fourth quarter as the athletic giant bore the brunt of higher product input costs, elevated freight and logistics costs and higher markdowns aimed at clearing excess inventory.
But the good news for fiscal 2024 is that the Swoosh expects to see a turnaround in gross margins now that ocean freight rates are turning in its factor, according to Nike chief financial officer Matt Friend, who also noted a “modest” improvement in markdowns versus the prior year.
More from Sourcing Journal
Fluctuating Freight Rates, 3PLs and Nearshoring Dominate 2023's Logistics Conversation
Kseniaschnaider Reimagines Adidas Originals' Signature Looks
“We’ve now negotiated our ocean freight rates with partners for fiscal year 2024, and we’ve negotiated rates that are near pre-pandemic levels,” Friend said during a Thursday earnings call. “Those benefits don’t kick in until halfway through the second quarter, and so we’ll start to see that tailwind come in in Q2 and then accelerate in Q3 and Q4 and then carry into fiscal year ’25.”
Nike does not expect the current spot rates will affect revenue in the upcoming fiscal year, forecasting mid-single-digit reported revenue growth.
As of June 29, ocean freight rates per 40-foot container were $1,494.46, down 78.9 percent from a year ago, according to data from the Drewry World Container Index (WCI). Prices have consistently fallen this year, with the past week’s container prices dipping 2.7 percent.
The Index appears to be in line with Nike’s commentary, noting that the rate remains 5 percent higher than average 2019 pre-pandemic rates of $1,420. But when zooming out, rates are still 44 percent lower than the 10-year average of $2,688.
Nike is taking advantage of an environment that is currently good for shippers, albeit volatile, according to Brian Bourke, global chief commercial officer at Seko Logistics. Bourke says the supply chain and logistics services provider is advising retail clients to prepare to monitor weekly freight rates so they can lock in good rates for the coming year or capitalize on the shorter term.
“It is definitely still a buyers’ market, but just because the past 12 months have been a certain way, that doesn’t mean it’s going be like that the next 12 months,” Bourke told Sourcing Journal. “It is a time to be a lot more hyper-aware on where the spot rate market is, and the trade lanes that companies leverage for their supply chain, especially if there’s any anticipation of increased volumes or demand in the fourth quarter.”
Nike’s scenario is similar to chief competitor Adidas‘ problems with high freight costs. While Nike’s gross margins sank 1.4 percent to 43.6 percent, Adidas took a larger margin hit at 5.1 percent to 44.8 percent in its first quarter.
In a May earnings call, Adidas CEO Bjørn Gulden said much its inventory was bought when freight rates ran about $10,000 per container. But chief financial officer Harm Olmeyer indicated the freight headwinds were expected to have the largest impact on the recent quarter, and be “less negative” in the second half.
Both athleticwear giants appeared to fall behind compared to another competitor, Lululemon, which saw declining air freight costs drive a 3.6-percent increase in first-quarter profit margin to 57.5 percent. For the full year, Lululemon expects air freight alone to give margins a 1.9 percent boost versus 2022.
Other retail giants, including Walmart, Target, TJX and Ross Stores and department stores like Macy’s, Nordstrom and Kohl’s, all cited freight cost declines in their most recent quarter.
But with a fresh start in the coming fiscal year, Nike expects to expand margins between 1.4 percent and 1.6 percent, which would indicate a gross margin of 45 percent to 45.2 percent.
Friend said in the call that the company also baked an improvement in full-price mix and markdowns into the full-year margins.
Cowen analysts aren’t sold on the margin improvements, particularly since they will still be a roadblock for Nike in its fiscal first quarter. The LeBron James and Kevin Durant collaborator anticipates gross margins will be down 0.5 to 0.75 percent on a sequential basis.
“Our concerns center around competition from emerging brands with broadening distribution in North America (e.g. Lululemon, Hoka, On, Skechers, Adidas, Puma) and an over-distributed and over-stored U.S. wholesale which is prompting lifestyle sneaker fatigue,” according to a Cowen research note.
The investment bank lowered its price target for the company, which recently unveiled it reignited partnerships with DSW and Macy’s, to $125 from the previous mark of $141.
