Retail Callouts (6/17): NKE Mid-Tier Promotional Activity

Takeaway: Best case, this discounting is a non-event. Worst case, its bad news for KSS, FL and perhaps NKE.

UNUSUAL RETAILER DISCOUNTING ACTIVITY

Takeaway: Those who know us know that we very rarely call to attention seemingly insignificant near-term datapoints like retailer emails. But a promotional email from Dick's Sporting Goods caught our eye this morning. Not the fact that the company sent one (DKS sends an email almost every day), but this was the first time we've seen the company in the past 12 months run a broad based sale on Nike product. It's not premium product -- the AUR at full price is just under $80 for the men's and women's footwear listed, but that is the segment in the marketplace that is commoditized. The key factor for us is that we subsequently  saw nearly every single player in the mid-tier channel running very similar offers . Sports Authority (check), KSS (check), JCP (check), Academy Sports + Outdoor (check), and M (check) (see ads below). That tells us a few things…

  1. First off, it's a great example of the price transparency brought on by e-commerce. 5 years ago this bucket of retailers would have had far more opacity related to their discounting practices.
  2. On the plus side, the level of discounting is not particularly egregious. For many of these mid-tier players, a 25% discount is considered about as close to a full-price sale as they'll get.
  3. Could this be Father's Day-related? Yes, it's possible. But we checked email activity for all these retailers last year as well in the week before Father's Day, and we did not see this. The 2014 World Cup may explain away a part of that. But, our sense is that there is more at play.
  4. If there's anything that rubs us the wrong way on this one, it's that we've seen very strong sales for Nike in US Mid-Tier channels in recent quarters. Take Kohl's, for example...in the latest two quarters its Nike sales were up 19% and 24%, respectively or about $96mm in absolute dollar growth. The way we are running the math Nike accounts for between 3-5% of total KSS sales or about $800mm. That translates to $550mm at wholesale for NKE, or 33% of KSS' growth over the past 2 quarters.
  5. Nike does a great job in tiering its product by retailer, such that excessive inventory in one channel won't necessarily derail another.  But still, this raises a yellow flag for us for the Foot Locker's of the world.

  Retail Callouts (6/17): NKE Mid-Tier Promotional Activity - chart1 6 17 15

Nike/UnderArmour Management Age Considerations

Takeaway: One thing that we think is a constant point of controversy inside Nike is ensuring that the age of its executive management team does not run too far askew from the age of its target consumer, which is about 15-25 years old. Clearly, we don't expect to see Nike promoting recent college grads into its top ranks, but truly understanding the mindset of the key consumer is something that has been particularly important to CEO Mark Parker, who's now 58 years old. 

We ran an analysis of Nike's top brass in each of the past ten years, expecting to see an aging team relative to the target market (which would be bearish). This was surprisingly not the case -- especially when we compare to UnderArmour. Though there's no smoking gun here (bullish or bearish) we thought we'd share the analysis. Consider the following…

 

1. The line chart below shows the average age of the management team at Nike over time. At face value, it looks ugly, but we're only talking a shift from 48 yrs to 51 yrs over a 10-year period. That's not bad by any stretch.

 Retail Callouts (6/17): NKE Mid-Tier Promotional Activity - chart2 6 17 15

 

2. When zooming out a bit and looking at both NKE and UA in the context of the broader growth in this business, the spread relative to the core consumer (a range that could arguably have come up over time) is not alarming.

Retail Callouts (6/17): NKE Mid-Tier Promotional Activity - chart3 6 17 15

3. Comparatively speaking, the gap between Nike and UA has actually been shrinking over time -- from 9.5 years nearly a decade ago to about 3 years today.  In other words, UA's team is about 49 yrs old vs Nike at 52.

Retail Callouts (6/17): NKE Mid-Tier Promotional Activity - chart4 6 17 15