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Takeaway: New FlyKnit tech changes up the shoe manufacturing paradigm for the first time since Phil Knight created a futures model 40yrs ago.

Make no mistake...this is B-I-G.

A new patent suggests that Nike plans to give users much greater control over the customization of Flyknit sneakers, which is right in line with our contention over the past two years.

The implication here is that it will commercialize the ability for Nike to 'Mass Customize' its high-end product at an above-average margin without taking up price. The FlyKnit manufacturing units outlined below will, we think, be in three different places…

  1. Nike Stores: This will be a Brand experience. Imagine creating product on a kiosk, then swiping a credit card (or using ApplePay), and immediately seeing your shoes being created right in front of you. One shoe might be a size 9, while the other might be a size 9 1/2 -- most people have two different sized feet, but the old paradigm simply did not allow for it. This change is huge -- it's akin to when the stock market went from pricing securities in fractions to pricing in decimal points.
  2. Nike Factories: Imagine a warehouse space that is filled with 100 FlyKnit Units. Users can go online, design shoes, and then receive the customized product overnight just as fast as they'd receive shoes from Zappos -- but they'd be customized. This is one of the factors that gives us confidence that Nike will add $10bn in e-commerce revenue over 5-years at a 70% Gross Margin (vs 46% today).
  3. Wholesale Accounts: Yes, Nike is likely to ultimately put the technology in the hands of its wholesale customers -- but only AFTER it has the technology firmly in place for it's own use. Also, style count would be restricted. Nonetheless, the wholesaler (FL) would pay for the customization technology, the Nike employees that would need to be on hand, the inventory, and all the other wholesale inventory that Nike invariably will stick them with.

The irony is that most times we discussed this with investors in recent years, we were met with one of two responses 1) that's too far in the future to matter, or 2) it's probably not happening, because I call the company and they say you're wrong.

As for point number 2...Of COURSE they'll say we're wrong! They don't want the retailers to know how serious they are about scaling up this technology, so they downplay it materially.

But in the end, this changes up the shoe manufacturing paradigm for the first time since Phil Knight created a Futures model 40-years ago. And to be clear, no one is remotely close to where Nike is in this regard. They can catch up, but Nike has been allocating capital to this initiative as far back as 2004 (to it's 'Considered' product line). We wish competitors all the best in catching up without outsized capital spend and subsequent lower margins.

Patent Info 

(http://pdfaiw.uspto.gov/.aiw?Docid=20150366293&idkey=NONE)

NKE  |  This is B-I-G - 1 5 16 chart1

Abstract: Computer based systems and methods for designing (e.g., customization) of consumer products, articles of footwear, knit footwear uppers, and the like. In some embodiments, a user may generate and/or modify footwear designs using a design interface. Additionally or alternatively, the footwear design interface may be configured to simulate the layout and/or operation of a knitting machine to provide the user with the impression of physically designing and/or manufacturing an article of footwear. In other embodiments the system may disallow prospective footwear design changes based on limitations associated with inventory availability and the footwear design characteristics.