Friday, March 18, 2011

Cost Pressures Begin to Filter their Way into Impacting Margins - Nike (NKE) an Early Example

It was just a matter of time when commodity cost pressures began to impact margins - you just never know when exactly due to the length of contracts and type of pricing, but record corporate profit margins at U.S. corporations are beginning to take a hit.  Oil is the most obvious issue as it's essentially a tax on everyone and everything, but it's actually been one of the more benign commodities over the past year.  As mentioned early last fall, the response to The Bernank's global liquidity party will be to protect margins by either trying to pass along price increases to consumers and/or by laying off workers.  Obviously neither is good for the 'Main Street' crowd. 

Last evening Nike (NKE) reported a significant hit to profits due to commodity pressure  The response will be across the board price hikes in coming quarters... but for now we have a stock hit 8% in the premarket and a price in the $78s.

Should be an interesting earnings reporting period coming in April as we hear both about these commodity impacts and supply chain disruptions in Japan for some of the global multinationals.  Probably the first reporting period in 2 years where the normal 70-80% of companies beating the analysts' lowly expectations game might be threatened. 
  • Nike is grappling with higher costs for cotton, labor and transportation, which the company projected may reduce profit margins this year. Gross margin, the difference between sales and cost of goods, narrowed 1.1% points in the quarter

More worrisome than the one quarter hit to gross margins is the outlook for the future.
  • Management sees gross margins down 300 basis points year over year for the rest of this fiscal year, and believes there is more downward pressure in 2012

Hence, shoe inflation....
  • Nike, which reported after the close, had been engaging in "surgical" price increases that targeted specific products and markets, but coming price increases will be "across the board," the company said. 

On the plus side, I hear iPads (which are dropping in price) make excellent footwear in a pinch.  (Ok, I promise this is the last iPad joke of the week!)

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