Nike Inc.’s decision more than a year ago to raise its prices is paying off in spades, according to a report by the retail equity research team at UBS.
In Nike’s May 2014-end fiscal year, the investment bank estimates that the brand’s global footwear average selling prices increased between 5 and 6 percent year-on-year, up from a 4 percent rise in fiscal 2013.
As Nike continues to redesign its pricing strategy, its peers have followed suit, with the company driving overall U.S. athletic industry growth this year.
According to UBS, higher ASPs by Nike have added $168 million to total U.S. athletic footwear industry sales for the year to date on the prior corresponding period.
“We find it particularly counterintuitive that Nike’s investment in an improved pricing architecture is showing such strong results during a period when the broader U.S. apparel and footwear industry is under significant pricing pressure,” said UBS analyst Michael Binetti.
He added that by raising the ASP of its sneakers, Nike is boosting its earnings visibility and increasing its ability to deliver upside to consensus earnings per share estimates for fiscal 2015 and beyond.
“The ability to raise prices is a key long-term advantage in the branded apparel and footwear industry — we are particularly encouraged that Nike is able to drive pricing while most U.S. apparel names are calling for elevated promotional [and] markdown levels in the near-term,” Binetti said.
He is forecasting that Nike’s renewed focus on pricing will drive gross margin expansion in coming years and also support Nike’s current price-to-earnings multiple premium.
As a result of its analysis of Nike’s price hike, UBS raised its 12-month price target on the stock to $90, up from $85, and reiterated its “buy” rating.
Binetti said Nike’s new strategy is an emerging competitive advantage.
“[The ability to raise prices] is particularly surprising considering the magnitude of the price increases that Nike is driving, given its sheer size and market share in the U.S. For Nike to deliver a more-than-1-percent increase [in ASP], the entire U.S. consumer population has to pay significantly more dollars for footwear,” he said.
Market watchers expect Nike will beat its forecasts for 14 and 15 percent EPS growth in fiscal 2015 and 2016, respectively.
Nike shares were 1 percent higher at $78.10 in midday trading.