Tuesday, August 21, 2012

Basketball Shoes and Nike Stock

$315 for a pair of basketball shoes? Are you kidding me?

Here's the story on Lebron James's new signature shoes in Nike's LeBron Sneakers to Test $300 Limit:

"Nike Inc. is raising the prices of its sneakers, assuming that the brand's cachet will carry it through a period when many of its shoppers are scrounging for discounts.

As labor, materials and shipping costs increase, Nike is raising shoe and clothing prices by 5% to 10%, analysts say. A test of the approach comes this fall, when Nike will debut its priciest sneaker yet—an expected $315 LeBron James basketball shoe that includes its own electronics. . . .

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Nike unveiled the LeBron X, shown, at the 2012 Olympic gold-medal basketball game between the U.S. and Spain. Analysts expect that this 10th LeBron shoe will retail for around $315. The first edition, modeled after basketball star LeBron James, the Nike Zoom Generation, retailed for around $110 in 2003; the ninth edition retails for around $250.

The price increases, from a company whose trendy footwear sometimes generates long lines of avid buyers, may test even the most dedicated Nike fans.

"Prices are getting crazy excessive and as long as we continue to buy sneakers, Nike is going to keep increasing the prices," said Donell Brown, 30, who owns a cleaning services company in Dearborn, Mich.

Mr. Brown said he and his friends have been posting messages on Twitter and YouTube, urging other longtime sneaker fans not to buy the pricier LeBron shoes and to forgo waiting in line for new sneaker releases.

Nike's price increases are also being felt at the lower end: The venerable Converse Chuck Taylor All-Star sneaker now costs $50 compared with $45 a year ago.

Nike isn't the only sneaker maker asking customers to pay more. Adidas's signature three-striped Superstar shoes now cost $70, nearly 8% more than a year ago. Overall basketball shoe prices were up 9.4% compared with a year before as of June, according to market researcher NPD Group Inc., while soccer cleats jumped 15.5% and running shoes climbed 5.Nike's basketball and soccer shoes make up about half its North American business, according to analysts.

Some families are already noting sticker shock as they start back-to-school shopping.

"Sneaker prices have definitely shot up this year," said Lucy Rangel, 37 years old, who was shopping for sneakers with her two teenage daughters at a Foot Locker store in Dallas.

Ms. Rangel said she paid $114 for a new pair of pink and purple Nike sneakers for her 12-year-old daughter, up from $69.99 she paid last year for a similar pair. . . .

The coming $315 LeBron X Nike Plus, due in the fall, is expected to come embedded with motion sensors that can measure how high players jump. The LeBron 9 PS Elite basketball shoes, which currently retail for $250, feature Nike's signature swoosh in metallic gold."

Nike Stock

And here's what a stock analyst says about Nike's stock as an investment these days in Nike Is a Strong Sell:

"As far as its business goes, I like Nike  a lot. In my mind, it’s a $70 stock. I wouldn’t mind buying it if it were at $60. Fifty dollars would be even better.
The problem is the stock’s at $95.

The normally solid company is also starting to show some cracks, and they may soon get much bigger. The last earnings report was a complete disaster. Revenue plunged 12% and Nike missed earnings by 20 cents per share.

Nike’s profit margins are getting squeezed, so their response is to raise prices even more. I think that’s a big mistake.

We’re going learn a lot more about this approach soon when Nike unveils its newest LeBron shoe which will retail for over $300. . . .

I think this is emblematic of some of the larger forces at work in the broader economy. Companies have pushed their margins as far as they can go. Some feel the need to raise prices even more but their customer base is tapped out. It’s like a rubber band that’s been stretched to its breaking point.

Something has to give. . . .

I think Nike is making a big mistake here. I wouldn’t be surprised to see the LeBron fall way short of expectations. You can tell when an industry is tired—there’s no real innovation, just larger tailfins.

That’s what’s going on now.

I don’t see how Nike can come close to being worth $95. Avoid this stock."

Summing Up

Nike is a great brand and a great company as well. That said, how much will customers pay for a pair of basketball shoes? And how much is a share of Nike stock worth?

We're going to find all this out in just a few short months.

{NOTE: I don't own any Nike shares and don't intend to purchase any anytime soon either.}

It will definitely be both interesting and fun to watch how things develop as customers register their votes by buying or not buying enough LeBron branded shoes from Nike.

Here are a few related questions: Will Adidas be able to sneak in there and capture some market share from Nike? Or will customers trade themselves down and buy less expensive footwear, both from Nike and its competitors as well? How much profit will Nike make and how much will investors pay for its shares?

Isn't competition great? Aren't free markets the best thing for customers? And investors, too?

Free choice rules. It's MOM based action all the way.

Thanks. Bob.


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