Nike Inc.'s Manufacturing Innovation -- What to Watch in 2017

By Seth McNew Markets Fool.com

Nike (NYSE: NKE) management spent some time in the most recent earnings call talking about how the company is focused on revolutionizing manufacturing, both in terms of product materials and how those products are made.Here's what we know so far about Nike's focus on manufacturing innovation, and why this could be the most important thing to watch in 2017.

Continue Reading Below

Speed matters

In the most recent earnings call, Nike CEO Mark Parker introduced the world to what the company calls "Express Lane." The idea behind the coined term is simple -- that the company wants to get product to market faster.

Image source: Nike Inc.

During the call, Parker said, "We also know from our consumers that speed matters. That insight is driving several speed and agility initiatives throughout our company." After that, he introduced Nike Express Lane, a part of the company's focus on manufacturing innovation that he said will allow for new products to reach market in weeks instead of months.

Led by more efficient manufacturing

Continue Reading Below

How will Nike bring its products to consumers faster?Parker went on to say that innovation is key, and that Express Lane and the company's other manufacturing revolution initiatives will help drive more product and distribution innovation going forward. In terms of what's happening on the backend to make that happen, we didn't get a lot of color on the earnings call, but we have some clues about product material and assembly cost and time savings.

"We've invested in a significant portfolio of work that isreinventingwhat a footwear factory looks like and how footwear is made," it says on the company's website about its manufacturing goals.

Nike Flyknit technology enables designers to micro engineer every stitch of an upper -- scientifically tuned to meet the exact specifications of athletes -- while also shaving ounces off each shoe upper.Flyknit reduces waste by about 60% on average compared to cut and sew footwear, and through Spring 2016, has reducednearly 3.5 million pounds of waste since 2012.

Image source: Nike Inc.

Why this could be one of Nike's most important initiatives

Increasing that kind of efficiency and speed-to-market focus within all of its product categories could be the most important pursuit the company makes in the years ahead. Nike stock dropped 18% in 2016, and even though the stock has been on a bullish run the last month, it's still more than 20% below its late 2015 high. One of the main reasons for investors cutting the stock's price has been concerns over declining gross margin -- it fell to a multiyear low of 44.2% --led by inventory challenges and higher product costs.

Image source: Under Armour.

This focus on manufacturing could help that. By using smarter materials and manufacturing practices to reduce waste, the company can grow its gross margin simply by reducingproduct costs. In terms of inventory management, some products need to be planned and in production months before they could potentially hit shelves. That's not helpful for inventory planning when consumer preferences change quickly and the company is selling many seasonal items. Having a way to get an idea to production and to the consumer faster should help in more efficiently managing inventory to reduce the need for discounting. Higher prices and lower product costs -- that's what could make this one of Nike's most important growth initiatives.

Nike certainly isn't the only one looking to manufacturing and supply chain changes to drive new growth.Under Armour(NYSE: UAA)(NYSE: UA)unveiled its "Lighthouse" manufacturing innovation center in Baltimore last June, which the company believes will be a hub for designing the best products in the smartest ways possible. Most recently, the company unveiled a new bra and other women's garments called the "UA Arris Project"that were developed and produced at Under Armour's Lighthouse.

Additionally, Nike faces some challenges outside of gross margin declines, such as slowing futures orders growth, a metric that reports distributors who place advance orders months out. Nike will no longer report this figure since it doesn't take into account the direct-to-consumer segment the company is working so hard to build, and the company's most recent quarter of 6% sales growth year over year isn't exactly inspiring for a company trading at 25 times earnings.

Still, Nike has done a great job of continuing to grow earnings, which rose 11% during the most recent quarter, year over year. With an increased focus on manufacturing innovation that could boost gross margin, Nike's earnings could continue to grow faster than sales in the years to come.For the back half of Nike's fiscal year -- the company will report fiscal third-quarter earnings in March -- we will want to see more updates on what the company is doing to continue this initiative, and if gross margin is starting to turn around as a result.

10 stocks we like better than Nike
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now...and Nike wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of February 6, 2017.

Seth McNew owns shares of Nike, Under Armour (A and C shares). The Motley Fool owns shares of and recommends Nike, and Under Armour (A and C shares). The Motley Fool has a disclosure policy.