10 Updates

Factors Underlying Our ~$68 Valuation of Nike

Mar 4 2014, 1:37pm CST | by

Sports giant Nike performed strongly in 2013, with its revenues from continuing operations up by nearly 10% over the first half of fiscal 2014. The surge in revenues was driven by strong...

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20 weeks ago

Factors Underlying Our ~$68 Valuation of Nike

Mar 4 2014, 1:37pm CST | by

Sports giant Nike performed strongly in 2013, with its revenues from continuing operations up by nearly 10% over the first half of fiscal 2014. The surge in revenues was driven by strong performances across all divisions, product types and geographies, especially Europe and emerging markets(excluding China). Below, we outline the key factors underlying our ~$68 valuation of Nike.

According to our analysis, the biggest contributor to Nike’s stock price is its footwear division. The division is likely to continue bolstering the company’s revenues in the future as it is expected to continue outpacing the industry wide growth of the global sports footwear market. Finally, if Nike can build on its recent advances in China and capture a significant share of the Chinese market, it can retain its strong growth for some time in the future.

Our price estimate for NIKE stands at $67.49 , implying a downside of ~14% to the market price.

See our complete analysis for Nike

Global Footwear Market Share

The global athletic footwear market is estimated to grow at a CAGR of 1.8% to reach $84.4 billion in 2018, according to a report by Transparency Market Research. In comparison, Nike’s footwear sales have grown at a high CAGR of 14.2% over fiscal 2010-2012, a rate in excess of the average industry growth rate. Nike footwear’s global market share has consistently grown over the years and reached 18.6% at the end of 2012. This can be attributed to strong marketing and innovation by Nike as its product line has been consistently evolving. We expect this figure to increase and cross 27% in the long run.
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We expect Nike to continue to outpace the industry growth rate in the future for the following reasons:

  • Nike is currently recognized as one of the top sports brands in the world.
  • Nike doesn’t manufacture the footwear sold under its brand name. Instead, the production is outsourced allowing the company to focus on design innovation. This gives the company flexibility to get the best products at the right prices and to move the production in case a better opportunity emerges.
  • Nike is associated with several top sportsmen around the world. The company leverages this association for the marketing of its products. The global appeal of its endorsers enables Nike’s products to be easily noticed.
  • Nike has strong R&D capabilities which are evident from its ever evolving product line and introduction of innovative products to the market.

Nike holds as much as 60% of the U.S. market share for athletic footwear. The company’s Jordan brand of basketball shoes alone contributes around 60% of the revenues to the entire U.S. basketball footwear category. Since, basketball is a high margin category compared to running and training shoes, this bodes especially well for the company. Moreover, the company has proven increasingly adept at passing on higher input costs to buyers of basketball shoes. The demand curve for Nike’s basketball shoes is considerably inelastic compared to that for other companies. Customers have regularly shown a willingness to fork out high amounts of cash to get their hands on shoes modeled around iconic names such as Michael Jordan, Kobe Bryant and Lebron James.
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Turnaround in China
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Over the course of 2012 and 2013, there were concerns regarding Nike’s inventory issues in China. The company had been plagued by high accumulation of inventory, that it had not been able to turn over at the set prices and instead had to offer these products at heavy discounts, in turn affecting its margins. However, the company’s efforts to reposition itself in the region began to reap fruit in late 2013. Nike brand revenues in Greater China saw 5% annual growth on a currency neutral basis in Q2 as compared to a 3% decline in the previous quarter. The company had been aggressively taking steps to return to growth in this region by reducing its inventory, enhancing its marketing activities, creating differentiated product portfolio, and improving the productivity of its store base in China. The results for Q2 and a reported future orders growth of 4% in the region show that these efforts are bringing in progress and putting the company on the path to sustainable growth in China. Given, the potential size of the market in China, if Nike can forge strong emotional ties with its Chinese customers, there can be significant upside to our valuation.
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Direct-To-Consumer Channel Performing Well

In the second quarter of fiscal year 2014, Nike’s Direct To Consumer revenue increased 19% driven by strong comparable store growth and the strong increase in online sales. The DTC channel is a higher margin segment as Nike does not have to share any of its revenues with middle men. Therefore, it is essential that as competitors, such as Under Armour and Lululemon Athletica , start encroaching upon Nike’s market share, the company uses the DTC channel to keep the same growth rate without reducing its margins.

Delving further into Nike’s DTC business, we find that the e-commerce business delivered another strong quarter with 33% revenue growth. Moreover, at less than 15% of Nike’s DTC revenues today, the ecommerce business clearly has opportunity to grow. The company expanded nike.com’s footprint in the quarter, launching sites in Japan, the world’s third largest e-commerce market, and Brazil, therebye further extending its commercial reach for consumers in this key growth market. The advantages of the e-commerce channel are such that it allows Nike to reach customers even in areas where it has no brick-and-mortar store presence. As the emerging markets grow and the demand for sports apparel, sports footwear and sports equipment grows with it, it is essential that Nike is well positioned to be able to meet this demand. Further expanding its distribution channels to support the e-commerce business is extremely important for Nike.
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