NKE: Flexing Sales Power, Profits falling short.
Based on the baseline scenario of Comparable Trading Analysis, I am providing a HOLD recommendation for Nike Inc. (NKE) with a target price of $74.1, indicating a 32.4% downside from its closing price of $109.69 on August 8, 2023. This valuation has been derived from the Comparable Company Analysis. Despite trading at higher multiples than its peers, Nike maintains a significant advantage in terms of market share and has consistently demonstrated innovation. Leveraging its extensive experience in the industry and benefiting from improved economic conditions, Nike is expected to enhance its profits in the medium-term.
Nike's Evolution and Impact in the Athletic Apparel Industry
Nike, a transformative American multinational, has revolutionized athletic footwear and apparel. Founded in 1964 as Blue Ribbon Sports, it has evolved into a global powerhouse. Nike's business model focuses on designing, producing, and marketing athletic products worldwide. While its core is footwear, Nike also offers apparel, equipment, accessories, and services tailored to enhance athletes' performance. The company strategically aligns with athletes, crafting sought-after lines like the Air Jordan, Nike Air Max, and Nike Dunk. In more than 190 countries, Nike thrives, with key markets in the United States, China, and Europe. It remains agile, penetrating emerging markets like India and Brazil. This prowess translates into financial strength, evident in 2022's impressive $46.7 billion revenue and $7.2 billion net income.
Nike's competition includes Adidas, Puma, and Under Armour, and its future hinges on expanding product ranges, entering new markets, and refining marketing and distribution strategies. The brand is renowned, ranked as Forbes' most valuable in 2022, and underpins major global events like the Olympics and FIFA World Cup. Despite criticisms regarding labour practices, Nike strides towards sustainability and progressive measures. Just as Airbnb altered travel accommodation, Nike's indelible footprint has disrupted athletic apparel, shaping a dynamic, evolving industry landscape.
Decreasing profitability and strong balance sheet
Nike's stock price demonstrated robust growth during the 2020-2022 period. However, the global disruptions in supply chains caused by the COVID-19 pandemic, coupled with issues like factory closures, transportation challenges, and material shortages, potentially impacted Nike's production and distribution capabilities. Moreover, due to an uncertain economic outlook, consumer spending has shown a declining trend. To address these challenges, Nike has turned to its wholesale partners to help reduce elevated inventory levels, which currently stand approximately 23% higher than those in 2021 (prior to the onset of supply chain constraints that affected the entire industry). While this approach has bolstered wholesale revenue in recent quarters, it has also led to a reduction in profit margins.
To adapt, the company has strategically shifted its business model towards e-commerce, resulting in a decrease in the number of days required to collect receivables. As of August 07, 2023, Nike's current dividend yield stands at 1.25%, and its earnings per share (EPS) is reported at $3.23.
Future Concerns and Risks
Airbnb faces new challenges from competition from established players in the travel and hospitality industry, including hotels, online travel agencies, and home-sharing platforms. Airbnb's business is vulnerable to economic downturns, as reduced consumer spending on travel and tourism could lead to decreased demand for its services. It also faces legal and regulatory risks, such as lawsuits, fines, and increased regulations, which could increase its operating costs and harm its reputation of the company.
Business Overview
Nike's core business model operates as a manufacturer, marketer, and distributor of athletic footwear, apparel, equipment, and accessories. The model revolves around two primary components: production and sales. Firstly, Nike designs and manufactures its products, catering to athletes and consumers seeking performance-oriented gear. Secondly, the company employs a multi-channel distribution strategy, encompassing direct-to-consumer platforms, such as its website and retail stores, as well as partnerships with third-party retailers. Nike generates revenue primarily through product sales, setting prices that encompass production costs and desired profit margins. This approach enables Nike to uphold its brand reputation while catering to a diverse global market of athletes and lifestyle consumers.
2023 Performance Highlights
NIKE's annual revenue for 2023 reached $51.22 billion, reflecting a 9.65% increase compared to 2022, or 16% when adjusted for currency fluctuations. The notable growth in revenue was primarily propelled by a surge in sales in the North American region. However, the company's gross margin for the fiscal year experienced a decline of 250 basis points, settling at 43.5%. This decrease was predominantly influenced by higher product costs, increased markdowns, and unfavourable shifts in foreign currency exchange rates. These effects were partially mitigated by strategic pricing actions.
In 2023, the normalized EBITDA amounted to $5.92 billion, marking an 11% reduction from the previous year. This decline in EBITDA was driven by demand creation expenses totalling $4.1 billion, indicating a 5% rise compared to the prior year. These expenses primarily encompass advertising, marketing, and sports marketing. Additionally, operating overhead expenses increased by 12%, reaching $12.3 billion. This increase was primarily attributed to wage-related expenditures, NIKE Direct variable costs, and higher investments in strategic technological advancements.
In fiscal year 2023, Nike distributed $7.5 billion to shareholders, comprising a $2.0 billion dividend increase and a substantial $5.5 billion share repurchase program, retiring 50.0 million shares. This encompassed $0.7 billion for 6.5 million shares from the 2018 program and $4.8 billion for 43.5 million shares from the 2022 program.
| All figures in USD billions | |||
| 2022 | 2023 | 2023 | |
| Income Statement | |||
| Revenue | 44.5 | 46.7 | 51.2 |
| Operating Income | 6.9 | 6.7 | 5.9 |
| Net Income | 5.7 | 6.1 | 5.1 |
| EBITDA | 7.7 | 7.5 | 6.8 |
| Diluted EPS | 3.6 | 3.8 | 3.2 |
| Balance Sheet | |||
| Total Assets | 37.7 | 40.3 | 37.5 |
| Total Liabilities | 25.0 | 25.0 | 23.5 |
| Total Debt | 12.8 | 12.6 | 12.1 |
| Total Equity | 12.8 | 15.3 | 14.0 |
| Cash | 13.5 | 13.0 | 10.7 |
| Working Capital | 16.6 | 17.5 | 16.0 |
| Cash Flow | |||
| Operating | 6.7 | 5.2 | 5.8 |
| Investing | -3.8 | -1.5 | 0.6 |
| Financing | -1.5 | -4.8 | -7.5 |
| Capital Expenditure | -0.7 | -0.8 | -1.0 |
| Free Cash Flow | 6.0 | 4.4 | 4.9 |
Key Strategies
Nike's growth strategy centres on innovation, sustainability, and global expansion:
Innovation and Technology: Nike's business strategy revolves around technological innovation, propelled by substantial investments in research and development. This focus has resulted in pioneering breakthroughs such as auto-lacing shoes, iPod-based pace and distance tracking, and airbag technology. By prioritizing innovation, Nike ensures its continuous leadership in introducing novel products to the market.
Diversification: A distinct facet of Nike's business strategy is diversification, underpinning its differentiation approach. Despite its commitment to quality, Nike caters to a broad spectrum of consumers by offering an extensive range of products, spanning various sports and activities.
Economies of Scale: As a dominant global sports equipment and textiles producer, Nike leverages economies of scale through bulk purchasing and price control of raw materials. This strategic advantage enables the company to secure significant discounts, resulting in lower production costs and enhanced profitability.
Outsourcing: Nike's core business model relies on outsourcing, particularly from Asian countries. This approach grants the company several advantages, including reduced production costs, lean operations, and flexibility in adapting to changing product prices.
Senior Management
Mark G. Parker
Executive Chairman. Has been employed by NIKE since 1979 with primary responsibilities in product research, design and development, marketing, and brand management.
John J. Donahoe II
President and Chief Executive Officer. Was appointed President and Chief Executive Officer in January 2020 and has been a director since 2014. He brings expertise in digital commerce, technology, and global strategy.
Matthew Friend
Executive Vice President and Chief Financial Officer. Joined NIKE in 2009 and leads the Company's finance, demand & supply management, procurement, and global places & services organizations.
Monique S. Matheson
Executive Vice President, Chief Human Resources Officer. Joined NIKE in 1998, with primary responsibilities in the human resources function.
Ann M. Miller
Executive Vice President, Chief Legal Officer. Joined NIKE in 2007 and serves as EVP, Chief Legal Officer for NIKE, Inc. She oversees all legal, compliance, government & public affairs.
Heidi O'Neill
President, Consumer, Brand & Product. Joined NIKE in 1998 and leads the integration of global Men's, Women's & Kids' consumer teams, the entire global product engine and global brand marketing and sports marketing to build deep storytelling, relationships, and engagement with the brand.
Craig Williams
President, Geographies & Marketplace. Joined NIKE in 2019 and leads NIKE's four geographies and marketplace across the NIKE Direct and wholesale business. In addition, he leads the Supply Chain and Logistics organization.