Nike, Inc.

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.

Corporate Governance and Social Responsibility

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.

Corporate Governance

Board of Directors: The members of the board possess substantial expertise in product development, marketing, e-commerce, and supply chain management. The CEO and Executive Chairman are distinct individuals, both of whom boast significant experience within the company and the industry at large.

Senior Management: Like Nike's board of directors, the company's management (listed on the left) comprises seasoned professionals who possess the capability to harness their expertise to generate value.

Audit & Finance Committee: The committee that helps oversee corporate accounting and reporting practices of the Company.

Compensation Committee: The committee oversees executive compensation, assesses CEO performance, and manages talent development, succession planning, and workplace diversity for executive officers and senior management.

Corporate Responsibility, Sustainability & Governance Committee: The committee Identify and propose qualified Board members, recommend director nominees, assess Corporate Governance Guidelines, ethical code, and governance documents, and provide recommendations on shareholder matters to enhance corporate governance quality and integrity.

Social Responsibility

Nike's extensive CSR policy encompasses detailed topics, emphasizing reputation management due to its direct-to-consumer model. The policy covers material sourcing, water management, taxes, and more, spotlighting its commitment to diverse aspects of social responsibility. The CSR framework is categorized into People (diversity, equality, inclusion, and community engagement), Planet (supply chain sustainability, carbon, waste, water, and chemistry), and Play (promoting physical activity and coach development).

• People: Focused on diversity, equality, and community engagement, Nike's People section aligns with modern business practices.
• Planet: Nike's comprehensive environmental efforts target carbon, waste, water, and chemistry. The firm strives to lower emissions, enhance material recycling, reduce freshwater use, and address chemical risks.
• Play: Promoting active lifestyles and fostering friendships through sports, Nike's Play initiatives contribute to social welfare.

Despite historic challenges, Nike commits to ambitious environmental goals by 2025, encompassing CO2 emissions, water use, chemicals, and waste. The firm's Cleaner Chemistry program underscores responsible chemical management.

On the social front, Nike allocates pre-tax profits to community projects, encourages sport engagement through the Play scheme, and facilitates grassroots development through the Nike Community Impact Fund.

However, challenges persist. Nike navigates potential conflicts in raw material sourcing, processing, and community impact. Stricter labor codes deter forced labor, but supply chain risks remain, necessitating continued vigilance to avoid reputational damage.

Industry Overview and Competitive Positioning

The athletic footwear and apparel industry is both large and continuously growing. In 2022, the global market for athletic footwear and apparel reached a valuation of $127.3 billion, and it is projected to maintain a compound annual growth rate (CAGR) of 4.9% from 2022 to 2030.

Several factors contribute to the expansion of the athletic footwear and apparel industry, including:

• The rising popularity of fitness and sports activities
• Increasing health consciousness among consumers
• Growing disposable incomes of consumers
• Escalating urbanization across the world's population

Nike's Role in the Industry

As a frontrunner in the athletic footwear and apparel sector, Nike boasts a dominant position. The company wields a robust brand presence, operates a global distribution network, and offers an extensive array of products. Nike's market share in the worldwide athletic footwear and apparel market is approximated at around 30%.

Historical and Projected Growth

Nike has consistently experienced impressive growth over its history. Over the past five years, the company's revenue has grown at a CAGR of 8.5%. This upward trajectory can be attributed to its compelling brand identity, innovative product offerings, and global marketing endeavors.

Anticipated Future Expansion

Nike's trajectory of growth is expected to persist in the future. This growth will stem from the industry's sustained expansion, along with Nike's own strategic growth initiatives. The company is making investments in novel product categories, such as sportswear and equipment, while also broadening its distribution network into emerging markets.

Navigating Competitors

Within the athletic footwear and apparel industry, Nike contends with several formidable competitors, including Adidas, Puma, and Under Armour. These industry giants are all vying for market share in this competitive landscape.

Nike's Edge

Nike's competitive advantage stems from its powerful brand identity. The globally recognizable "swoosh" logo confers a substantial edge upon Nike over its rivals. The company also boasts a robust product pipeline, constantly pioneering new products for market release.

Overall, Nike holds a well-established position in the athletic footwear and apparel industry. With its compelling brand identity, diverse product range, and extensive global distribution network, Nike is poised for sustained growth. The company's projections indicate it will continue to expand, allowing it to maintain its pivotal leadership role within the industry.

Future Growth Strategies

Looking ahead, Nike remains committed to its sustained expansion within the global athletic footwear and apparel domain. The company's strategic plans encompass diversification of its product range, exploration of new markets, and enhancement of its marketing and distribution strategies.

Assured Prosperity

With a robust brand identity and a promising outlook, Nike stands as a preeminent global leader in athletic footwear and apparel. The company is well-positioned to nurture ongoing growth and success in the forthcoming years.

Comparing Past and Present

Over time, Nike's business model has evolved significantly. While its historical focus cantered on wholesale distribution, recent years have witnessed a shift towards direct-to-consumer sales. This transformation has manifested through the establishment of proprietary retail stores and the expansion of the company's e-commerce endeavours.

Amplified Marketing and Branding

Substantial investments in marketing and branding have played a pivotal role for Nike. Sponsorship of prominent sporting events and endorsement agreements with top-tier athletes have bolstered brand recognition and catalysed sales growth.

Overall Business Model Success

Nike's adept business model has steered the company effectively towards its growth aspirations. The strategic alignment has positioned Nike favourably for continued expansion and prosperity in the years ahead.

Additional Noteworthy Information

In 2022, Forbes crowned Nike as the world's most valuable brand, underscoring its global prominence. Demonstrating commitment to sustainability, Nike has set ambitious targets to reduce its environmental footprint. Nike's extensive sponsorship involvement encompasses global sporting events like the Olympics and FIFA World Cup. While criticisms regarding labour practices have emerged, Nike has taken measures to enhance these practices.

Products and Services:

At the core of Nike's portfolio lies athletic footwear, complemented by an array of apparel, equipment, accessories, and services. Tailored to optimize athletes' performance, notable products include the iconic Air Jordan basketball shoes, the innovative Nike Air Max running shoes, and the sought-after Nike Dunk skateboarding line.

Augmenting Core Offerings

• Beyond its core products, Nike extends an array of services, including:
• Retail operations through a global network of stores
• E-commerce platforms, both proprietary and third-party
• Collaborations with athletes, teams, and events to drive product promotion
• Licensing arrangements that expand the utilization of Nike's brands across diverse products

Supplier Relationships

Nike nurtures longstanding relationships with its suppliers, fostering joint efforts in new product development, quality enhancement, and cost optimization. Technical training and support further underpin these collaborations. Nike's supplier network spans the globe. Predominant footwear suppliers operate in China, Vietnam, and Indonesia, while apparel production primarily involves China, Bangladesh, and India.

Target Audience

Nike's diverse customer base encompasses individuals across age groups, all seeking athletic footwear, apparel, and equipment. The following demographics constitute the company's primary target markets:

• Athletes of all levels
• Fashion and lifestyle enthusiasts
• Those seeking high-performance, premium quality products

Value Creation

Nike delivers value to customers through a multi-pronged approach:

• Development of innovative, purpose-driven products
• Effective product marketing and demand generation
• Global product distribution through an extensive retail network
• Provision of exceptional customer service

Valuation Summary

Comparable Trading Analysis
All figures in USD millions unless stated
	Enterprise		Market	EBITDA	Net Income	EV / EBITDA	P / E
Peer Companies	Value		Cap	LTM	LTM	LTM	LTM
Adidas AG	40,840		34,380	730	794.4	55.95x	43.3x
Puma SE	12,200		10,330	793	347.2	15.39x	29.8x
Under Armour, Inc	4,090		3,300	412	243.4	9.92x	13.6x
Lululemon Athletica Inc	48,520		48,370	2,179	1,382.4	22.27x	35.0x
Anta Sports Products Limited	30,280		31,210	1,755	931.6	17.25x	33.5x
Columbia Sportswear Company	4,800		4,730	521	319.2	9.21x	14.8x
Skechers U.S.A., Inc.	9,530		8,470	826	336.3	11.53x	25.2x
Steven Madden, Ltd.	2,540		2,670	222	132.6	11.44x	20.1x
Li Ning Company Limited	13,400		14,250	798	588.4	16.79x	24.2x
VF Corporation	14,670		7,610	1,228	116.5	11.95x	65.3x
Target Company Valuation
Average	123,082		118,122	6,774	3,876	18.2x	30.5x
Median	92,601		106,455	6,774	3,876	13.7x	27.5x
Maximum	379,005		253,232	6,774	3,876	56.0x	65.3x
Minimum	62,389		52,553	6,774	3,876	9.2x	13.6x
Valuation Summary
Median Enterprise Value		92,601
Less: Total Debt		12,140
Pluss: Cash		10,680
Equity Value		91,141
Nike's Stock Outstanding, Billions		1.23
Equity Value Per Share, USD		74.1
Current Market Price per Share, USD		109.3
Downside, %		-32%

The provided table presents a Comparative Trading Analysis of peer companies in the athletic footwear and apparel industry alongside Nike's valuation metrics. The analysis offers a comprehensive view of various financial ratios and enterprise values (EV) for each company, facilitating a comparative assessment of their relative performance and valuation.

Key insights from the analysis include:

• EV/EBITDA as a Feasible Metric: Among the valuation metrics, EV/EBITDA (Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortization) is widely used in financial analysis. It provides a clearer picture of a company's operating performance and financial structure by factoring in both debt and equity. This is especially relevant in capital-intensive industries like sportswear, where debt levels can significantly impact valuation.
• Use of Median vs. Average: The median values are often preferred over averages in comparative analysis, as they mitigate the impact of extreme values, or outliers, that can distort the results. In this case, the median Enterprise Value of $92,601 million provides a more representative midpoint compared to the average of $123,082 million.
• Valuation Range Insights: The analysis indicates a wide valuation range among the peer companies, with Nike's Enterprise Value falling within the range of $62,389 million to $379,005 million. This variability reflects differences in market perception, financial health, and growth prospects among the peers.
• Nike's Valuation: Nike's median Enterprise Value of $92,601 million suggests that the market is valuing the company in line with its industry peers. The Equity Value per Share of $74.1 indicates the implied value attributed to each outstanding share of Nike stock. The downside of -32% highlights the potential for stock price decline from the current market price.

In conclusion, EV/EBITDA is a robust metric for evaluating companies in the athletic footwear and apparel industry due to its consideration of both operational performance and financial structure. Median values are preferable for comparison purposes, offering a more stable representation of the data. Nike's valuation appears aligned with industry norms, and the analysis provides investors with valuable insights for making informed decisions based on relative valuation metrics.