Wide-Moat Nike Faces Challenges, but Its Powerful Brand and Digital Strategy Position It Well

Business Strategy & Outlook:

Company views Nike as the leader of the athletic apparel market and believes it will overcome the challenge of COVID-19 despite near-term supply issues. The wide moat rating on the company is based on its intangible brand asset, it will maintain premium pricing and generate economic profits for at least 20 years. Nike, the largest athletic footwear brand in all major categories and in all major markets, dominates categories like running and basketball with popular shoe styles. While it does face significant competition, the company believes it has proven over a long period that it can maintain share and pricing. Company thinks Nike’s strategies allow it to maintain its leadership position. Over the last few years, Nike has invested in its direct-to-consumer network while cutting wholesale accounts like Belk and Dillard’s. In North America and elsewhere, the firm has reduced its exposure to undifferentiated retailers while increasing its connections with a small number of retailers that bring the Nike brand closer to consumers, carry a full range of products, and allow it to control the brand message. Nike’s consumer plan is led by its Triple Double strategy to double innovation, speed, and direct connections to consumers. Triple Double includes cutting product creation times in half, increasing membership in Nike’s mobile apps, and improving the selection of key franchises while reducing its styles by 25%. It is considered that these strategies will allow Nike to hold shares and pricing.

Although its recent results in China have been inconsistent due to supply issues and a political controversy, I still believe Nike has a great opportunity for growth there and in other emerging markets. The firm experienced double-digit annual sales growth in six of the past eight years in greater China and, fueled by high government investment in athletics, it will do so again after the current difficulties have passed. Moreover, with worldwide distribution and huge e-commerce that exceeded $10 billion in fiscal 2022, Nike should benefit as more people in China, Latin America, and other developing regions move into the middle class and gain broadband access.

Financial Strengths:

Company believes Nike is in excellent financial shape to weather the COVID-19 crisis. At the end of fiscal 2021, Nike had $9.4 billion in debt but $13 billion in cash and short-term investments. Its debt/adjusted EBITDA and debt/equity were 1.3 and 0.6, respectively. Nike does not have any long-term debt maturities until May 1, 2023, when its $500 million in 2.25% senior unsecured debt matures, but it does have significant endorsement commitments of more than $1 billion per year. Nike has an unused credit facility of $1 billion and a separate $3 billion commercial paper facility for short-term borrowing, so it has significant unused borrowing capacity. The firm, with its investment-grade credit ratings, could easily increase debt for stock repurchases or other uses. Nike may also make acquisitions, although these are likely to be technology-focused and fiscally immaterial. It is anticipated Nike will continue to return significant cash to shareholders. The firm produced $20.6 billion in free cash flow to equity over the past five years, and estimates it will generate more than $40 billion in free cash flow to equity over the next five. It completed a $12 billion stock-repurchase program authorized in 2015 and has begun to repurchase stock under a four-year, $15 billion stock-repurchase program authorized in 2018. Moreover, Nike issued $1.8 billion in dividends in fiscal 2022, and forecast an average annual dividend payout ratio of 28% over the next decade. Over the next five fiscal years, the company forecasts that Nike will repurchase about $24 billion in stock and issue $11 billion in dividends.

Bulls Say:

Nike has a great opportunity in fast-growing markets like China. More than 70% of Nike’s growth over the next five years may come from outside North America.
Nike’s Triple Double strategy of increased innovation, direct-to-consumer sales, and speed may improve margins and share. Membership growth in its digital channel has exceeded expectations.
Nike’s gross margins may expand by a couple dozen basis points per year through automation, ecommerce, and higher prices. Nike is actively shifting sales to differentiated retail in North America to increase full-priced sales.

Company Description:

Nike is the largest athletic footwear and apparel brand in the world. It designs, develops, and markets athletic apparel, footwear, equipment, and accessories in six major categories: running, basketball, football (soccer), training, sportswear, and Jordan. Footwear generates about two thirds of its sales. Nike’s brands include Nike, Jordan, and Converse (casual footwear). Nike sells products worldwide and outsources its production to more than 300 factories in more than 30 countries. Nike was founded in 1964 and is based in Beaverton, Oregon.

(Source: Morningstar)

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