Business Strategy and Outlook
We view Nike as the leader of the athletic apparel market and believe it will overcome the challenge of COVID-19 despite near-term supply issues. Morningstar analyst think Nike’s strategies allow it to maintain its leadership position. In mid-2017, Nike announced a consumer-focused realignment. It is investing in its direct-to-consumer network while reducing the number of retail partners that carry its product. In North America and elsewhere, the firm is reducing its exposure to undifferentiated retailers while increasing distribution through 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%. We think these strategies will allow Nike to hold share and pricing.
Although its recent results in China have been inconsistent due to supply issues and a political controversy, Morningstar analyst still believe Nike has a great opportunity for growth there and in other emerging markets. Moreover, with worldwide distribution and huge e-commerce that totaled about $9.3 billion in fiscal 2021, Nike should benefit as more people in China, Latin America, and other developing regions move into the middle class and gain broadband access.
Financial Strength
Nike is in excellent financial shape to weather the COVID-19 crisis. At the end of fiscal 2021’s second quarter, Nike had $9.4 billion in long-term debt but $15.1 billion in cash and short-term investments.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 that, as of the end of fiscal 2021, totaled at least $5.5 billion over the ensuing five fiscal years. The firm produced nearly $19 billion in free cash flow to equity over the past five years, and Morningstar anlayst estimate it will generate more than $38 billion in free cash flow to equity over the next five. Nike issued $1.6 billion in dividends in fiscal 2021 and analyst forecast an average annual dividend payout ratio of about 30% over the next decade. Over the next five fiscal years, Morningstar analyst forecast that Nike will repurchase about $19 billion in stock and issue $11 billion in dividends.
Bull Says
- 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 Profile
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, 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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Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
