Sometimes companies at the top of an industry face problems maintaining investors' confidence since new players are constantly attracting new investors. Nike (NKE) is a pioneer in the apparel industry that has been able to attract investors, but it has been facing competition from emerging players in the industry that are also giving consistent returns to shareholders in the form of capital gains.
Nike expects good soccer sales from the upcoming World Cup 2014. However, it will face considerable competition from Adidas (OTCQX:ADDYY).
What Upcoming Soccer world cup holds for Nike?
The upcoming FIFA World Cup event will test the capability of Nike regarding soccer sales with Adidas, its biggest rival. Adidas is one of the six official FIFA partners for the World Cup. Moreover the world's top four teams including Germany, Argentina, Colombia, and Spain will be clothed in Adidas uniforms. Also, every game will be played with an Adidas World Cup ball. Although Adidas has an edge over Nike with respect to the upcoming World Cup earnings, Nike has some strategic moves planned to generate revenue from the upcoming event.
Nike will introduce new uniforms for the countries it sponsors, which include the United States and the host country Brazil. It is planning to sell world cup Nike shoes, clothing, and gear in a mobile application. The company will start a 'Make History' campaign that will allow users to compete for their country online through the Nike Fuel World Cup application. This will enhance the user experience with active participation in the 2014 FIFA World Cup. Nike has also partnered with Reddit for facilitating the ask me anything, or AMA, platform which will give application users the opportunity to ask questions to Nike sponsored soccer stars. The company expects these efforts will attract soccer customers' attention towards Nike products and will lead to enhanced soccer sales.
Can Adidas affect Nike's soccer sales in the upcoming World Cup?
Adidas expects that its soccer division will contribute $2.5 billion in fiscal year 2014. Nike generated $1.93 billion from its soccer division in the last fiscal year, witnessing an average growth of 7.7% over the last two fiscal years. Considering the same growth of 7.7% until the fiscal year ending in May 2015, covering the time the World Cup is going to held, then the revenue from the soccer division is expected to reach $2.23 billion, which is $0.27 billion lower than what Adidas is expecting to achieve. $0.27 billion is not a considerable figure for a company such as Nike, which generated revenue of $25.31 billion in the fiscal year ending May 2013. So according to our analysis, Adidas cannot hamper the soccer sales of Nike in a significant manner.
Constant share repurchase and inclusion in S&P 500
Nike will be a new inclusion in the Dow Jones Industrial Average, or DJIA, beginning September 23, 2013, becoming the second ever sports apparel company to get included in the index after International Shoe, which was replaced in 1933. Nike has been involved in a consistent share repurchase program, which could be a complementary factor in its inclusion in the index. It announced a four-year $8 billion share buyback in September 2012.
Out of this $8 billion, shares worth $789 million were repurchased in the previous fiscal ended in May 2013. Considering a scenario where the company can repurchase $2 billion of shares for the fiscal year ending May 2014, then the company can repurchase 29.6 million shares at current market price. And, if the company generates earnings growth of 8% based on the average earnings of last two fiscal years, then the EPS is expected to reach $3.37 against the trailing twelve months, or TTM, EPS of $2.71, fostering 24% increase.
The frontrunner in the apparel business
Nike is operating in a very competitive environment with emerging players such as Lululemon (LULU) and Under Armour (UA), which are two of the fastest growing companies in terms of revenue in the U.S. according to Fortune's 100 fastest companies rankings. Unlike Nike, Lululemon and Under Armour have not entered into a strategy of constant share repurchase, but both companies have given considerable returns to their shareholders.
Lets have a closer look on Nike and its peers.
TTM Return on Equity
Source: Yahoo.com, morningstar.com
From the above table it can easily be inferred that Nike, being one of the largest players in the apparel industry, is giving good returns to its shareholders but lags behind Lululemon. Nike's TTM P/E stands lowest among its peers, promising a better growth opportunity.
We have already calculated our EPS growth projection for Nike, which stands at 24%. Now lets have a look at the earning potential of Lululemon and Under Armour. Considering the average growth they achieved in the last 2 fiscal years, they will witness earnings of $403 million and $176.59 million respectively by the end of the fiscal year. With this, the EPS will be $2.78 for Lululemon and $1.67 for Under Armour, fostering a 50.4% and 33.6% rise from their present TTM EPS. This means that Nike will only lag behind Lululemon in terms of EPS growth.
Let's look at the performance of the stock and its peers.
From the above chart, we can infer that Nike has considerably performed the Dow Jones Industrial Average index by more than 20% from the time it announced the share repurchase. Nike performed well in comparison to its peers, facilitating considerable capital gains for its shareholders, much better than Lululemon's -9.77% and a little lower then Under Armour's 37.07% returns for the same period.
Nike is giving stiff competition to emerging players such as Lululemon and Under Armour and even to its biggest rival Adidas. It also has its plan intact for the World Cup. We believe that the share repurchase activity will continue to provide considerable returns to the shareholders so we give a strong buy recommendation on this stock.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Madhu Dube, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.