With FIFA World Cup and the Winter Olympics around the corner, sportswear companies are battling against each other to establish long-term partnerships with sports tycoons and capture the highest share of the market. Nike Inc. (NYSE:NKE) is no different in this respect. This article will highlight the historical performance of the company, emerging competitive threats, and events that could affect its future revenue growth and stock market performance.
Nike's revenues are spread across various geographical regions, with North America accounting for 45% of the company's revenues. Contribution to revenues by each region is indicated in the pie chart below.
Source: Annual Report, 2013
Distributing the revenues as per the product base of the company, I saw that footwear alone contributes 56% to the total revenues of the company. The apparel segment is the second-largest, and contributes 32% to revenues. The highest growth in the revenue stream was seen in the Converse (14%) and Global Brands division (11%). As per the second quarter's earnings report, revenues of the company have grown by 8% YoY.
Per share earnings of the company grew by 4% YoY, reflecting a reduced number of outstanding shares. The company has been repurchasing its shares over the past several quarters as part of an $8 billion program approved in 2012, thus improving the ownership percentage of its investors. The program is expected to continue for the next couple of years. However positive, the company's EPS declined by more than 30% compared to the previous quarter's owing to the lower revenue base in the December quarter. Besides repurchasing 5.5 million shares, the company increased its dividend payments by 14% this quarter as well. Over the past five quarters, the dividends of the company have grown at a CAGR of 65%.
Comparing the company with the industry indicates that Nike has maintained higher-than-industry competitive profit margins and investment returns. The company exceeded the industry norm by paying higher-than-average dividends to its investors and showed an exceptional sales growth of approximately 8% compared to the industry's sales growth of 2.63% over the same time period. Owing to its strong financials, the company generated a return on equity (ROE) of 25.05 as compared to the industry average of 8.45. The following table indicates the breakdown of the ROE into its key drivers. It is apparent that the company's ROE is sustainable, as it delivers more than double the margins of its peers and manages its assets in a much more efficient manner.
As far as the financing policy of the company is considered, it has slightly less debt in its balance sheet compared to its peers, indicated by its lower debt-to-equity ratio of 12.24 compared to the industry average of 14.53. These figures indicate the very strong balance sheet position of the company.
Industry Trends and Future Outlook
Studying the industry of the company, I realized that athletic brands benefit greatly during sports seasons. Research indicates that the revenues of sports brands, athletic apparel, and footwear trend highest around the third quarter of the year, around which various major sporting events are scheduled.
Considering the fact that the developed countries are showing double-digit growth, the World Cup in Brazil is expected to boost Nike's future revenues.
As far as the company's market share is concerned, Nike captures 47.1% of the global market. Within the US, 42% of customers prefer Nike over any other brand. A survey indicated that most buyers believe that the brand fairly prices its products in reference to their quality.
Athletes will be sporting Nike's apparel in the upcoming major sports events, such as the Winter Olympics and as was seen recently during the Super Bowl. Athletic icons sporting a particular brand's apparel or equipment is the best kind of endorsement and is a trend that is recognized around the globe. Nothing else attracts the younger population than their favorite team donned in a particular fashion. With that insight, Nike recently launched the Kobe 9 Elite, designed by Kobe Bryant, which has been the most technically built shoe by Nike so far.
The most recent disturbing news for Nike is that Puma won a contract with Arsenal to become the team's kit supplier. The Puma-Arsenal deal is worth $50 million and this is quite a low blow for Nike, since the company maintained a partnership with the English soccer club for about two decades. Puma is becoming a major threat to the overall competitive position of Nike, since the former is reestablishing itself as a premier sports brand. Losing out on the Arsenal deal means that Nike is probably going to lose a number of its Arsenal-fan customers to Puma.
As far as Nike's deal with Manchester United is concerned, the deal is still valid till next year though Manchester United made a public announcement that it is considering rival suppliers to replace the current partnership deal. Though it is highly likely that Manchester United will renew the deal with Nike, the team's consideration of other rivals does put Nike in a perplexing situation since the company has already lost out on Arsenal.
Even though the company has lost its contract with Arsenal, the company still has a strong balance sheet. In addition to that, the company is paying off its investors quite generously. Considering the company's high market share and the fact that a large chunk of buyers do not consider the brand pricey, the revenue growth of the company is not expected to stall much due to the loss of the Arsenal contract. I believe that the company will reposition itself in the face of rising competition in a timely fashion, as it always has. I believe that it will continue to grow and will land other significant clients to make up for the loss of Arsenal fans. The company has maintained a strong sales growth throughout history and it presently sports a strong balance sheet position. The recent drop in price is an investment opportunity, in my opinion.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.