Nike's New Five-Year Plan

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 |  Includes: ADDDF, NKE, PMMAF
by: Sportgamma

According to this article at the Motley Fool, Nike (NYSE:NKE) has come up with an ambitious five-year strategic growth plan. Its aims are, among others, to:

  • Double profits by 2015
  • Achieve 40% revenue growth by 2015
  • Double sales in the Action Sports category, which currently accounts for $390M

On March 5, Véronique Adam wrote an article about Adidas (OTCQX:ADDDF) claiming it to be fully priced and without an upside (short term, I guess). Nike and Adidas compete head to head in almost all markets and therefore the question arose: Why the different outlook?

In another article Ms. Adam compares the three big players, Nike, Adidas and Puma (OTCPK:PMMAF):

“Where does Nike stand from a profit margin standpoint? YTD Gross margin at 45.9% is in line with Adidas (45.4%) but 5.4 points lower than Puma (51.4%). Puma is more exposed to lifestyle apparel than Nike, where pricing is better. However, Nike’s control over selling and administrative expenses looks much better than peers, enabling it to achieve 13% operating margin, in line with Puma.”

So Nike seems to be a bit more profitable than Adidas, but to achieve these goals it has to be even more profitable. Does it add up?

  • To increase revenue by 40% in five years, Nike will have to grow by 7% a year on average.
  • Nike’s net profit margin is 9.26% ($1.7 B). To double its profits in five years the net profit margin will have to be 12.2%.
  • Adidas generates about $4.57 of free cash flow per share compared to Nike’s $2.64 per share (very roughly estimated).

Conclusion: In order to achieve these goals, Nike would have to gain relative market share from its competitors as other companies controlling high market share are estimating growth at around 2-4% (VF Corp, Adidas).

Disclosure: Long ADDDF.PK, no positions in NKE, PMMAF.PK