Will Nike Continue Outperforming Rivals?

Aug.27.14 | About: Nike Inc. (NKE)


Nike has emerged stronger after the FIFA World Cup in an emerging market such as Brazil and expects the positive sales momentum to continue.

Nike's product innovation and diversification should lead to strong performances going forward.

Nike's stronger balance sheet and huge cash position should allow it to overcome the challenge of Under Armour and Adidas.

During the FIFA World Cup, sports equipment giants Nike (NYSE:NKE) and Adidas (OTCQX:ADDYY) were involved in a brand war. Adidas won the duel, as both finalists were kitted by the German company, while another rival, Under Armour (NYSE:UA), didn't make much of a dent as it sponsored just two players.

Nike, however, wasn't a loser, as revenue from soccer products in the recently concluded fiscal year jumped 18% to $2.3 billion. The company also reported solid results for the fourth quarter, driven by strong sales in Europe and North America. In fact, its strong performance made up for the heavy investment it made in marketing for the 2014 World Cup.

Nike is seeing strong traction across different geographies and sport disciplines. Its fourth-quarter revenue increased 11% year over year to $7.4 billion, better than consensus estimates. Its earnings also increased 4% to $0.78 per share, topping estimates. Looking ahead, the company expects to sustain the momentum even as the World Cup fever has come to an end.

Beyond soccer

Nike is a diversified company with interests in several disciplines beyond soccer, and this is another reason why it looks well-positioned for the long run. With innovation at its core, Nike targets other popular sports as well. For example, it recently introduced the KOBE 9 Elite, the first basketball shoe based on the Flyknit technology. Similarly, at the Sochi Winter Olympics, Nike leveraged its opportunity to deliver "high performance apparel, such as the lightweight hockey game jersey with Flywire, and the Aeroloft Summit Jacket."

The company is also focused on innovations in running with Free Flyknit footwear, Dri-Fit Touch, and Aeroloft apparel. Equipment driven by these technologies are adopted by thousands of runners worldwide. For example, in the first quarter, Nike engaged with more than 85,000 runners through various events, and was able to monetize its relationships into retail sales.

Nike's women's business also reported strong growth, with a 12% increase in its revenue year-over-year. Its women's strategy combines running, training, and sportswear, forming a compelling product portfolio. The company sees solid opportunity in the women's market. It strengthened the distribution of women's product last fiscal year, and rolled out its Nike Training Club at 50 retail stores. The strategy was a success in the pilot phase, and Nike will continue tapping this market for growth.

Winning with soccer

Brazil, the World Cup host, is a soccer-crazy nation, and Nike sees greater scope in this region post the extravaganza. Its "Risk Everything" campaign has been a hit, and innovative products will allow the company to maintain its momentum in Brazil.

Nike has introduced ground-breaking performance boots, such as the Hypervenom, the Tiempo 5, the Magista, and the Mercurial Superfly. Magista and Mercurial Superfly are based on its Flyknit technology. Moreover, the company has boosted its retail sales on the back of stores, online channels, soccer shops, and wholesale partners around the world.

Management is now optimistic about its prospects, and believes that it has created a solid background with the help of the World Cup to continue its strong performance going forward. According to CEO Mark Parker, "We have built tremendous momentum for the business and the brand as we delivered an unprecedented level of innovation heading into the World Cup." Looking ahead, Nike has more innovative products in its pipeline to fuel its growth.

Better than competitors

Nike, however, will need to keep an eye on the moves of Adidas and Under Armour. Adidas expects a solid bump in sales of its soccer equipment, leveraging its official sponsorship deal with FIFA. It expects to sell another 500,000 Germany jerseys alone outside Europe, after selling a total of eight million replica jerseys of all teams that it sponsored.

Adidas believes that it has got strong momentum heading into the 2018 World Cup in Russia. However, Nike has a stronger profit margin and better fundamentals as compared to Adidas, and it can use this to its advantage going forward. Nike has $5.1 billion in cash, and its debt stands at $1.37 billion. In comparison, Adidas' cash position is weaker at $1.83 billion, and its debt is greater at almost $2 billion.

Moreover, Nike's big size and huge advertising budget should also help it stay ahead of upstarts such as Under Armour. In April, Under Armour announced that it is increasing its 2014 marketing budget by a whopping 34%. The company has been delivering 20%-plus growth in revenue for 17 consecutive quarters, but it doesn't have the necessary financial resources to compete with Nike.

Under Armour has cash of $300 million, and its debt stands at $197 million. Also, the stock is expensive at almost 90 times last year's earnings, so it doesn't look like a good investment.


Nike has emerged stronger after the World Cup. The company's strong fundamentals, solid financial position, and innovative products should allow it to sustain the momentum going forward, making it a solid long-term buy.

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