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Summary

  • Nike's focus on launching products with new technology should help it gain more customers.
  • Nike is adopting various strategies to engage with customers and increase its brand presence, which have allowed it to gain share from Adidas.
  • Nike's strong cash pile will enable it to continue investing in the business and deliver more innovations.
  • Nike's earnings are expected to grow at a superior pace in the next five years as compared to the last five.

Sports apparel retailer Nike's (NYSE:NKE) performance has been patchy in 2014. The stock has remained flat so far, but the good thing is that it has gained some momentum of late. Nike's shares have appreciated close to 8% in the last five months, and given the new product introductions and strategic moves that the company is adopting, Nike can continue getting better.

Focusing on new products and innovation

Nike is focused on launching new consumer experiences, expand its digital ecosystem, and develop engaging concepts in retail to drive the performance of its brands. The company sees strong potential across its five brands, and since it is present across six geographies and eight categories, it enjoys the benefit of diversification.

To deliver cutting-edge products to its customers, Nike is focused on accelerating its level of innovation in products, services, supply chain, and the online business. It has recently launched a slew of products that will allow it to sustain its growth in the long run.

Nike recently introduced the KOBE 9 Elite, which is the first basketball shoe to utilize its unique Flyknit technology. In addition, Nike has launched high performance apparel, such as the lightweight hockey Game Jersey with Flywire and the Aeroloft Summit Jacket by leveraging its expertise at the Sochi Winter Olympics.

Nike has introduced four innovative performance boots, the Hypervenom, the Tiempo 5, the Magista, and the Mercurial Superfly. Both the Magista and the Mercurial utilize its transformative Flyknit technology, and they are seeing strong demand. Moreover, Nike's strong retail network of football equipment will help it drive results across its stores, the online platform, and at football shops with its wholesale partners around the world.

In the running segment, key product innovations such as the Free Flyknit footwear, Dri-Fit Touch, and Aeroloft apparel are expected to drive the company's performance going forward. Nike is looking to expand its business by connecting with a new generation of runners. In fact, the company claims to have engaged with more than 85,000 runners in the fourth quarter alone through events, while the Nike+ platform is also increasing its penetration.

Nike has also launched the Vapor Carbon Elite Cleat, which is its first cleat to take advantage of 3D printing at the Super Bowl in New York. Looking ahead, the company is focused on extending its investments in the sportswear category, acting upon its belief that innovation will be a long-term growth driver.

Increasing interaction with customers

Nike is extending its drive for innovation beyond product into areas such as digital in an effort to tap an increasing number of consumers who are digitally connected. Management's goal is to grow the Nike+ community exponentially by creating an integrated system of digital services. Through this move, Nike is looking to provide seamless access to its products, along with a full range of services.

In addition, Nike is leveraging social media platforms to reach more customers through various campaigns. One such campaign is the Risk Everything campaign, which celebrates the energy and enthusiasm of global football. In addition, two of the campaign's videos, Winner Stays and The Last Game, have broken the past records for engagement with more than 370 million digital views. This indicates that people are increasingly engaging with Nike, and this might help the company to convert more customers going forward.

In addition, Nike is making investments in e-commerce to improve its infrastructure, fulfillment capabilities, and geographic reach to provide a better experience to customers.

Competition from Adidas

Armed with such moves, there is no doubt that Nike is gaining market share over its rivals. For instance, according to Investor's Business Daily, Nike is gaining market share in Western Europe at the expense of Adidas (OTCQX:ADDYY). However, Nike should prepare for a marketing assault from Adidas. According to a recent report:

"Adidas is vowing to overtake arch rival Nike to win the No. 1 spot in the sportswear world by spending millions of euros on an ad campaign set to launch next year.

Faced with falling shares after a profit warning last week, the company's CEO reportedly vowed to raise the company's marketing budget by €200m-equivalent to $260 million-about the same margin of its reported operating profits in the second quarter, according to The Guardian.

Adidas has also signed an exclusive 10-year contract with Manchester United to be the club's shirts and gear sponsor for a reported minimum guarantee of $1.25 billion. The deal ends Nike's 12-year partnership with the English football club.

And, last month Adidas announced sponsorship agreements with four of NBA's top draft picks."

As such, investors need to keep an eye on Adidas' moves, but considering the fact that Nike has been introducing new products, equipped with new technology, at a good pace, it should be able to stay ahead of Adidas.

Strong fundamentals

It won't be difficult for Nike to increase its advertising budget, as the company has a strong cash position. Nike has cash of $5.14 billion on the balance sheet, as compared to a relatively low debt of $1.43 billion. The company also boasts of strong cash flow metrics, generating $3 billion in operating cash flow over the past twelve months, along with $2.36 billion in levered free cash flow.

Hence, the company has got enough resources to push up its marketing and product innovation efforts. Moreover, over the next five years, Nike is expected to grow at a rate of 13.35% a year, better than the growth of 10.7% seen in the previous five years. Thus, there is a good possibility that the company's performance will continue improving going forward as the estimates suggest. All in all, the stock looks like a robust investment due to its impressive product development moves and customer outreach initiatives. As such, Nike is a stock that's worth considering for the long run.

Source: A Few Reasons Why Nike Should Continue Getting Better