Nike's Win Over Reebok
Nike (NKE) won a ruling Thursday to prevent rival Reebok from capitalizing on Tebow mania once again by creating unauthorized Tebow New York Jets merchandise. The loss is not that significant for Reebok as they are losing NFL jersey rights next week to their larger rival. This is a big win by Nike as it brings the company into the headlines and makes sure everyone who has internet access knows that Nike is the new NFL official jersey maker and the number one apparel company in the world. Back in December, I included Nike as one of winners in Tebow mania.
New NFL Deal
April 5th marks the day for football fans to pay attention to the internet as the official new jerseys of their favorite team will be released. Nike takes over a new five year contract for exclusive jersey rights with the National Football League. Nike is believed to be paying up to $35 million a year to take the contract away from Reebok, who held it for the last ten years.
In a recent article, I called Nike the biggest winner in the Peyton Manning free agent sweepstakes. Manning's move to the Denver Broncos of course will increase the number of Broncos jerseys sold this year. Nike takes over the exclusive NFL jersey rights next month and will benefit from those new sales. It is rumored that Nike paid up to $35 million a year for the NFL rights. Nike takes the contract away from Reebok, which is owned by Nike's number one rival Adidas.
The Summer Olympics begin July 27th in London, England and Nike will once again be at the forefront with huge sponsorships of teams and individual athletes. In swimming, Nike sponsors American stars like: Aaron Peirsol, Jason Lezak, Bendan Hansen, Ben Wildman-Tobriner, Cullen Jones, and Tyler Palmer. The number of track athletes sponsored by Nike is extensive and includes many different represented athletes. Nike is also the official sponsor of the US National Track Team. With swimming and track & field the two most watched sports by Americans, Nike will have a place in millions of homes beginning in July.
The European Championship happens every four years and falls two years after or two years before the World Cup. The competition allows Europe's countries to compete for a continental soccer trophy. The tournament features sixteen of the nations who qualified throughout the year placed into four groups of four. After group stage, a tournament style will determine the winner of the European Championship. The importance for Nike is it will be the sponsor for eight of the sixteen countries represented including:
· England (Umbro)
· Sweden (Umbro)
· Ireland (Umbro)
Outside of America, soccer remains the number one sport and fans and collectors will want to get their hands on new jerseys. New jerseys were introduced for each of the teams over the past couple of months and Nike will benefit from this competition. Through its newly acquired Umbro, this will be the most teams ever outfitted by Nike in an international challenge.
The Nike Fuelband technology was one of several recent new product launches. The band comes as a bracelet, watch, or a synching technology with Apple's iPod. The technology allows athletes both professionally and amateur to track their performance by setting daily and monthly goals. The bands are interactive through Facebook and other platforms to help keep amateurs more motivated. A range of features including counting calories, steps, and keeping track of the number of laps and time ran are als included. Nike has taken a few products like pedometers, speedometers, and stopwatches, and sewn them together into a socially interactive must have tool. Nike has sold out of several of the products since the launch. Some examples of products are:
· FuelBand $149
· SportBand $59
· SportWatch with GPS $199
Along with the Nike brand, the company owns several other large apparel brands including:
· Cole Haan
· Chuck Taylor
· All Star
· Air Jordan
· Jack Purcel
Umbro was the most recent acquisition for Nike and I think it could become one of the most powerful brands under the Nike umbrellas. Complemented with Nike Soccer, Umbro will help make Nike the leader in the world's most popular sport. Sales for 2011 were $224 million for the Umbro brand. Nike has stated that Umbro will double their business by 2015.
China was one of the biggest obstacles for Nike and it took the company over ten years to become a billion dollar brand in the world's most populous nation. Brazil now remains Nike's biggest opportunity and it is on track to have a billion dollars in sales by 2016 in Brazil. The upcoming World Cup and Summer Olympics taking place in Brazil will strengthen Nike's sales in the country and help it obtain the one billion dollar goal.
Russia and Turkey are two countries where Nike is not the number one sporting apparel company and it has listed both as key opportunities. Russia in particular remains a focus since the country will be hosting the 2014 Winter Olympics and the 2018 World Cup.
Recently reported third quarter earnings saw Nike have double digit growth in revenue and earnings per share. Revenue grew to $5.8 billion, which was a fifteen percent increase from the prior year. Earnings per share grew eleven percent to $1.20. Earnings were strengthened by increased demand for Nike basketball shoes, thanks to the ended lockout. Nike launched four new signature basketball shoes: Air Jordan 2012, Kobe VII System Supreme, Durant Zoom KD4, and a new Chris Paul shoe.
Hyper Elite jerseys were launched for nine College Basketball teams, including Final Four teams Kentucky and Ohio State. The nine teams had new large product offerings as well from Nike and the strength of the sales will be seen in the next quarter.
In the running segment, Nike saw double digit growth for the eighth consecutive quarter thanks to new shoe offerings and the FuelBand technology.
One worry of investors was the reported thirty two percent increase in inventory. I do not see this as an immediate red flag as the year offers so many opportunities. Nike is not in a position where they want to sell out of merchandise during a key event like the European Championship or the Summer Olympics. The increased demand of the FuelBand will also mean higher inventory dollar amounts to meet demands in the running segment.
For the current quarter, analysts see Nike earnings $1.37. The full 2012 earnings target is $4.93 by analysts on Yahoo Finance. The following year, analysts are expecting earnings per share of $5.79.
Shares of Nike stand at $107.85 and are close to a fifty two week high and all time high of $112.97. The beginning of 2012 saw shares begin trading at $96.37.
Quarterly dividends are paid in March, June, September, and December. The current amount paid out quarterly is $0.36 and that amount has been raised nearly every year. The dividend payout remains affordable with only 27% of earnings paid out annually in the form of the dividend.
Nike's last acquisition of Umbro helped strengthen its Nike Soccer brand and the company has consistently made smart acquisitions to further its own brands.
Nike sits with plenty of cash ($3.2 billion) and minimal debt ($369 million). Rival Under Armor (UA) has a market capitalization of just under $5 billion while apparel maker Lulemon (LULU) has a cap of $10.5 billion. Both of these companies have been rumored as buyout targets of the larger Nike. I think Nike will stay quiet in 2012 as it has plenty of internal growth ahead of it and will wait until 2013 to make any strategic buyouts.
In December, I recommended buying shares of Nike when they were trading below $100 and I once again recommended buying shares after a pullback earlier this month. Shares are currently trading at $107.85 and I have to once again recommend buying shares after a pullback around $105.
This will be a huge year for Nike with the European Championship and Summer Olympics in London. Nike continues to dominate every sport it touches and has two huge opportunities in Soccer and Running in front of it once again. New product launches like the Fuelband, along with new growing markets like Brazil will lead the stock higher. Look for shares to hit $125 by the end of 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.