Nike (NYSE:NKE) is one of the world's most recognizable brands, with famous athlete endorsers from practically all sports throughout the globe. The $43 billion company has a presence in nearly 200 countries and sells its product in a variety of brands that appeal to all walks of life. However, after a 14,000% return since 1980, and a continuous trend higher, this mammoth of a company/brand has recently hit a crossroad. The company's stock has traded somewhat flat over the last year with mediocre gains during a year when the market has rallied 23%. Consequently, rumors are beginning to stir and questions are being asked of whether or not Nike is preparing for, and if it needs, a high profile acquisition to create excitement and shareholder value.
As the company prepares for its quarterly earnings, some are concerned that Nike will disappoint and that its growth has hit a wall. When you take a look at the company's fundamentals, this perception doesn't make a lot of sense. The company grew revenue by 12% during its most recent quarter, and has a forward P/E ratio of 16.33 compared its current P/E ratio of 20.36, indicating earnings growth. The company returns $24 billion per year as an industry leader; however, compared to its leading competitor, Adidas (OTCQX:ADDYY), the stock is priced at a bit of a premium, and the hype surrounding the company has regressed. Hence, not only do some expect a high-profile acquisition, but some investors demand it.
The two most popular potential acquisitions are Lululemon (NASDAQ:LULU) and Under Armour (NYSE:UA). Both are fast-growing companies in the athletic apparel industry, with individual focuses. Lululemon concentrates on women's fitness while Under Armour is primarily a men's sporting apparel company. Both would provide excitement for Nike, and would also give Nike a competitor that is gaining ground on two different industries. However, the spark provided from acquiring either company, along with fundamental growth, would come at a hefty price. Take a look at the stock metrics/fundamentals of both Under Armour and Lululemon below.
Fundamental data obtained from Yahoo! Finance
Market Cap (billions)
Forward P/E ratio
Total cash (millions)
You can see that both companies are very expensive and trade with a substantial premium. Under Armour has returned about 60% more in sales compared to Lululemon during the last 12 months; but Lululemon is growing faster than UA, and has better margins. Both companies have great balance sheets, but Lululemon returns larger profits with better cash flow. It is evident that both companies have positives and negatives, and would provide Nike with a growing brand.
In my opinion, it makes more sense that Nike would acquire Lululemon. Nike already has products that compare with Under Armour, and most likely does not view the company as a threat. Lululemon, on the other hand, is growing rapidly in the women's fitness apparel industry, has great margins, and Nike could grow the company even faster with its already large presence. The key is the purchase price, and the main question is: What would be Lululemon's asking price, and could Nike afford it?
The question of whether or not Nike could afford Lululemon may sound somewhat silly. After all, the company has announced very public endorsement deals with the likes of Tiger Woods, Lebron James, and Michael Jordan; but Nike is surprisingly not as cash-rich as many would expect. The company has very little debt (with only $385 million), operating cash flow of nearly $2 billion, and cash in the amount of $3.76 billion. The company also has a very attractive $5.588 billion of retained earnings. But still, a Lululemon acquisition wouldn't be a walk in the park. Lululemon executives believe strongly that the company can continue to grow and potentially control the women's fitness industry. And why wouldn't they? The company has blossomed over the years and has become much more than just a yoga store.
If Nike were to acquire Lululemon, it would have to pay a premium that would be similar to a social media company's market cap. Lululemon could possibly ask for as much as $20 billion; and if so, then it would be hard to find any level of upside for Nike. It's possible that Nike could make an offer to Lululemon, but the chances of it occurring, I'd say, are slim-to-none. In regards to Under Armour, it would help in diversifying Nike's business, but it too trades with a hefty valuation. Despite recent rumors, speculation, and opinions that Nike will acquire one of these two companies, fundamentally I can't see it happening. Perhaps I am wrong, but with such a high cost, it would be an acquisition that could lead Nike to bankruptcy if unsuccessful-- and I don't believe Nike is willing to risk its place as the dominant company in the space. I think it's more satisfied with moderate growth, limited downside, and growing itself through innovation rather than acquisitions.