Nike - Solid Investment Supported By Strong Fundamentals

Jun. 16, 2017 9:35 AM ETNIKE, Inc. (NKE)30 Comments

Summary

  • Sportswear industry grows healthily as people's shifting preference toward activewear is supported by rising health consciousness and cultural shift.
  • Nike's strategies leveraging product innovation, manufacturing revolution, and direct-to-consumer sales should help them defeat current challenges and let it become the long-term winner.
  • Nike's campaigns on social media such as Instagram also bolster its outlook.
  • Conservatively, I expect around 45% total upside potential if holding to 2020.

Business Overview

Nike (NYSE:NKE) is a sportswear company that designs, promotes and sells footwear and apparel and possesses 4 brands: Nike, Jordan, Converse and Hurley. Under the reported business segment, Nike brand including Jordan and Hurley, represented 94% of revenue in FY16. The rest was credited to Converse.

In fiscal 2016, Nike recorded $32.5bn revenue, 65% from footwear, 30% from apparel, and 5% from equipment sales. Nike also licenses its trademark, but the revenue generated is nearly negligible. Recorded 13% constant currency growth in FY16, the growth mainly came from footwear and apparel sales, with growth at 15% and 11% respectively, while equipment sales registered a slightly decline at 2%.

Source: Company filings, FY2016

Let' s move to geographical split. Half of Nike' s revenue comes from North America, where Nike has a major lead against Adidas (OTCQX:ADDYY) and UA (UAA). Emerging markets, including China, count for a third of the sales.

Source: Company filings, FY2016

From the sales channel prospective, Nike recently ramp up its effort to facilitate direct to consumer (DTC) sales, namely, the online channel and self-own stores including factory stores (lower price points) and in-line stores (more premium products). From 2014 to 2016, DTC shares from 20% rose to 26%. The rest of sales is mainly sales to wholesale partners.

Source: Company annual reports

Industrial Analysis

Globally, sportswear sales are the bright star among various apparel categories. From 2011 to 2015, sportswear continued to lead the global apparel sales. In 2016, sportswear apparel grew 6% and footwear grew 10%, showing the strong athleisure trends across the world.

Source: Quartz, data from Euromonitor

This trend is resulted from multiple factors. First of all, people now weigh experience over others. And as sportswear companies started to combine function and fashion together, people began to shift their spending to the category. But other

This article was written by

I am an individual investor seeking stocks that have great growth potential with strong competitive advantage and are currently undervalued. I studied finance in the university and have worked for a buyside company as an intern for about 6 months. I started my investment in U.S. stock market just one year ago. I invest stocks with acceptable potential return and associated risks.

Disclosure: I am/we are long NKE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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