Is Nike A Buy Ahead Of The World Cup?

| About: Nike Inc. (NKE)


Does buying shares of dominant sports apparel maker Nike ahead of the 2018 World Cup make sense?

I see Nike's 2018 soccer sales increasing 15%-18% YOY, suggesting that one-fifth of the total company's growth will come from this vertical.

Yet, the true benefit of the World Cup might be to Nike's brand awareness.

The largest sports event in the world is about to start: the FIFA World Cup, which will be hosted in Russia this time. Ahead of the competition that happens only once every four years, I ask myself: does buying shares of dominant sports apparel maker Nike (NKE) make sense? Credit: YouTube

Those who are not great fans of soccer (a.k.a. football) or live in a country where it is not the most popular sport (particularly the United States) may not appreciate the relevance of the 2018 tournament. For context and a sense of scale, over 1 billion people worldwide watched the 2014 World Cup Final between Germany and Argentina, compared to "only" 103 million Super Bowl viewers just a few months ago.

As reported here on Seeking Alpha, Nike will provide 10 national teams with jerseys in the current edition of the World Cup (about one third of the total number of squads, similarly to 2014), including title contenders Brazil and France, as well as pop sensation Cristiano Ronaldo's Portugal. The Oregon-based company supplies four of the top 10 best ranked teams in the world, and endorses soccer celebrities like Brazil's forward Neymar and the Portuguese star, five-time world's best player himself.

To try and assess the impact of the World Cup on Nike's finances, one could attempt to estimate the increase in sales of jerseys and other soccer-related accessories and apparel products driven by the event. In that regard, Bloomberg reports that Nike's soccer sales landed at $2 billion in 2017, in a declining trend that seems consistent with the period between World Cup editions. If accurate, this figure represents a rather small 6% of the company's total sales in fiscal 2017, but likely a much larger chunk of the $9.7 billion apparel segment revenues last year.

See graph below.

Source: Bloomberg

In 2014, Nike posted the most robust revenue growth rate of the past five years, which hovered around the low-double digits, as the graph below illustrates. The company spoke of "tremendous energy around the World Cup" in late June 2014 to justify the strong performance and upbeat outlook for the remainder of the fiscal year.

Even if I conservatively assume that the 2018 World Cup might not represent to Nike what the 2014 edition did - particularly as Adidas (OTCQX:ADDYY), dressing 14 national teams, might be the sports brand to benefit the most this time - I can reasonably project Nike's 2018 soccer sales to increase 15% to 18% YOY, in contrast to Adidas's 24% and the Oregon-based company's own 21%, both in 2014.

The derived $360 million in revenue growth would represent about one-fifth of the company's projected top line increase this year, with higher marketing expenses directly associated with World Cup initiatives preventing a chunk of the sales boost from trickling down to the bottom line.

Chart NKE Revenue (Quarterly YoY Growth) data by YCharts

My takeaways

Purely from a dollars and cents perspective, I do not believe that a boost in soccer-related sales driven by the 2018 World Cup alone will be very meaningful to Nike's financial results in the next quarter or two. Considering how fast the company's stock has risen since October 2017 (see below), I could even argue that any potential P&L upside might have been properly captured in the share price already.

Chart NKE PE Ratio (Forward) data by YCharts

But to borrow from Adidas's own management team's narrative, the World Cup is "a fantastic platform to present [the] brand, [and] the brand impact is of course beyond football." Even assuming that the direct financial consequences are limited, the aspirational aspect of the World Cup, coupled with a solid global economy and discretionary spending trends that in turn look robust, can only bode well for a strong global sports company like Nike.

Regardless of this year's massive soccer event, I continue to find NKE one of the most interesting, high-quality plays to consider in this sector.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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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