NIKE Inc. (NKE) is engaged in the design, development and worldwide marketing and selling of footwear, apparel, equipment, accessories and services. NIKE is a seller of athletic footwear and athletic apparel worldwide. The company sells its products to retail accounts, through NIKE-owned retail stores and Internet sales, and through a mix of independent distributors and licensees, in approximately 190 countries around the world.
The firm has been generating economic value for shareholders for the past few years, a track record we view very positively. Return on invested capital (excluding goodwill) has averaged 33.6% during the past three years. Nike has an excellent combination of strong free cash flow generation and low financial leverage.
The FIFA World Cup and Olympics will boost the company's market share in Brazil and the international market and will ultimately improve the company's top and bottom lines. The company is also improving the online channel to capture consumer trends in digital spending.
Nike reported its third quarter revenue of $7.0 billion reflecting an increase of 13% from the same quarter in 2012 and beating analysts' estimate of $6.69 billion. Third quarter earnings per share were $0.76 also beating analysts' estimates of $0.72 per share. Other indicators were also moving in the right direction as gross margins improved 30 basis points to 44.5%, and future orders increased 14% on a currency neutral basis to $10.9 billion. In addition, Nike repurchased $788 million worth of shares in the quarter helping to reduce the number of shares outstanding.
The increase in revenues was basically driven by Nike's overall growth in its major regions. Nike brand sales in North America were up 12% to about $1.9 billion, sales in Western Europe were up 22% to about $1.3 billion, sales in Central and Eastern Europe were up 17% to $356 million, sales in China were up 9% to 697 million and sales in emerging markets were up 8% to $937 million. Japan is the only region where Nike sales declined by 9% to $177 million.
NKE's debt-to-equity ratio is very low at 0.12 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, NKE has a quick ratio of 2.12, which demonstrates the ability of the company to cover short-term liquidity needs.
Not only is Nike still growing, but so is its dividend. Nike's current dividend yield is very acceptable at 1.70%, but what's more is that the company has been consistently raising it. The dividend has grown 13.11% in the past 5 years. Meanwhile, Nike's payout ratio is just 27.3, meaning the dividend growth pattern should be in no immediate danger of reversing.
On a Growth Spree
Nike has a high perceived value and is a hit among consumers who are brand conscious and willing to pay a high price for high quality. It has a good brand reputation and is distinctively marked by its slogan, Just Do It. Nike is continuously improving its products, meaning it can rightly be said that innovation plays a key factor in its growth opportunities. Strong research and development, complementing innovation, expansion into trendy/fashion industry where not just athletes are targeted but the general population where new competition can be met from alternative clothing lines, are some the measures the company has taken to sustain its growth.
The next five-year plan can involve a shift in Nike's focus from the traditional division in categories like footwear, equipment, etc., to individual sports, selling of other assortments like sunglasses, hats and other accessories. On the other hand, Nike's strong financial performance will help it to cash in on new innovation with its robust R&D. Apart from the main focus on athletic apparel and footwear, Nike can make further development in casual wear items. Further, Nike can inbuild RFID technology into its supply chain system which will help it in operating more efficiently in the market and also gain six sigma quality standards. There is also an opportunity to tap other market segments like Asian countries where disposable income of people is increasing and they are becoming more brand conscious.
The company is planning for fiscal year 2015, it expects to see continued strong momentum in 2015 and the summer Olympics will fuel the growth in 2016. The company also launched vapor carbon cleat footwear using its 3D printing capabilities and will be able to charge premium prices for its innovative products. In the apparel segment, it emerged with a collection of training and sportswear products designed to be lightweight. Nike's portfolio includes a diverse set of categories and the company is well positioned to add more growth.
Nike is a global brand and is the No. 1 sports brand in the world. Nike is a very competitive organization and boasts of a very good leadership. Nike sponsors the top athletes and gains valuable coverage through the media. For the last 20 years there has been increased demand for products in the sports clothing market which suggests that Nike will have a profitable investment if it continues business in the same industry. People are spending more on such products. Its market share in the global sports apparel market has historically increased from 3.9% in 2007 to 4.9% in 2012 as its apparel sales grew at a pace above the industry average during the period.
Nike is expected to create value for its shareholders in the near future. Fitness consciousness, rising income levels in developing countries, the growing popularity of sports apparel for women as well as the trend towards stylish and comfortable sportswear are some of the factors that will add to the growth of Nike.