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Nike Is a Solid Buy for the Long Run

June 27, 2014 | About:
Vinay Singh

Vinay Singh

5 followers

Nike (NKE) is engaged in the design, development, and worldwide marketing and selling of footwear, apparel, equipment, accessories, and services. It is a seller of athletic footwear and athletic apparel worldwide, and operates in approximately 190 countries around the world. This Oregon-based company focuses its product offerings in seven key categories: running, basketball, football (soccer), men's training, women's training, Nike sportswear (its sports-inspired products), and action sports.

Competition

Nike faces stiff competition from Under Armour (UA). With strong momentum, the company boasts of a three-year average growth rate of 29%. It also operates in China but comparatively has a smaller hold on the market. This Baltimore-based company is increasing its base in the international markets, and is expected to increase its revenue from $2.2 billion in 2013 to $4 billion in 2016.

In the recent quarter, net income decreased by 47%, and diluted EPS decreased to $0.07 from $0.14 in the prior-year period. The outlook for 2013 net revenue is anticipated at about $2.2 billion. The drop in income reflects its investments in its biggest global marketing campaign using the slogan I Will, the opening of the first Under Armour Brand House retail store, and an expanded footwear line.

With a market cap that is roughly one-10th of its rival Nike’s, it has plenty of room to grow and increase its market share in the athletic apparel and footwear market. The company continues to innovate by introducing new products and materials, such as its recent "Alter Ego" line of shirts that have sold extremely well.

Head to Head

Adidas also presents stiff competition. The company is approaching a market leadership position and is growing. To better manage its inventory levels, it closely collaborates with its retail partners and stores to stay informed on which items are selling.

During the first quarter, it had net income of $394.9 million, up 6% over the same period last year. First-quarter diluted EPS was $1.88, up 6% from $1.77 in the first quarter of 2012. It is re-branding the Reebok division with the symbol of its highly successful CrossFit program.

Nike has beaten Adidas by growing revenue despite slowing sales in China. It even managed to grow brand sales in Europe last quarter. Adidas will have to shed out an additional $288 million in annual sales by 2017 to catch up to Nike’s sales in China.

Nike has more liquidity, having a current ratio of 2.1, compared to Adidas’s 1.7. Adidas is trying to become at par with Nike by constantly innovating its footwear segment and increasing the number of stores.

Nike's dividends have grown by nearly 18% a year-over-the for the past five years compared to 12.5% for its competitors. That means that over time, its effective dividend yield will catch up to that of its industry. In the next 12 months, it is expected to trade at $70 per share. With almost no debt, its pretax margins have been broadly inline with its industry at 12.6% over the past five years compared with 12.8% of its peer group.

Recently, its profit rose by 22% to $668 million, translating into EPS of $0.76 per share, $0.02 ahead of analysts' estimates. There has been an increase of 7% in sales, and a 1.1% increase in operating margins. Dividend payments were recently increased, and the yield is currently 1.3%.

Let the China Problems Get Resolved

Nike continues to struggle in China, from where it gets 9.7% of its revenue. The company has been under pressure from rising labor and material costs in China. It has responded by increasing costs and improving its supply chain. Nike also divested its brands Cole Haan and Umbro in 2012, which were dragging its results lower. But things are slowly moving in the right direction in China.

CEO Mark Parker stressed during the fourth-quarter earnings call that China and North America are Nike’s “two big market stories,” and the company is focused on creating long-term sustainable and profitable growth in China.

Growth Opportunities

Nike is continuously improving its products, which play a key role in its growth. To sustain its growth, Nike is expanding into trendy/fashion industries targeting the general population. Rising fitness consciousness and income levels in developing countries, as well as the trend towards stylish and comfortable sportswear, will add to its growth.

Nike can produce high-quality product at the lowest possible price. The next five-year plan may involve a shift in the focus from the traditional categories like footwear, equipment, etc. toindividual sports and sales of other items like sunglasses, hats, and other accessories. This athletic giant may attain six-sigma quality standards by incorporating RFID technology into its supply chain system.

On a Concluding Note

Nike has a high perceived value, and is a hit among consumers who are brand conscious. It is distinctively marked by its slogan “Just Do It.” There is also an opportunity to tap other market segments, like Asian countries where disposable incomes are increasing.

The company will be a profitable investment since there is an ever-increasing demand for products in the sports sector. The acquisition of the brand Converse has also proved beneficial. The addition is raking in annual revenue that is four times the purchase price.

Nike is expected to create value for its shareholders. It remains solid on the revenue and earnings front while North America remains its strong point. Greater China and other emerging markets will be key for Nike to gain market share in the future as these regions are growing faster compared to the developed markets. The balance of its fundamentals and forward outlook makes it an attractive component in any investment portfolio.


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