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Nike: Innovation and Robust Fundamentals Will Create Shareholder Value

July 10, 2014 | About:
Value Investor

Value Investor

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Nike Inc’s (NKE) stock has been rising and the company’s current performance coupled with clear growth prospects would keep the stock soaring even further. As the FIFA world Cup in on and Wimbledon just over, it is the right time to discuss a stock, which caters to the huge demand in the sports industry.

Nike is considered to be an iconic brand in the sporting industry and with a decent current yield of 1.30% could be considered a good investment. In this article I will discuss about how the company will continue to create shareholder value.

Financials

Before looking in to the company’s key growth driver I would like to discuss about its performance and an impressive financials. For fourth quarter 2014 there has been 11% increase in revenue y-o-y. This increase is reflected in the company’s earnings as well with 5% increase over the last year fourth quarter.

It is important to note is that the company has delivered a positive free cash flow over the last four quarters which also suggests that the company has enough cash to fund its R&D expenses. This is also a reason for low debt on the company’s balance sheet.

For fourth quarter 2014 the company has a total debt of only $1,200 million and with a debt to equity of 0.11, the company is in a healthy position to borrow more debt to finance its R&D. Nike also has a better return on equity of 25% compared to industry average of 23%. Thus, with positive free cash flow investors could also expect an improved dividend yield.

Innovation At Its Best

As rightly said by Mark Parker, President and CEO of Nike, that key to success in the industry is innovation. I will discuss about the company’s innovation not only in products but also in the digital and ecommerce segment.

With globalization and with countries becoming more interconnected, customers globally expect the same level of innovation everywhere. This is a challenge for a company and hence an improved and accelerated innovation in products and digital ecosystem is required.

Nike has had always catered to the needs and expectations of athletes and has delivered their best of products at key events such as the KOBE 9 Elite basketball shoes in Los Angeles. Delivering right product at the right time has help Nike to earn good returns from their investments.

Further focussing on the company’s digital and e-commerce innovation, the company has made significant investments in its infrastructure and geographic expansion. This is to give their customers premium experience and also a platform to for consumers to interact.

E-commerce investment has made shopping easier for consumer and at the same time digital investment has helped the company to deepen its relationship with consumers. The success of the company’s innovation in this section is evident with 40% increase in its online business in fiscal 2014 over the last year.

Shareholder Value Creation

Nike has been very aggressive in its share repurchase plans. In a span of 10 years Nike has brought back 15% of its stock and this is just the beginning. As of September 2012, Board of Directors has approved a buyback of $8 billion, 51.9 million shares of worth $3.4 billion has been repurchased as of fiscal 2014.

Therefore, a further $4.6 billion shares will be repurchased in the next two years. It would further have an upside effect on the company’s earnings per share and would help in shareholder value creation. Apart from the company’s buyback programme, a dividend yield of 1.30% with payout ratio of 28.5% makes the dividend safe with further room of increasing dividends over the years.

Conclusion

Nike has its presence in eight geographies and with five brands and categories, there is a huge untapped potential for the company to grow. At a current PE of 26.4, Nike might look expensive but when compared to Under Armour’s (UA) 75 and Crocs Inc’s (CROX) negative earnings per share, the company looks cheap. Thus an iconic brand with a dividend yield of 1.3% and further room to create shareholder would outperform with its innovation and expansion plans.

About the author:

Value Investor
A value investor.

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