Nike on a Winning Streak

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Jul 11, 2014

NIKE Inc. (NKE, Financial) 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 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. It also markets products designed for kids, as well as for other athletic and recreational uses, such as baseball, cricket, golf, lacrosse, outdoor activities, football (American), tennis, volleyball, walking and wrestling.

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.

Performance Recently

Nike reported its fourth-quarter revenue of $7.4 billion, reflecting an increase of 11% from the fourth quarter of last year, and beating analysts' estimates of $7.3 billion. Fourth-quarter earnings per share were $0.78, also beating analysts' estimates of $0.75 per share. Gross margins improved 170 basis points to 45.6%, and future orders increased 11% on a currency-neutral basis to $13.3 billion. The rise in orders was driven by Western Europe, where future orders increased by 25%. In addition, Nike repurchased $912 million worth of shares in the quarter, helping to reduce the number of shares outstanding.

The increase in revenue was mainly driven by Nike's strong sales growth in North America and Western Europe. Nike brand sales in North America were up 10% in the fourth quarter, while sales in Western Europe were up 18%, excluding the impact of currency fluctuation.

Sales in North America were up by 10% to $3.29 billion, while emerging markets posted a 9% jump in revenues to $1.08 billion. Even Chinese sales recovered and were up by 4% to $702 million. This comes after the company has been struggling in the country for quite some time.

Following the divestiture of some non-core brands, Nike is more focused than ever on its core brand, with revenues of Nike increasing by 13% in constant currencies to $7.0 billion. Revenues from Converse were up by 15% to $410 million in constant currencies, driven by momentum in the US, the UK and China.

Nike saw a further boost in gross margins, improving by 170 basis points to 45.6% of sales on the back of higher selling prices and greater direct-to-consumer sales.

Share Repurchase

During the fourth quarter, NIKE, Inc. repurchased a total of 12.3 million shares for approximately $912 million as part of the four-year, $8 billion program approved by the Board of Directors in September 2012. As of the end of fiscal 2014, a total of 51.9 million shares had been repurchased under this program for approximately $3.4 billion, at an average cost of $65.83 per share. Nike has been creating shareholder value by buying up shares and driving eps growth.

Dominant Position in TV Commercials Spending

Nike has shelled out $56.4 million in TV commercials through the end of June, representing more than a quarter of the category’s TV spending. Through the first six months of the year, Nike has released 28 commercials that have aired just under 1,500 times on national TV. Nike’s commercial spending has been focused on networks such as NBC Sports, ESPN, and Univision during programs like the Winter Olympics and SportsCenter. The brand spent most heavily during the Olympics and spends on Spanish language programming consistently.

On a Growing 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.

To End

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.

NKE continues to be on fire, reporting continued double-digit revenue growth, as the momentum surrounding the World Cup is boosting the company's enthusiasm into fiscal year 2015.

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.