Nike’s (NKE, Financial) revenue growth has been solid in the last 10 years, allowing its stock price to move from under $12 in 2006 to the current above-$50 levels.
We know that Nike is targeting $50 billion in sales by 2020. If that happens and the price-sales (P/S) ratio stays at the current level of around 3, the company will have a market cap of $150 billion. That’s potentially a 63% growth in market cap between now and then.
In my previous articles I detailed why Nike has a good chance to achieve that growth target and why it would be a huge blow to the company even if it misses the target by a year or two. The market understands that Nike’s growth in the last few quarters has been coming in below expectations, but nobody can that Nike’s growth is going to nose dive in the near future. The question is always about how much more the big brand can grow from here, and how fast.
Where does Nike stand in today’s apparel and footwear markets?
Nike, the world’s largest apparel and footwear maker, has the world’s entire footwear market in its sights. The footwear market is highly fragmented and worth hundreds of billions, allowing enough room for a brand like Nike to keep growing through the next decade. The only challenge for Nike will be other brands such as adidas (ADS, Financial) or Under Armour (UA, Financial) giving it a hard fight at the premium end of the market.
According to Technavio, fashion is a major driver for the footwear market, which is expected to expand to about $216 billion by 2019. Technavio’s market research analyst also observed that the 14-30 age group is a major contributor to that growth because people in this group tend to replace their footwear more often and even prefer buying footwear to match their daily apparel.
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Though the estimates vary depending upon which research firm’s report you are reading, it is not that difficult to see that the global footwear market’s value is around $200 billion and growing. In 2015, Nike’s footwear segment reported $18.3 billion in sales, accounting for 60% of the company’s overall revenue. Its largest revenue earner was also the company's fastest-growing segment.
The key point to note here is that Nike, the world leader in the footwear segment, makes only $18 billion in annual revenues, which is less than 10% of the global market value. In other words, no other footwear company on earth makes more than Nike, and if the No. 1 player is holding less than 10% of the market then it’s clear that the market is highly fragmented. And that’s exactly what allows Nike to keep growing for the foreseeable future.
The positioning paradox and China
But that’s just one side of it. We need to remember that Nike’s price positioning puts it at the premium end of the footwear market, which is one of the reasons why it has a 10% operating margin in the first place. In emerging markets they can balance margins with volume, but their premium positioning will follow them into every market.
Take China, for example. Despite its positioning Nike is seeing major gains in the People’s Republic. In the fourth quarter it saw a 23% increase in revenues from that market and expects to close the year at 27% up from the year before. And it saw increases across nearly all apparel and footwear categories for the quarter, and the 27% year-on-year growth came from a combination of direct-to-consumer sales (44%), the Jordan brand, basketball, running and sportswear.
From Nike’s fourth quarter 2016Â earnings call:
“So how will NIKE continue to lead in fiscal 2017? Within our complete offense where do we see the greatest opportunities for growth? Our focus will be continue to drive our potential across North America and Western Europe, to expand our leadership in China and across our emerging markets, to unleash the power of the Jordan brand across multiple categories.”
So China is already playing a huge role in Nike’s growth, and Nike is possibly the only company that recorded such growth in a market that has been turbulent at best. Smartphone sales may have nosedived in this market, but somehow people have continued to buy premium shoes despite copycat products available at less than half the price of the original.
As such it isn't relevant whether Nike reaches its goal by 2020. What is more relevant to investors is that the company will go well beyond that in the next 10 years. The market has ample room for the industry leader to further penetrate, thereby blazing a trail for other brands to follow. This is a company to buy and hold indefinitely.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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