Oregon-based Nike, Inc. (NYSE: NKE) is one of the best-recognized brands across the globe. The company, with its “Just Do It” slogan, has captured a huge share of the market for its products including athletic footwear, apparel, equipment and accessories. Nike designs, develops and markets these products, selling through its factory and retail stores worldwide as well as online. Nike has been around for almost five decades and is going strong; no other company in the space matches its popularity and growth. On the investor relations page, it states, “Nike, Inc. is a growth company,” which is a strong message about its attitude and intention. If Nike can live by it and continue with the momentum, its investors will surely be pleased. The company had a market capitalization of $78 billion in 2015.
Things have been going well for Nike, Inc. Fiscal 2015 ended with a 10.08% rise in its revenue, taking it to $30.6 billion from $27.8 billion reported at the end of fiscal 2014. On a currency neutral basis, the rise was 14% from the previous fiscal year.
Converse and Hurley are Nike’s core subsidiary brands. Converse designs, markets and distributes athletic lifestyle apparel, footwear, and accessories, while Hurley designs, markets and distributes surf and youth lifestyle footwear, apparel and accessories. Market transitions to direct distribution in AGD and strong growth in the United States pushed revenue for Converse to $1.98 billion, up 18% from the previous fiscal year.
Excluding the revenue from Converse, Nike’s revenue was $28.7 billion. North America contributed 48% to this revenue, while 20% came from Western Europe; emerging markets contributed 14%, while greater China added 11%.
The company’s net income increased to $3.27 billion, 22% on the back of strong growth in revenue, expansion in profit margin (currently at 46%, a 1.2% expansion over FY14), and lower tax rate (22.2% vs. 24% in FY14 as a result of favorable tax resolution).
The strong income statement was reflected in the company’s earnings per share (EPS), which increased by 25% to $3.70 in FY15 from $2.97 during FY14. The yearly consensus EPS forecast by analysts compiled per the Nasdaq database projects an earnings per share of $4.15 for FY16, $4.70 for FY17 and $5.47 for FY18.
The graph below portrays the movement of Nike vs. the S&P 500 over the last five years. The share price of Nike has moved up much more than the broader market index, the gap growing wider since mid-2013. Nike had announced an $8 billion share buyback program, approved by the Board of Directors in 2012. As a part of the ongoing program which expires in 2016, the company repurchased shares worth $6 billion by the end of fiscal 2015. Such activity, of course, leaves the company with a lesser amount for investment into business, but at the same time, the decrease in the number of outstanding shares has raised its earnings per share.
Nike’s direct-to-consumer (DTC) strategy should boost margins and revenue in the years to come, as it helps to cut down on middleman charges. At the end of FY15, the number of DTC Nike store locations increased to 832 from 768, while its DTC revenue increased by 29% to $6.6 billion as a result of the addition of new stores and aggressive online sales. Other than DTC, Nike’s focus on brand recognition and growth via endorsements, along with investments in research and development and demand generation, should continue to pay off. Nike has even won a $1 billion contract from National Basketball Association (NBA) and will be entered into an eight-year deal, as Adidas’ contract ends in 2017, with the NBA. Additionally, the growing middle class in emerging markets, as well as greater China, should keep the demand for its products growing.
The Bottom Line
Nike is a sound stock based on its steady stock performance and impressive growth in earnings per share, revenue and net income, strong balance sheet and management approach. But there is no risk-free stock, not even Nike. A slowdown in China, currency movement and growing competition could dent the growth numbers. Although the positives should outweigh the negatives, the stock currently looks a bit expensive, trading around its 52-week high. There is potential in the company to justify those levels, but it would be wise to let it take a breather before you pick this sporting stock.
The author has no holdings in the stocks mentioned.