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Investment Overview for NIKE (NYSE:NKE)
Below are key drivers of Nike's value that present opportunities for upside or downside to the current Trefis price estimate for Nike:
- Nike Footwear Global Market Share : Nike Footwear Global Market Share has consistently grown over the years and had grown to about 18.6% by the end of 2012. This can be attributed to strong marketing spend and innovation to enhance the product line.
Trefis expects this figure to increase past 26% by the end of our forecast period. If the market share increases to 32% by the end of our forecast period, there could be a 10% upside to the Trefis estimate for Nike stock. On the other hand, if it decreases to 22%, it represents a 10% downside to the Trefis estimate for Nike.
- Nike Brand Footwear Gross Profit Margin: Nike Brand Footwear Gross Profit Margin declined to reach 43.2% in 2012. The decline in gross margins was primarily driven by higher product input costs, including materials and labor costs as well as unfavorable currency impact. Trefis expects this figure to gradually improve to 44.4%, as an increase in contribution of the direct to consumer channel to Nike's total sales should improve the margins. In case the gross margin increases to 48.5% by the end of the Trefis forecast period, there can be a 5% upside to our price estimate for Nike's stock. On the other hand, if it declines to 40.5%, there could be a 5% downside to the Trefis price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Nike at the top of the page.
Nike Inc. is the largest manufacturer of athletic footwear, apparel and equipment worldwide by sales with close to $25.1 billion in revenues in 2012. The company sells its products under several brands which include Nike, Nike Golf, Converse, Hurley etc. It typically outsources manufacturing of its products to Asian manufacturers and focuses on innovation and designing of products. Previously, Nike offered its products through two additional brands i.e. Cole Haan and Umbro. It later sold these two brands as they were not complementing Nike's brand image.
The primary sources of Nike's value are footwear and apparel sold under the Nike brand and together contribute about 70% of Nike's value. Nike Brand Footwear is more valuable than Nike Brand Apparel and Converse Brand Footwear for the following reasons:
Nike Footwear has four times greater market share but two times smaller the market than Nike Apparel
Nike branded footwear commands about 18.6% share in the $76 billion global sports footwear market. As the economy improves in the U.S. and Europe and demand increases in China and emerging markets, we expect this share to continue to rise. With aggressive marketing and innovation, Nike branded footwear has been able to capture a significant chunk of the global sports footwear market, which we expect to increase to $86 billion by the end of the Trefis forecast period.
In comparison, the global sports apparel market stood at about $135 billion in 2012 continuing the growth it experienced in 2011. Nike, with its approximate 4.9% share, generated close to $6.7 billion revenues in Nike branded apparel in 2012. We expect Nike to continue gaining share in this market driven by innovation, heavy marketing and capitalizing on sports events to create higher demand of its products.
Market share for Nike Brand Footwear is more than ten times that of Converse Brand Footwear
Nike Brand Footwear has a share of 18.6% versus a mere 1.6% for Converse Brand Footwear. This is because Nike Footwear is a more established brand for more than 40 years. Converse still has a long ways to go before achieving Nike's popularity. In addition, the company does aggressive marketing and advertising for its Nike brand footwear by signing endorsement deals with famous athletes that gives high visibility to its flagship brand.
Nike is expanding its own stores which provide higher margins
In the footwear business, producers and distributors jointly earn a profit per shoe of about 12% while retailers earn a profit of 13%. By selling through its own retail stores, Nike is able to capture both margins. The total number of company owned stores for Nike has increased from about 486 at the end of fiscal year 2007 to 826 at the end of fiscal year 2012.
Demand for low performance athletic wear is increasing
In the last few years, demand for low-performance footwear in the US and Europe has grown significantly. Low-performance footwear refers to footwear that is not intended for athletic use. In such situations, Nike faces competition from low cost manufacturers that are trying to establish a foothold in the US and other international markets. Nike has gradually increased its focus on selling low-performance footwear through its Converse, Hurley and Cole Haan brands.
High growth potential in China and emerging markets
With the rapidly growing economies of China and other emerging markets such as Brazil, these regions have emerged as key markets for Nike. The company is experiencing strong growth in virtually every one of its business segment in these regions, and the trend is expected to carry forward going ahead.
Trefis Forecast Rationale for Nike Footwear Global Market Share
This refers to the dollar market share of Nike footwear in the global market for sports and sports inspired footwear.
Nike footwear global market share has consistently grown over the years and reached about 18.6% at the end of 2012. This can be attributed to strong marketing and innovation by Nike as its product line has been consistently evolving.
We expect this figure to increase and cross 27% in the long run.
Trefis considered the following factors for this forecast:
- Nike continues to record above-industry average growth rate
- The global athletic footwear market was valued at $74.7 billion in 2011 and is estimated to grow at a CAGR of 1.8% to reach $84.4 billion in 2018, according to a report by Transparency Market Research.
- In comparison, Nike's footwear sales have historically grown a high CAGR of 14.2% over fiscal 2010-2012.
- We expect Nike to continue its strong pace in the future, helped by participation in major sporting events such as the Olympics and continued innovation.
- Strong competitive position
- Nike, Adidas, Puma and Asics are the key players in the global athletic footwear market, together accounting for more than 30% market share.
- Nike is positioned as the leading player in the market, with an estimated share of around 20% in 2012, followed by Adidas. Nike and Adidas Group saw footwear sales of around $13 billion and $9 billion respectively in fiscal 2012.
- We believe Adidas is the closest competitor to Nike in the long run as both companies vie for market share in key markets and compete aggressively for sponsorship of major sporting events such as the Olympics.
- Nike also faces competition from companies such as Under Armour. While Under Armour is growing rapidly, we do not see it as a major threat to Nike in the near future as its footwear sales are only around 2% of total Nike’s footwear sales and also because it has a low presence in the international markets
- Strong growth in developed markets
- The developed markets – North America and Europe – account for 44% and 24% of Nike’s footwear sales respectively. During the first nine months of fiscal 2013, Nike saw footwear sales growth of 16% and 10% in North America and Western Europe respectively.
- We expect continued strong growth for Nike in these markets on account of its strong competitive position and innovation pipeline.
- Opportunity in China and emerging markets
- Greater China and other emerging markets represent 11% and 18% of Nike's footwear sales.
- We think growth in 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.
- In fiscal 2012, Nike recorded footwear sales growth of 25% and 27% in Greater China and emerging markets respectively.
- While Nike’s Chinese sales have weakened recently due to high inventory in the marketplace, we believe it could return to sales growth in the region in the long run as the company is actively taking efforts to enhance its brand image in China and realigning its product portfolio to suit Chinese tastes and preferences.
- Direct to consumer business is a growing opportunity for the company
- Direct to consumer business refers to direct sales by Nike to consumers through its own branded retail outlets and online, thus by-passing general retailers.
- During the past few years, online sales have grown faster than comparable store sales for Nike and we expect this trend to continue.
- The growth potential in this segment can be analyzed by the fact that contrary to overall revenue growth of 16%, the direct to consumer segment reported growth of around 23% in fiscal 2012.
Back to Company Overview
- A weakening economy has led to a slowdown in footwear business
- Weakened economic conditions have forced consumers to cut back on their expenses and have made them more conscious in their choice of purchases.
- This has directly affected the athletic footwear market because of the discretionary element involved.
- The economic recovery has been slower than expected in the U.S., and Europe still remains under recessionary pressure.
- Competitive landscape may change leading to new threats for the company
- The competition in sports footwear market is expected to intensify.
- Along with big competitors such as Adidas and Puma, Nike also faces stiff competition from regional sports footwear manufactures.
- Problem of counterfeit products
- Nike faces a threat from counterfeit products and exacerbation of this problem could result in slower sales growth from emerging markets.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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