Here’s What Matters For Nike’s $56 Valuation

by Trefis Team
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With revenues of over $24 billion and gross profit margin of 43.4% in fiscal 2012, Nike (NYSE:NKE) has been seeing strong growth in its top-line since 2010. In Q2 2013, its revenues grew by 7% annually driven by a 17% rise in sales in North America, its biggest market. However, sales in Western Europe and China marked a decline on account of weak macroeconomic conditions. The company has stepped up its efforts to address declining growth in China, and we believe it will be able to realign its product portfolio to better match the needs of Chinese consumers. (Read: North America Lifts Nike Despite Weak Europe And China Results)

Leveraging major sporting events to boost its brand image, continuously improvising its product portfolio and growing its direct-to-consumer business are the key strategies that we believe will help fuel Nike’s growth in the future. However, increased competition from upcoming companies such as Under Armour could restrict potential growth.

In this article, we provide a quick overview of Nike’s major brands, its main markets and the key strategies that impact its valuation.

See our complete analysis for Nike

What Is The Significance of Different Brands In Nike’s Valuation?

Nike sells a majority of its footwear, apparel and equipment products under the Nike brand, which accounted for around 87% of the company’s revenues in 2012. It also sells it products through other brands such as Converse, Hurley and Nike Golf. According to our estimates, Nike Brand Footwear and Nike Brand Apparel are the most valuable divisions for Nike contributing around 53% and 27% to its value, respectively. Other brands including Converse, Hurley and Nike Golf account for around 12% of Nike’s value.

Nike recently sold its Cole Haan and Umbro brands to focus on its core brand portfolio. Cole Haan and Umbro brands were unprofitable for the company and some of the products offered within these brands did not match Nike’s core product portfolio.

What Are The Key Target Markets For Nike?

Nike operates globally across North America, Western Europe, Central & Eastern Europe, Greater China, Japan and other emerging markets.

North America and Western Europe are the two biggest markets for the company which represent around 42% and 20% of the Nike brand revenues, respectively. North American revenues have recorded strong growth over the last few quarters. In Q2 2013, revenues from this region were up by 17% annually. Continued innovation and the participation in major sporting events have helped sustain Nike’s growth in North America. We feel the company will continue to perform well in this region in the near term on account of its superior brand image and strong marketing strategy.

However, revenues from Western Europe have seen a decline over the last few quarters on account of weak macroeconomic conditions in Europe. We expect economic uncertainty in Europe to remain a major headwind for Nike’s growth in this region.

China accounts for around 12% of Nike brand’s revenue. While Nike has historically achieved high growth, recently it has faced difficulties in the region. Sales from China declined by 11% annually in Q2 2013. A weakened economic environment and Nike’s difficulty in adapting to tastes of Chinese consumers were the main factors responsible for this decline. However, Nike has stepped up its efforts to address this situation by showcasing its products in the 60-day sports festival to increase its popularity with customers as well as improve the style, performance and design of its product range to align them with Chinese tastes. If the company is able to achieve success with efforts such as these, we feel that Nike will be able to generate significant growth from this region.

What Are The Strategic Initiatives Being Taken by Nike To Fuel Its Growth?

The key strategic initiatives for Nike include leveraging major sporting events to bolster its brand image, maintaining a strong line of innovative products and growing its direct-to-consumer business.

Nike has leveraged major sports events to enhance its popularity and brand image among consumers. It entered into a  five-year contract with National Football League to gain exclusive rights to all NFL team uniforms. Nike reportedly paid around $1.1 billion for this contract, which was previously held by Reebok. [1] It also targeted other sporting events including summer Olympics and Euro 2012 to enhance its brand image. Considering the immense popularity of such events and Nike’s track record of introducing market leading products (including Flywire and Lunar) in such events, we believe this strategy will provide Nike an edge over its competitors.

Innovation is one of the key elements of Nike’s growth. The company’s innovations such as Flyknit, FuelBand, Pro Combat, Lunar and Free have helped fuel the company’s growth in the sportswear market. Flyknit provides extra cushion in sports shoes, FuelBand tracks daily physical activities of the user and Pro Combat provides light weight armor for American football players. We expect Nike to keep delivering innovative products which will help drive its sales in the future.

While sales through indirect channel represent more than 80% of total Nike brand sales, Nike is also enhancing its direct-to-consumer sales by growing its network of company-owned stores and focusing on e-commerce sales. In Q2 2013, Nike registered 25% growth in direct-to-consumer sales compared to only 5% growth in sales to wholesale customers. The percentage of direct-to-consumer sales in total Nike brand revenues went up from 15.3% in Q2 2012 to 17.7% in Q2 2013. We feel that this strategy will also help bolster Nike’s bottom-line as direct sales have higher margins.

Who Are The Key Competitors For Nike?

Nike faces stiff competition from not only big companies such as Adidas, Reebok and Puma, but also from upcoming companies including Under Armour, Lululemon and Columbia Sportswear. As these smaller companies are growing rapidly and expanding internationally, they could take away some of Nike’s market share in footwear and apparel products. We feel that Nike will have to keep enhancing the quality and design of its products to sustain and grow its market share in the global footwear and apparel market.

Our price estimate for Nike is $56, which is broadly in-line with the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Nike Shows NFL Gear, The Wall Street Journal, April 4, 2012 []
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