Sports giant Nike (NYSE:NKE) reported robust revenue growth of 9% and 7%, in Q3 and Q4 fiscal 2013 respectively. Investors were encouraged by these results and the company’s future guidance, and hence, its stock price has climbed by about 30% this year. In this article, we assess the key drivers and barriers to Nike’s business in the short term to understand whether it will be able to maintain its solid growth momentum in the future.
We believe Nike will be able to maintain its strong growth performance in fiscal 2014. High demand in running, basketball and football categories coupled with healthy growth in North America, emerging markets, and central and eastern Europe bodes well for the company’s outlook. We expect Nike to increase its prices in the future, which will positively impact its profitability. Excess inventory in China represents a near term threat, and addressing this problem faster than expected could help the company outpace market expectations.
Robust Growth In Running, Basketball And Soccer Categories
Strong growth in running, basketball and soccer categories are fueling demand for Nike’s products. Nike’s strategy is to focus on discrete categories (category offense) has further helped drive its sales. In fiscal 2013, Nike brand wholesale equivalent sales in running, basketball and soccer rose by 18%, 22% and 9% in constant currency terms.
While innovative technologies are fueling growth in the running category, the growing popularity of basketball around the world coupled with Nike’s sponsorship of leading basketball players is driving the sales in the basketball category. We expect the growth in the soccer category to accelerate in the future owing to upcoming sporting events such as the 2014 FIFA World Cup.
Strong Growth In North America, Emerging Markets And Central And Eastern Europe
Nike brand revenues in North America, central and eastern Europe and emerging markets rose by 18%, 12% and 16% (excluding currency changes) in fiscal 2013. North America continues to be a strong growth market for the company on account of its category offense, superior innovation, strong marketing and premium distribution. Since the North American futures orders growth stood at 12% at the end of May 2013, we believe Nike will continue to attain healthy growth in this geography.
Emerging markets represent a big growth opportunity for Nike since the athletic apparel and footwear category is growing rapidly in these geographies due to rising economic prosperity. We expect the high demand in countries such as Brazil, Argentina and Mexico as well as Turkey and Russia to continue in the future. The upcoming World Cup in Brazil will further drive sales for Nike. The recent futures orders growth at 12% (constant currency) in emerging markets and central and eastern Europe further bodes well for business in these growth markets.
Nike’s gross margin expanded by 30 basis points and 110 basis points annually in Q3 and Q4 fiscal 2013. It rose after a number of quarters and hence investors were encouraged by its rising profitability. We believe Nike’s gross margins will rise in the future as it has the ability to increase product prices, especially in premium products. Moreover, the company is investing in lower cost methods of production and optimizing its supply chain to leverage cost savings. Its profitability will also improve once it clears the excess inventory in China.
Innovative Product Portfolio
Nike’s strong track record of introducing new products is a major competitive advantage for the company. We expect innovative technologies such as Nike Air, Lunar, Flyknit, Free and Dri-Fit to boost its sales in the future.
Excess Inventory Issues In China
Nike continues to face excess inventory issues in China, even though its situation is improving. It is taking aggressive steps in the region such as lowering its inventory, enhancing its marketing activities, creating a differentiated product portfolio, and improving the productivity of its store base. While the company currently forecasts a recovery in Greater China in the second half of fiscal 2014, a faster turnaround in this business would be a catalyst to the company’s stock. Conversely, if Nike fails to achieve growth in the region throughout fiscal 2014, then it could under perform market expectations.
Threat From Newer Companies
Newer companies such as Under Armour and Lululemon Athletica that target niche market segments such as performance apparel (which are engineered to keep athletes dry and cool) and yoga-focused sportswear have achieved impressive growth in the past few years. While these companies could potentially impact the company’s growth in North America, Nike is also making a play within these upcoming market segments to enhance its sales. Hence, we believe the threat from these players is limited in the near term.
Challenging Market Conditions In Certain Parts Of Western Europe
Nike continues to face problems in certain Southern European markets such as Italy and Spain due to economic challenges in these countries. We believe this problem could continue over the short-term and this will impact the overall growth rate from Western Europe.
Our $60.40 price estimate for Nike is around 10% below the current market price. We believe the market price already incorporates most of the drivers present in Nike’s stock.