Key Initiatives for Nike’s Growth

by Trefis Team
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With an aggressive mid-term layout, Nike Inc (NYSE:NKE) recently announced a revenue target of $36 billion by fiscal 2017, which translates to an annual growth in excess of 10%. ((Nike Announces Target For FY17 Revenues)) Although Nike’s branded footwear division historically has been the biggest contributor to its top line, future growth may come from other segments. Here are some potential areas for Nike to exploit:

See our complete analysis for Nike

Geographical Expansion

The company has a stronghold in the North America region but is also gaining ground in the Western Europe region, which has traditionally been the terrain of the company’s competitor, Adidas.

Western Europe already contributes a sixth to Nike’s revenues. [1] Furthermore, the company also reported a future orders growth of 12% from the region, which will help it sustain growth in this market. Considering its current strong position in Western Europe, coupled with the healthy demand for its products going forward, the company can gain significant upside by aligning its resources with opportunity areas specific to the region.

We have highlighted the importance of Nike’s market share in China to its stock price in the past and it remains as important as ever to the company. The company’s sales in the Greater China region, which incorporates Mainland China, Taiwan, Hong Kong and Macau, have been inhibited in the past due to high inventory build up and strong currency headwinds. Nike has made progress in China by clearing its inventories and investing in products more suited to tastes and preferences of Chinese customers. Nike has also invested in productive assets to differentiate its retail locations from a crowded athletic foot ware market in China. Owing to its huge population and growing economy, China offers huge potential for Nike.

See our analysis of how market share in China holds the key to Nike’s long term growth

Women’s Apparel

The annual revenues of Nike’s women’s apparel business have quadrupled to $4 billion in the last three years. The company expects the figure to rise to $7 billion by 2017, which would represent about a fifth of the company’s total revenue. [2]

In order to achieve this, the company has introduced an array of products especially for women. It introduced a limited edition of Nike Tight of the Moment or NTM, style which comes with a sweat wicking Dri-FIT fabric that helps keep dry during a heated workout. Nike also introduced Free 3.0 V4 shoes for women, which are versatile shoes made using the latest technology and innovations. Apart from new products, Nike has high expectations from the sneaker culture, which is growing among women. It is seeing an increasing number of women lining up for sneakers, just like men.

Innovation

Nike has a strong reputation for coming out with innovative products that meet the latent demands of consumers. Nike’s product launches, such as FuelBand, have positioned the company in the digital health monitoring market. The wearable FuelBand bracelet measures one’s movements throughout the day and tells how many calories have been burnt through the day’s activities.

Other products, such as Nike Air Jordan, Lunar, Shield Flash and Nike’s new smart watch, are also expected to boost its sales in the future.

See our analysis of the key drivers of Nike’s growth

Converse brand

Low performance, light-weight footwear is another market segment showing rapid growth. However, this is an under-penetrated segment as far as Nike is concerned. The Converse brand, which Nike acquired for $305 million in 2003, could therefore be a source of growth for the company. It is also Nike’s most profitable brand with a strong top line growth combined with minimal capital requirements.

Converse requires little R&D expenditure as little has changed about the brand since its inception. Converse has traditionally not relied on multi-million dollar endorsements of top level athletes to grow sales. Through its shoes, Converse developed into an iconic brand not long after its inception, and has benefited from becoming the fashion shoe of choice of many celebrities.

Nike will expand the direct-to-consumer reach for Converse and convert additional markets for direct distribution of the brand. Given the cost effective characteristics of Converse, Nike has increased store operations for the brand. [3] In addition, the company is also trying to enhance the reach of Converse shoes by concentrating on designing new products under the brand. Nike is also introducing a program where shoppers can design their own shoes. [4]

Our current estimate for the impact the Converse brand has on Nike’s valuation is quite conservative, but if the brand manages to obtain a larger market share in the low performance footwear market it, could represent a significant upside to our estimate.

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Notes:
  1. Nike Revenue Report 2013 []
  2. Nike women’s business annual revenue []
  3. Nike announces revenue target of $ 36B []
  4. Design your own Converse Shoes []
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