Division In Focus: The High Performing Footwear Division Fueling Nike’s Growth

Sports giant Nike (NYSE:NKE) has continued its upward trajectory in 2014 after an excellent 2013, in which its stock price appreciated by about 60%. The company has been posting solid bottom line growth driven by strong performance across all divisions, product types and geographies. This is likely to continue in the future as the outlook for the global sports footwear market is very promising. According to our analysis, this division makes up about 44% of Nike’s valuation. In this article we take a closer look at the trends impacting our valuation of this division.

Our price estimate for NIKE stands at $68, implying a downside of ~20% to the market price.

See our complete analysis for Nike

What Is The Footwear Division?

This is the division that designs, manufactures and markets footwear globally under the Nike brand. Nike footwear is typically designed for athletic purposes, but is also worn as part of casual and leisure attire. The top selling footwear categories include training shoes, running shoes, basketball shoes and sports-inspired casual shoes. Nike also sells flip flops and sandals in addition to shoes, but the percentage contribution to overall sales for these categories is quite low.

Global Footwear Market Share

The global athletic footwear market 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 at a high CAGR of about 20% over fiscal years 2012-2014, a rate far in excess of the average industry growth rate. ^[1] Nike footwear global market share has consistently grown over the years and reached about 19.7% at the end of calendar year 2013. ((Forecast of Nike’s global market share in athletic footwear from 2011 to 2020, Statista)) This can be attributed to strong marketing and constant evolution of its product line. We believe Nike will continue to outpace the industry growth rate in the future, helped by its association with major sporting events such as the Olympics and continued innovation. By the end of our forecast period, we expect Nike’s share to grow to 27%. ^[2]

Some factors supporting our projection for Nike’s share in this market are as follows:

• Nike is currently recognized as one of the top sports brands in the world.
• Nike doesn’t manufacture the footwear sold under its brand name. Instead, the production is outsourced, allowing the company to focus on design innovation. This gives the company flexibility to get the best products at the right prices and to move production in case a better cost opportunity emerges.
• Nike has several top sportsmen around the world as brand ambassadors. The company leverages the global appeal of these endorsers to create brand awareness and market its products.
• Nike has strong R&D potential which is evident from its ever evolving product line and product introduction to the market.
• Nike has a strong hold of the North American market with nearly 45% share(60% if you also include the AIR Jordan and Converse brands). This is the biggest contributing region to Nike’s topline and the company’s strong performance in the region is expected to continue in the future.
• Nike’s footwear sales are growing rapidly in Europe, which has historically been a strong hold of the company’s competitors Adidas and Puma. In the fiscal year 2014, Nike’s footwear sales grew by ~25% in Europe, and on the back of this growth the company is edging closer to becoming the market leader in the region. ^[1]

Improving Margins

Nike’s gross margins are sensitive to higher product input costs, including materials and labor. However, in the recent past the company has been able to offset the negative impact of higher labor prices in China and rising synthetic rubber prices with higher product selling prices, as well as the growth of its direct-to-consumer business.

Some Nike products, such as t-shirts, are quite price sensitive. Increases in their prices tend to result in lower sales numbers. However, Nike’s basketball shoes, one of it’s core products, witnessed stable demand. Over the past few years, demand for these shoes has proven to be inelastic. Price increases have been absorbed by consumers even though this is one of the highest priced product category. Consumers have increasingly shown a willingness to buy premium shoes styled around sportsmen such as Kobe Bryant, Michael Jordan and Lebron James, irrespective of price points. In the running category, Nike’s sales have been driven by increasing unit volumes rather than price increases. Since, the runner’s market makes up about a third of the total U.S. sneakers market, there is a huge opportunity in this market. ^[3]

In fiscal 2014, Nike’s margins increased by 120 basis points to 44.8%. Going ahead, we expect margins to gradually increase in the future and surpass 45% in the long run. ^[1]

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. Nike 10-K, SEC [↩] [↩] [↩]
2. Global Athletic Footwear [↩]
3. Sneaker Price Hike Could Result in Record 2014 for Nike, Forbes, December 2013 [↩]