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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 stood at 24% by the end of 2015. This can be attributed to strong marketing spend and innovation to enhance the product line.
Trefis expects this figure to increase past 32% by the end of our forecast period. If the market share increases to 40% by the end of our forecast period, there could be a 10% upside to the Trefis estimate. On the other hand, if it decreases to 27%, it represents a 10% downside to the Trefis estimate for Nike.
- Nike Brand Footwear Gross Profit Margin: Nike Brand Footwear Gross Profit Margin increased from 44% in 2013 to 46.1% in 2015. The increase in gross margins was primarily driven by lower product input costs, including materials and labor costs, as well as favorable currency impact. Trefis expects this figure to remain around the current estimate. In case the gross margin increases to 51% by the end of the Trefis forecast period, there can be a 10% upside to our price estimate for Nike's stock. On the other hand, if it declines to 40%, 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 $31.3 billion in revenues in 2015. The company sells its products under several brands which include Nike, Nike Golf, Converse, Hurley, etc. It typically outsources manufacturing of its products to Asia, 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 they contribute about 80% of Nike's value. Nike Brand Footwear is more valuable than Nike Brand Apparel and Converse Brand Footwear for the following reasons:
Market share for Nike Footwear is four times greater, but the market size is only half that of Nike Apparel
Nike branded footwear commands about an 24% share in the $80 billion global sports footwear market in 2015. 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 $84 billion by the end of the Trefis forecast period.
In comparison, the global sports apparel market stood at about $152 billion in 2015. Nike, with its approximate 5.8% share, generated close to $8.8 billion in revenues in Nike branded apparel in 2015. 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 24% versus a mere 2% for Converse Brand Footwear. This is because Nike Footwear is a more established brand with more than 40 years of experience. 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 881 at the end of 2015. Just by looking at the numbers, one can see how much Nike is focused on growing their DTC networks and increasing sales in the stream. Furthermore, it has recently opened a new 55,000 sq ft store in New York's prime Soho area that offers customers a unique and immersive shopping experience. Another such store is expected to open on Fifth Ave.
Demand for low performance athletic wear is increasing
In the last few years, demand for low-performance footwear in the U.S. and Europe has grown significantly. Low-performance footwear refers to footwear that is not intended for athletic use. In this segment, Nike faces competition from low cost manufacturers that are trying to establish a foothold in the U.S. and other international markets. Nike has gradually increased its focus on selling low-performance footwear through its Converse and Hurley brands. However, the brand is facing stiff competition from competitors like Adidas that threaten to level the playing field.
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 segments in these regions, and the trend is expected to carry forward. China in particular is leading the charge with immense growth coming in from the region at a time when demand in North America is shrinking marginally.
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 stood at 24% at the end of 2015. This can be attributed to strong marketing and innovation by Nike as its product line has been consistently evolving. However, in the recent past Under Armour and Adidas have caused problems for Nike. The company is still significantly in the lead, but UA and Adidas are continuously level the playing field.
Despite this, we expect this figure to increase and cross 32% in the long run.
Trefis considered the following factors for its forecast:
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- Nike continues to record an above-industry average growth rate
- The global athletic footwear market was valued at $74.7 billion in 2011, according to a report by Transparency Market Research. The report estimated the market to grow at a CAGR of 1.8% to reach $84.4 billion in 2018.
- In comparison to the industry-wide sales, Nike's footwear sales have historically grown at a high CAGR of 12% over fiscal 2010-2015.
- We expect Nike to continue growing faster than the overall market in the future, helped by participation in major sporting events, such as the Olympics, and continued innovation.
- Market Share in the U.S. athletic footwear market
- The U.S. athletic footwear market size was approximately $17.2 billion in 2015. At 45.3%, Nike has the largest market share.
- Despite lower expenditure on marketing (Nike spent 12% of net revenues, compared to 14% for Adidas, and 27% for Under Armour), Nike continues to outperform the industry-wide growth rate. Nike's footwear revenues grew at a double-digit growth rate, while the industry has grown at around 8% since 2008.
- The biggest contributor to Nike's footwear revenues in the U.S. is its basketball category. Basketball is not only the fastest growing category, but it also enjoys the highest margins.
- Nike's Jordan brand of shoes alone contributes almost half of the revenues to the entire U.S. basketball shoes category.
- Nike has increasingly proven to be able to sell its shoes at high price points. While competitors suffer in sales when they raise the price of their products, the demand for Nike's basketball shoes has proven to be relatively inelastic. This is a very healthy sign for both market share and profits in the long run.
- However, in the recent past, Nike has been threatened by Under Armour's sudden burst into the Basketball shoes market. That being said, Nike has still not lost much market share.
- Strong competitive position
- Nike, Adidas, Puma, and Asics are the key players in the global athletic footwear market, accounting for a combined market of more than 30%.
- Nike is positioned as the leading player in the market, with an estimated share of around 23% in 2015, followed by Adidas. Nike saw sales of $17.5 billion and $19.2 billion in 2014 and 2015. Its current market share is estimated to be around 21%.
- 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 – accounted for ~63% of Nike’s overall sales in 2014 and 2015. During fiscal 2014 and 2015, Nike saw footwear sales growth of over 10% in both North America and Western Europe.
- 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 represented 9.5% and 14% of Nike's overall sales in fiscal 2014 and 2015, respectively.
- 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.
- For example, in fiscal 2015, Nike recorded footwear revenue of $2.4 billion in North America. Assuming an average spend of $100 per customer on footwear, Nike sold 24 million units of footwear in the continent, implying a penetration rate of roughly 1 unit per 20 people in the continent. If the company could achieve a similar penetration rate in China, whose population is three times that of United States, Canada, and Mexico combined, it could attain footwear revenues of around $7 billion in a year, nearly 3 times the current revenue of North America.
- In fiscal 2015, Nike recorded footwear sales growth of 8% and 11% in Greater China and emerging markets respectively.
- While Nike’s Chinese sales remained weak in the past due to high inventory in the marketplace, the company has restructured its business in the region. Early signs point toward the success of the restructuring initiative. We believe Nike could return to consistent sales growth in the region in the long run as it is actively making 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 compared to the 9% growth in sales to wholesale customers, sales made directly to consumers reported growth of around 25% in fiscal 2015.
- A weakening economy has led to a slowdown in footwear sales
- 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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