VALUATION HIGHLIGHTS

1. Nike Brand Footwear constitutes 62% of the Trefis price estimate for NIKE's stock.
2. Nike Brand Apparel constitutes 31% of the Trefis price estimate for NIKE's stock.

WHAT HAS CHANGED?

Latest Earnings - Q1 FY2021

• Nike delivered a strong performance in its Q1 2021 (ending August) earnings, with the company beating market expectations for revenues and earnings. Overall, Nike's revenue declined by 1% to $10.6 billion in Q1 2021, as NIKE Brand digital sales increased 82 percent led by double-digit increases across North America, Greater China, and APLA and triple-digit growth in EMEA
• Moreover, Nike reported a profit of $0.95 per share for the quarter, as compared to a profit of $0.86 per share in the year-ago quarter, mainly due to a combination of stable revenues and a lower selling expenses.
• Nike didn't provide any detailed guidance figures for FY2021 due to the uncertainty resulting from the spread of Covid-19.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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 Revenues: Nike Footwear Revenues have consistently grown over the years and stood at $23.3 billion by the end of Fiscal 2020. This can be attributed to strong marketing spend and innovation to enhance the product line. Trefis expects this figure to increase to $35.4 billion over the forecast period. If this metric increases to $40 billion by the end of our forecast period, there could be a 10% upside to the Trefis estimate. On the other hand, if it increases to only $30 billion, it represents a 10% downside to the Trefis estimate for Nike.
• Nike Brand Footwear Gross Profit Margin: Nike Brand Footwear Gross Profit Margin remained relatively flat from 44% in 2013 to 43.4% in 2020. Trefis expects this figure to increase to around 46% over the forecast period. In case the gross margin increases to 50% by the end of the Trefis forecast period, there can be a 5% upside to our price estimate for Nike's stock. On the other hand, if it declines to below 40%, there could be an 8% 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.

BUSINESS SUMMARY

Nike Inc. is the largest manufacturer of athletic footwear, apparel, and equipment worldwide, by sales, with close to $37.4 billion in revenues in 2020. The company sells its products under several brands, which include Nike, Nike Golf, Converse, Hurley, etc. It typically outsources the manufacturing of its products to Asia and focuses on innovation and designing of products. Previously, Nike offered its products through two new brands - Cole Haan and Umbro. It later sold these two brands as they were not complementing Nike's brand image.

SOURCES OF VALUE

The primary sources of Nike's value are footwear and apparel sold under the Nike brand, and together they contribute about 90% of Nike's value. Nike Brand Footwear is more valuable than Nike Brand Apparel and Converse Brand Footwear for the following reasons:

Nike Footwear is more valuable than Nike Apparel

Nike's footwear revenues stood at $23.3 billion in 2020, more than double to that of its apparel revenues which were around $11 billion. As the economy improves in the U.S. and Europe, and demand increases in China and emerging markets, we expect footwear revenues 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

Revenues for Nike Brand Footwear is more than twelve times that of Converse Brand Footwear

Nike Brand Footwear revenues stood at $23.3 billion in 2020-nearly 12 times to that of Converse's revenues, which came in at $1.8 billion. This is because Nike Footwear is a more established brand with more than 40 years of experience. Converse still has a long way to go before achieving Nike's popularity. Also, the company does aggressive marketing and advertising for its Nike brand footwear by signing endorsement deals with famous athletes to ensure high visibility for its flagship brand.

KEY TRENDS

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 the fiscal year 2007 to around 1100 stores at the end of 2020. Just by looking at the numbers, one can see how much Nike is focused on growing its 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.

Growth of digital platform

NIKE Digital has achieved impressive growth over the few quarters. Both the SNKRs app - which sells limited-edition shoes using collaborations with athletes, celebrities, and universities - and the newly launched NIKE app are resonating strongly with consumers. For the year, NIKE Direct drove the majority of Nike's incremental revenue growth, with Nike Direct constituting approximately 35% of the company’s total revenues in 2020. This share is expected to go up to 40% in 2021, with mobile contributing more than 50% of Digital commerce revenue. We expect growth momentum in Nike Digital to continue with increasing digitization and Nike’s increasing investment in order to expand its digital ecosystem.