VALUATION HIGHLIGHTS

1. Nike Brand Footwear constitutes 65% of the Trefis price estimate for NIKE's stock.
2. Nike Brand Apparel constitutes 26% of the Trefis price estimate for NIKE's stock.

WHAT HAS CHANGED?

Nike Saw Mixed Q4 Results

Nike reported Q4 revenue of $12.83 billion, up 5% year-over-year (y-o-y), and ahead of Wall Street's average estimate by $250 million. In the fiscal fourth quarter, Nike Direct sales were up 15% to $5.5 billion on a reported basis. A rise in revenue in Greater China (16%) outpaced the revenue growth recorded in the Asia Pacific & Latin America (+5%), North America (+5%), and Europe, Middle East, & Africa (+3%). Footwear revenue rose 7% to $8.55B, while apparel revenue was flat compared to a year ago at $3.23B. In addition, the company's GAAP earnings were $0.66 per share, which missed analysts' consensus estimate by 2 cents and was down 27% y-o-y.

Cash and equivalents and short-term investments were $10.7 billion, $2.3 billion lower than the prior year, as cash generated by operations was used for share repurchases, cash dividends, capital expenditures, and the retirement of $500 million of debt upon maturity.

Note: Nike's FY'23 ended on May 31, 2023.

Dealing With Lower Margins

Nike's gross margin decreased 140 basis points y-o-y to 43.6% in Q4, primarily due to higher product input costs and elevated freight and logistics costs, higher markdowns, and continued unfavorable changes in net foreign currency exchange rates. This was partially offset by strategic pricing actions and lapping higher inventory obsolescence reserves in Greater China in the prior period.

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 $33 billion by the end of Fiscal 2023. This can be attributed to strong marketing spend and innovation to enhance the product line. Trefis expects this figure to increase to around $54 billion over the forecast period. If this metric increases to $58 billion by the end of our forecast period, there could be a 5% upside to the Trefis estimate. On the other hand, if it increases to only $49 billion, it represents a 5% downside to the Trefis estimate for Nike.
• Nike Brand Footwear Gross Profit Margin: Nike Brand Footwear Gross Profit Margin decreased from nearly 45% in FY 2021 to 43.5% in FY 2023. Trefis expects this figure to increase to around 49% over the forecast period. In case the gross margin increases to 53% 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 about 46%, there could be an 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.

BUSINESS SUMMARY

Nike Inc. is the largest manufacturer of athletic footwear, apparel, and equipment worldwide, by sales, with $51.2 billion in revenues in FY 2023. 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.

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 $33 billion in FY 2023, more than double that of its apparel revenues which were around $14 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.

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 Retail stores for Nike in the U.S. has increased from about 344 at the end of the fiscal year 2022 to around 369 stores at the end of FY 2022. 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.

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 last 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. NIKE Direct drove the majority of Nike's incremental revenue growth, with Nike Direct constituting approximately 32% of the company's total revenues in FY 2021, 42% in 2022, and 44% in FY 2023. We expect growth momentum in Nike Digital to continue with increasing digitization and Nike's increasing investment in order to expand its digital ecosystem.