Nike: Is An Upturn In Sight?

+31.31%
Upside
93.98
Market
123
Trefis
NKE: Nike logo
NKE
Nike

Nike (NYSE:NKE) has delivered strong numbers all three quarters thus far, in CY 2016. In its most recent quarter (Q1 2017), the company posted strong figures, beating consensus estimates in both revenues and earnings. Despite this, the stock price has fallen by almost 20% since the beginning for the year. The main reason for this is the consistent drop in future orders and loss of market share in the footwear business over the past few quarters.

Q1 earnings

Excluding currency fluctuations, the company has seen  future orders decrease by about 5% in the U.S. Overall the sportswear giant reported a 3% drop in future orders worldwide. Future orders are indicative of demand for Nike products and has a direct affect on sales. To put this into perspective, in 2015, 87% of Nike’s wholesale footwear shipments were made through future orders, as was 67% of Nike’s U.S. wholesale apparel. This news has shaken investor confidence as this the third straight quarter (and the lowest in five quarters) in which the company has reported future orders figures below analyst expectations.

Relevant Articles
  1. Down 19% In Last Twelve Months, Will Nike Stock Gain Following Q3 Results?
  2. Nike Stock Could Rise 70% If It Recovers To Pre-Inflation Shock Highs
  3. What To Expect From Nike’s Stock Post Q4 Results?
  4. What To Expect From Nike’s Stock Post Q3 Results?
  5. Nike’s Stock Down 13% Over Last Year. What’s Next?
  6. Company Of The Day: Nike

Future Nike

Furthermore, as mentioned before, Nike has been losing market share in the footwear business. The company is facing increased competition from competitors like Under Armour and Adidas in the segment. Ever since signing Stephen Curry on, Under Armour has managed to grab a larger market share in the basketball footwear. The Curry series of basketball shoes have outsold Nike’s Jordan and LeBron series in the last few quarters, forcing the company to release cheaper models of its KD and LeBron shoes in an effort to regain some of the lost market share. This move is bound to affect margins.

Adidas has primarily scored with fashion shoes promoted by celebrities such as Kanye West. In June, Adidas expanded its partnership with this artist, who moved to the company from Nike in 2013 due to creative differences. In the first quarter, Adidas managed to post a 31% increase in sales of footwear in North America, driven primarily by its Yeezy designs and retro shoes.

Why We Can’t Discount Nike Just Yet:

  • The company’s longterm debt is currently at $2 billion. In comparison to this, Nike has a cash stockpile of about $2.6 billion and short-term investments of about $2.1 billion. Total liabilities sit at $9 billion, while the total of cash, short-term investments and accounts receivables almost equal this amount. Furthermore, this figure is without the inclusion of inventory, receivable and property, plant and equipment.
  • Nike is a brand that has ranked as one of the best in the world consistently for years together. The brand has become a household name and is synonymous with health and fitness, thanks to targeted and well thought out marketing. This has resulted in consistent premiums for the company for decades. For example, if one were to invest $100 in 2005, by 2014, the investment would appreciated to $460. This represents an average compound gain of about 20% per annum.
  • In the previous final year (FY 2016), Nike managed to report an earnings per share of about $2.16. This number has grown by a notable average rate of about 12.6% per annum over the past decade. Further, we estimate this figure to reach about $3.91 in next five years, growing at a consistent CAGR of about 12.6%.

Screen Shot 2016-11-21 at 3.10.22 PM

One must keep in mind that Nike has solid financials and a great brand image that is not going to diminish any time soon. With great future prospects, it seems likely that Nike’s stock price and valuation will see a turnaround very soon.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment / ask questions on the comments section

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our full analysis for Nike

View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research