Nike (NKE)

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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 Global Market Share: Nike Footwear Global Market Share has consistently grown over the years and stood at 25.5% by the end of 2017. This can be attributed to strong marketing spend and innovation to enhance the product line. Trefis expects this figure to increase past 34% by the end of our forecast period. If the market share increases to 39% 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 29%, 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 43.7% in 2017. Trefis expects this figure to remain around the current estimate going into the future as well. In case the gross margin increases to 49% 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 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 $34.7 billion in revenues in 2017. 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.

SOURCES OF VALUE

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 a 25.5% share in the $83.8 billion global sports footwear market in 2017. 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 $89 billion by the end of the Trefis forecast period.

In comparison, the global sports apparel market stood at about $167 billion in 2017. Nike, with its approximate 6% share, generated close to $10 billion in revenues in Nike branded apparel in 2017. 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 25.5% 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.

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 fiscal year 2007 to 900+ at the end of 2017. 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.

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