Nike: A Comeback Takes Time!

TLDR;

• Jordan Brand was 17% of Nike’s overall revenue in FY24, growing 6% Y/Y.
• In 2023, Nike footwear sales were greater than Adidas, Under Armour and Puma combined.
• NKE has a forward P/E of 22.15x, well below the average 5 year P/E of 35.60x.
• FY25 revenue guidance down to single digit.
• Shares price down by ~30% YTD.

Traditional Metrics

• Revenue -2% Y/Y to $12.6B ($250M miss).
• Non-GAAP EPS $1.01 ($0.17 beat).
• Inventory -11% Y/Y to $7.5B.
• Wholesales +5% Y/Y to $7.1B.
• Direct sales -8% Y/Y to $5.1B.
• Gross margin = 44.7%
• Selling and administrative expenses fell 7% YoY ($4.1B).
• Operating income +39% Y/Y ($1.7B).
• Net income +45% Y/Y ($1.5B).
• Cash and equivalents were $11.6B in Q4, up $0.9B from last year.

Still A Top Dog

• The company’s debt is rated AA-, a high investment grade rating.
• Nike is well-positioned to succeed in the sports industry in the long term because of its brand power which is unmatched (world’s 9th valuable brand).
• Nike’s focus lies on accelerating its pace for innovation and scaling new products in their portfolio.
• Olympics in Paris is a big opportunity for Nike to showcase its innovations and make its brand different from its competitors by telling stories through their products.
• Nike has also managed to save money by minimizing the costs associated with fulfilling orders, uniting vendors, and updating technology.

What led to Nike’s fall?

• Forward outlook of double-digit revenue drop in Q1 this fiscal year.
• Nike’s overestimation of consumer’s willingness to pay a premium for direct purchases have exposed vulnerabilities in its business model.
• D2C channel, including digital, underperformed due to softer traffic and lower sales of classic footwear franchises.
• Consumers are gravitating towards newer brands like On and Hoka, which is impacting Nike’s market share, particularly in the lifestyle segment.
• Uneven consumer trends in key markets like China and EMEA, along with unfavorable foreign exchange rates, contributed to the revenue shortfall.

2029 Valuation

Assumptions :

• 2023 Revenue: $51.36B
• 5Y Revenue CAGR: 2%
• 2029 Profit Margin: 12%
• 2029 PE Ratio: 23
• Shares outstanding: 1.517B
• Shares reduction: 2%/year

Valuation :

• Q2 2029 NIKE SHARE PRICE = 51.36 * (1.02)^5 * 0.12 * 23 / [1.517 * (0.98)^5] = $114
• Using discount rate for Nike as 9%.

• CURRENT SHARE PRICE: $76
• DISCOUNT RATE: 9%
• FAIR VALUE: $114 / (1.09)^5 = $74
• POTENTIAL DOWNSIDE: 6%
• EXPECTED RETURNS: 7.6%/year
• DIVIDEND YIELD: 1.9%
• MY RATING: HOLD, for conservative buyers : SELL