Nike: A Strong Long-Term Prospect
Contributor since 2020 / 704 Followers
Summary:
- Nike continues to see double-digit growth.
- China, Asia, the Middle East, Africa, and North America all continue to push sales higher.
- Nike continues to improve its operational efficiency.
- The market remains bullish on the stock.
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NIKE (NYSE: NKE) continued to see strong results during the latest quarter despite a slowdown in the global economy. Nike’s prime position within the global athletic industry continues to play a key role in its ability to grow its revenue at a record pace, despite its size.
Investment Thesis: The coming quarter should be another strong one for Nike, as the China re-opening theme continues. But revenue is not likely to come in as strong as in previous quarters, as consumers slowly start to pullback spending, both in China and globally, due to the continuation of global macro headwinds
Nike to see demand from multiple geographies
China’s reopening continues to be the most prominent theme for Nike. And China has been the biggest story for Nike over the past few years, being the most significant source of growth. In North America, EMEA, and APLA geographies, the company witnessed a 30% growth on a currency-neutral basis. Beyond those areas, Greater China continues to be the main focus of Nike’s sales, and with a potential consumer base of anywhere from 500-600 million in the region, and potential spending of $100-200 per year, Greater China could add billion to Nike’s revenue in the coming years.
Asia and the Europe, Middle East & Africa (which combined for a $12.5 billion market size) continue to be strong sources of growth, with many consumers looking into Nike as a casual wear option, running option, along with other sports as well such as basketball, which have seen significant interest. This means that despite any weakness out of China and the North American market, there are other markets, in Asia (India, which is expected to be a $40 billion in market for athletic wear by 2027 up from $22 billion in 2022).
North American sales also continued to be strong for the quarter, as a range of footwear continued to hit the market. North America and China will continue to be the focus of Nike, as it looks to continue growing at a relatively strong pace. Middle East, Latin America, and Europe will see more tepid growth, although the Middle East has been witnessing strong demand for basketball footwear in recent times.
Nike’s Products and Divisions
Nike continues to benefit from its basketball division, with both the Jordan Brand and the Lebron footwear continuing to see strong demand. The new releases from these sub-brands, mainly the Lebron 20s, are expected to see significant revenue, as both collectors, and those looking to buy the brand for general use continue to buy the products. Furthermore, Nike, which has been historically behind other brands such as Adidas in Football, saw significant interest in their Zoom Air Bag, which was worn by Mbappe during the world cup.
Beyond direct-to-consumer stores, Nike has also been significantly investing in its online distribution, and online channels. It continues to invest in its online membership and loyalty programs and now has 160 million active members. The combination of online sales and new releases, including Air Jordans, Air Max, Air Force, etc. sneakers in combination with a range of basketball, football, and other models could see Nike push up its sales slightly compared to a slower cycle.
Competition remains relatively weak in the areas such as running, basketball, and the general footwear brand, with the exception being football. Nike has managed to carve itself as both an athletic brand and a casual footwear brand in recent times making its footwear more resilient.
Nike should benefit from improved inventory management
Nike has made a considerable effort to reduce inventory as well, and it looks to continue to make its operations more efficient. The total inventory growth slowed down from 65% to 55% during the latest quarter and Nike’s current operating margin, which stands at around 13% should increase slightly, to 14.5-15% potentially as better inventory management results in higher margins.
Furthermore, despite the latest revenue run rate standing at $49 billion, EBIT fell slightly to $6.4 billion, from $6.6 billion, this mainly due to increases in G&A costs. These costs should moderate through the year, and things should start to normalize later in the year. I expected EBIT at the end of the year to come in slightly higher, albeit by not much.
Valuation and Outlook
NKE stock is slightly down over a year, with the price of the stock declining from $133 to $117, and a dividend of 1.1%. Considering that interest rates continue to go up, and Nike’s growth is likely to be around 10% in 2023, it is expected that we might see the stock correct further slightly. The current P/E of 33x is slightly ahead of itself considering where discount rates are headed. Considering where global growth is headed, and market penetration a far more reasonable valuation would be around 24-25x earnings, considering where the athletic sales market is heading.
Nike also faces a range of headwinds, mainly a slowdown in consumer spending, as the base effect from the previous years wears off. Nike will rely on China’s economy in 2023, which itself is slowing down, and North American consumers are seeing a pullback in spending as well. The combination of these could see a downside risk for revenue where revenue comes in only around 8% higher. This could result in the stock correcting downwards by another 10-11%.
Furthermore, Nike currently has a beta of around 1.11, which would mean should the market continue to fall, as interest rates continue to rise, it could lead to a situation where Nike’s stock fall slightly more than the broader market. Despite the higher beta, the company’s implied volatility has been continuously falling and its put-call ratio is clearly skewed in the ratio of calls, clearly indicating that the market continues to be bullish on the stock.
Implied Volatility (Alpha Query)
Nike’s stock is clearly priced at a point where there might not be a lot of upside in the short term. Investors are hoping that Nike continues to perform well going into the future and that growth continues to be strong. Nike remains a buy for the long term. The brand and with a strong market share in the athletic footwear market, and plenty of room to grow, the premium footwear brand is clearly going to continue to see strong brand growth for a while. Buying the stock for the long term could see a return on investment of 10% over the next decade, considering sales in North America, Europe, Greater China and Asia, and thereby estimating market penetration, that would be good, considering that global economies continue to slow.
Nike’s brand and global presence clearly makes it a stock that has a strong competitive advantage that is not easily replaceable. Investors can consider the stock to invest in for the long-term.
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.