Bill Cara

Nike (NKE) Quarterly Report for Maverick Investors

November 7, 2023,   $109.36

Business Overview:

  • NIKE is a global company specializing in footwear, apparel, equipment, and accessories, distributed through retail accounts, NIKE-owned stores, the Internet, and independent distributors. Its offerings span six categories, including running, basketball, the Jordan brand, football, training, and sportswear, with a separate product line for kids. The company employs approximately 79,100 individuals, including part-time workers.

Maverick Guidance:

  • Short-term technical buy/sell recommendation: BUY, with Triple-Top Breakout Nov. 3
  • Long-term portfolio recommendation: BUY ON EVERY SHORT-TERM PULLBACK
  • Nike’s world-leading position in the footwear and accessories market, growth in North America and Europe, and emerging demand in China indicate a positive outlook. Athleisure, which refers to a fashion trend characterized by athletic clothing that is both comfortable and aesthetically appealing) continues to thrive, and Nike is well-positioned to benefit from it.

Consideration for Maverick Portfolio:

  1. Appropriate for risk profile score of 16-21. The Moderately Conservative Investor aims for a balanced approach that combines growth and stability. The Maverick CAUTIOUS GROWTH portfolio is designed to achieve modest medium-term total returns.
  2. Appropriate for risk profile score of 22-29. The Moderate Investor seeks to balance caution and ambition, aiming for reasonable growth while managing risk. The Maverick MODERATE GROWTH portfolio is designed to maintain a stable yet potentially rewarding financial strategy by including a mix of conservative and moderately aggressive Dow 30 stocks.
  3. Appropriate for risk profile score of 30-35. The Moderately Aggressive Investor is willing to take on higher risk for the potential of higher returns. The Maverick DYNAMIC GROWTH portfolio includes a higher allocation of high-growth-oriented Dow 30 stocks to align with this risk-tolerant approach.

Market Guidance:

  • Consensus Analyst Ratings— MarketBeat = Moderate Buy, TipRanks = Moderate Buy
  • 28 Wall Street analysts have offered 12-month price targets in the last 3 months. There are 18 Buy, 10 Hold, and zero Sell. (from TipRanks)
  • Based on 18 Wall Street analysts offering 12-month price targets in the last 3 months, the average price target is $118.48, with a high forecast of $150.00 and a low forecast of $88.00. The average price target represents a +8.5% change from the last price of $109.36. (from TipRanks)
  • Dividend Yield: $0.34 per share paid quarterly to yield 1.27%.
  • Dividend growth for 11 years. (from TipRanks)
  • Technical Sentiment (based on Technical Indicators and Moving Averages):
    • Investing.com = Daily (STRONG BUY) and Weekly (BUY)
    • TipRanks = Daily (BUY) and Weekly (NEUTRAL)

Value Line Guidance:

  • Company Financial Strength Rating:  A++
  • Share Price Safety, Market Timing, Technical Rank: 1=best. 5=worst
  • Share Price Safety:      1 of 5               
  • Market Timing:             1 of 5               
  • Technical Rank:            4 of 5               
  • Beta:                                  1.15                
  • Stock’s Price Stability:             65/100             
  • Price Growth Persistence:      80/100             
  • Earnings Predictability:          60/100             
  • Average Annual PE:                   20                                
  • Average Annual Sales Growth in the past 5 years:                 +8.0% 
  • Average Annual Sales Growth for the next 5 years:               +8.0% 
  • Average Annual Cash Flow Growth in the past 5 years:       +7.5% 
  • Average Annual Cash Flow Growth for the next 5 years:     +16.0%           
  • Average Annual Earnings Growth in the past 5 years:          +8.5% 
  • Average Annual Earnings Growth for the next 5 years:        +17.0%           
  • Average Annual Dividend Growth in the past 5 years:          +11.5%           
  • Average Annual Dividend Growth next 5 years:                      +12.0%           
  • Projected Average Annual Dividend Yield in 3 to 5 years:  +1.4% 

Financial Performance

  • 10-year Average Annual Total Return: +12.21% (through Nov 7, 2023)
  • EPS
    • 2020: $1.85
    • 2021: $3.56
    • 2022: $3.75
    • 2023: $3.23
    • 2024: e$3.75  (from Value Line Quarterly Report)
  • Average Annual PE: 20 (VL Quarterly Report)
  • PEG Ratio: 2.31 (FinViz)
  • Beta: 1.09 (FinViz)

Quarterly Reports Summaries (including Revenue, Cash Flow, Earnings):

1Q2024 (Oct. 14 report for the quarter ending August 2023)

  • Q1 2024 revenues reached $12.9 billion, up 2% compared to the previous year.
  • NIKE Direct revenues were $5.4 billion, growing 6% year-over-year, with growth in all regions.
  • NIKE Brand Digital sales increased 2%.
  • Wholesale revenues were $7.0 billion, flat compared to the previous year on a reported basis and up 1% on a currency-neutral basis.
  • Gross margin decreased slightly to 44.2%.
  • Diluted earnings per share for the quarter was $0.94, up 1%.
  • NIKE shares have declined to below $100 this year, with mixed performance in North America but improved results in China.
  • Expectations of a 16% increase in earnings per share for fiscal 2024.
  • Inventory reduced by 10% YoY, suggesting potential for more full-price sales.
  • Positive outlook for digital sales as the year progresses, contingent on a more favorable macroeconomic environment.
  • NIKE’s performance in China has improved despite earlier challenges.
  • The stock is at the top of the Timeliness Ranking System, but long-term appreciation potential is below average, and the dividend yield is lower than the Value Line median.

4Q2023 (for the quarter ending May 2023)

  • In 4Q 2023, NIKE reported a 14% decline in earnings despite a 16% increase in sales year-over-year.
  • The lower earnings were attributed to promotional pricing.
  • NIKE had been dealing with bloated inventory but saw an improvement, with the year-end inventory almost flat with the previous year.
  • Earnings are expected to reach $3.80 per share in fiscal 2024, an all-time high, though it’s a quarter lower than anticipated three months earlier.
  • Wholesale relationships are being restored as consumer spending tightens and consumer preferences influence the Direct channel’s performance.
  • NIKE’s Direct channel performed well, with receipts up 15% YoY to $5.5 billion.
  • NIKE is set to deliver merchandise to Macy’s and DSW in October, contributing to a sales target of just below $54 billion for fiscal 2024.
  • NIKE’s shares, despite a 10% reduction in price since late April, are not particularly appealing at recent price levels.
  • The stock is assigned a Below Average (4) Timeliness designation, with subpar capital appreciation potential for three to five years and a lacking yield.

3Q2023 (for the quarter ending February 2023)

  • NIKE reported strong fiscal third-quarter results, with sales nearly $1 billion ahead of estimates.
  • Ongoing markdowns and discounting to clear inventory boosted sales, but margins and profitability were down year-over-year.
  • Earnings reached $0.79 per share, slightly better than expected.
  • Margins are expected to take a larger hit in the final quarter as the company clears out more inventory for a fresh start in the next fiscal year.
  • Full-year earnings are expected to slide to $3.25 per share, even as the sales target climbs to nearly $51 billion.
  • The athleisure trend thrives, driven by hybrid work setups and casual fashion.
  • Strong growth in North America, firm demand in Europe, and emerging demand in China are positive signs.
  • NIKE is introducing a fiscal 2024 outlook for record-level sales and earnings as the company holds a significant share of the thriving market.
  • These shares are considered timely, but long-term readings are subpar, and the dividend yield is slightly below average.

The 3-to-5-year Operational and Financial Outlook:

  • The 3-to-5-year outlook indicates strong growth in revenue and earnings.

Company SWOT Analysis

Internal Strategic Factors:

Strengths

  • Strong Brand Awareness and Value: Nike is a globally recognized brand with a unique name and iconic swoosh symbol. It ranks 10th in Interbrand’s global brand ranking, with a brand value of $50.2 billion.
  • Huge Customer Base: Nike has millions of loyal customers worldwide, contributing to a market capitalization of $193 billion as of April 2023.
  • Sustainability Focus: Nike aims to address environmental issues and contribute to solutions under CEO Mark Parker’s leadership.
  • Iconic Relationships: Long-term partnerships, such as the one with Michael Jordan, have resulted in successful products like “Air Jordan 1 Shoes.”
  • Side Brands: Nike’s side brands, including Converse and Hurley, have contributed to its enduring success.
  • Low Manufacturing Costs: Nike outsources manufacturing to countries with favorable wage structures, keeping manufacturing costs low.
  • In-house Professionals: Nike’s dedicated team of professionals conducts thorough research for product design.
  • Superior Marketing: Nike invests heavily in marketing, with successful social media campaigns and endorsements.
  • Black Community Support: Nike’s “Don’t Do It” campaign supports Black communities against racism.
  • High Market Share: Nike captures 39% of the global athletic footwear market and 13% of the athletic apparel market.

Weaknesses

  • Poor Labor Conditions in Foreign Countries: Nike has faced criticism for poor labor conditions, including forced labor, child labor, low wages, and unsafe working conditions in foreign countries.
  • Retailers Have a Stronger Hold: Nike’s dependence on retailers for 65% of its product sales limits its ability to control pricing.
  • Pending Debts: Despite apparent prosperity in income statements, Nike has a growing long-term debt, raising financial concerns.
  • Lawsuits: Nike has faced discrimination and equal pay lawsuits, impacting its image.
  • Lack of Diversification: Overreliance on sporting apparel leaves Nike vulnerable to market changes, such as the pandemic’s impact on sports events.
  • Contradicting Strategies: Nike’s “Move to Zero” sustainability initiative appears inconsistent with its emphasis on innovation over sustainability.
  • Dependency on North America: Despite global reach, Nike relies heavily on the U.S. market, which exposes it to market shocks and economic downturns.
  • Sexual Harassment: Reports of sexual harassment and a toxic work environment have tarnished Nike’s image.
  • Controversial Labor Practices: Historical unethical labor practices still affect Nike’s reputation.
  • Worrying Financial Indicators: Nike’s increasing long-term debt and declining profit margins raise concerns.
  • Unfavorable Relationship With Retailers: Nike’s reliance on third-party retailers can lead to lower profit margins and issues with counterfeit products.
  • Revenue Over-dependence on Footwear: Over 60% of Nike’s revenue comes from footwear, leaving it vulnerable to product-related shocks.
  • Cultivation of Luxury Brand Image: Nike’s shift towards luxury brand collaborations may alienate its traditional customer base.
  • Reduced Quality Control: Outsourcing manufacturing can reduce control over product quality and lead to counterfeit products in the market.

External Strategic Factors:

Opportunities

  • Emerging Markets: Nike sees opportunities in emerging markets like India, China, and Brazil.
  • Innovative Products: Nike focuses on innovation, particularly in technology and health-related products.
  • Efficient Integration: Nike aims to improve supply chain efficiency by considering the acquisition of manufacturers.
  • Cutting Ties with Big Retailers: Nike is ending partnerships with large multi-brand retailers to enhance product positioning and customer experience.
  • Acquired Artificial Intelligence Start-up: Nike acquired Celect, a predictive analytics platform, to improve online sales and predict customer behavior.
  • Merges with the Metaverse: Nike is exploring the virtual world through acquisitions like RTFKT to market digital and physical products.
  • Exiting From Wholesale Distribution: Nike is moving away from wholesale distribution in the U.S. to increase profit margins and control the customer experience.
  • End Use of Kangaroo Leather: Nike is discontinuing the use of kangaroo leather in its products in favor of synthetic materials.
  • Consumer Direct Strategy: Nike is shifting towards digital business and online sales to adapt to changing consumer behavior.
  • Investing in New Markets: Nike is expanding into new markets, including women’s sportswear, to diversify its product range and reduce reliance on North America.
  • Increasing Their Product Range: Nike is exploring sports technology and promoting a wider range of products.
  • Tapping Into the Future: Nike is using artificial intelligence to improve e-commerce and investing in the Metaverse.
  • Introducing Anti-counterfeiting Technology: Nike is taking steps to combat counterfeit products through collaborations and reporting platforms.
  • Investing in Sustainability: Nike incorporates sustainable materials and recycling initiatives into its products.

Threats

  • Counterfeit Products: Counterfeit products can harm Nike’s reputation and revenue. They are a global problem, with some merchants and retailers selling low-quality fake Nike products at lower prices, potentially tarnishing the brand’s image.
  • Increased Competitive Pressure: While Nike dominates the athletic industry, competition from emerging brands poses a threat. To stay competitive, Nike invests heavily in marketing and must focus on designing innovative products tailored to athletes’ needs.
  • Marketing Budget Pressure: Rivals like Under Armour, Adidas, and Lululemon are increasing their marketing and advertising spending, intensifying the competition for Nike.
  • Currency Foreign Exchange Risks: Nike is affected by fluctuating foreign exchange rates as it operates globally, which can impact its revenue since it reports earnings in U.S. dollars.
  • Patent Disputes: Nike has been involved in patent disputes, particularly with Adidas, which can have public relations consequences and legal costs.
  • Economic Uncertainty: Like any company, Nike is vulnerable to the negative effects of a global recession, which can lead to declining sales.
  • Trade Tensions: Nike depends on markets in both China and the U.S., and trade tensions between these two countries could threaten a significant portion of its sales.
  • Risk to Kangaroo Population: Nike has faced accusations of endangering the kangaroo population due to its use of kangaroo skin in products. This has prompted calls for alternative, plant-based materials.
  • Retail and Warehouse Thefts: Nike experiences theft throughout its supply chain, which is a costly problem. Retail theft is a significant issue in the United States, with substantial financial implications.
  • Patent Conflict towards Adidas Primeknit Shoes: Nike has filed a complaint against Adidas, alleging patent infringement related to shoe technology. This dispute has legal and reputation implications.
  • Competition From Other Sports Brands: While Nike is a dominant player, competitors like Adidas have been growing faster and making celebrity endorsements, challenging Nike’s market position.
  • High Profile Patent Disputes: Nike has been involved in legal battles with Adidas over patent infringement, leading to a lasting impact on their reputations.
  • International Trade Tensions: As an international brand, Nike is exposed to trade tensions and agreements, especially between the U.S. and China, which can affect its sales.
  • Animal Abuse Scandal: Nike has faced criticism for using kangaroo skin in its products, contributing to the decline in the kangaroo population. Animal rights advocates urge the use of alternative materials.
  • Competitors’ Advertising Investments: Nike’s competitors, like Adidas, are investing heavily in advertising, which concerns Nike’s market share despite its strong branding.

FinViz Snapshot:  https://finviz.com/screener.ashx?v=121&t=NKE

10-Year Historical Price Chart:

https://tvc-invdn-com.investing.com/data/tvc_b89bb99b106f230cbeb373e44d7d49f3.png

 

Point & Figure Chart:

https://stockcharts.com/freecharts/pnf.php?c=nke,P

 

 

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