Nike: More Than Just a Sports Brand
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With revenues and gross profit of $24 billion and $11 billion, respectively, in 2012; Nike (NYSE: NKE) is much more than just a sportswear brand. The company has seen strong growth in revenues, since 2009. Revenue growth is underpinned by stellar performance in North American. However, sales in Europe and China have not achieved the expected growth due to a weak economic environment. Nike has started making serious efforts to address the declining sales in China as it realizes the potential it presents and now acknowledges the market as a key revenue driver going forward. Nike’s efforts in China to organize various promotional sports events to build its brand image and constantly restructuring the product portfolio will provide as a catalyst to spur its popularity in the Chinese market. We also expect Nike to focus more on its business to consumer segment, like most of its competitors, to expedite its global growth. Based on its strategic values, I believe the stock may have a higher intrinsic value than its current trading price.
Key Revenue Drivers
Nike generates most of its revenues through the sale of branded footwear followed by apparel and equipment. Over the years, Nike has created sub-brands to target a wider base of potential customers. It sells various products under brand names such as Converse, Nike Golf, and Hurley. Nonetheless, it must be noted that the highest value generating stream for the company is its branded footwear and apparel segments.
Nike is a global brand with presence across North America, Europe and several emerging nations. North America and Europe are the two biggest markets for the brand with the highest contributions to the overall revenues. Revenues from North American have experienced strong growth, as the brand perception and product positioning is ideal for the market. Nonetheless, revenues from Europe have dipped considerably on the grounds of a weak macroeconomic environment. The European market has been a key contributor to Nike’s success and the investors must keep a close eye on how the market recovers as future earnings depend on how the market performs. Going forward, Nike can gain strong momentum through emerging markets. China provides a huge opportunity to continue growth globally and strengthen its lead on competitors like Adidas (NASDAQOTH: ADDYY). In 2012, sales from China constituted approximately 12% of total revenues. However, the revenue growth from the Chinese market has not been up to expectations due to sluggish economic growth and a weak brand perception. China, being a unique market, needs a high level of marketing and promotional effort for brand development. Nike recently participated in a sports festival held in China; in addition, it also restructured the entire product portfolio for China to serve the market better. On the grounds of such efforts, I expect the revenue from the Chinese market to grow moving forward and Nike to establish a unique competitive advantage over all its peers.
Other Key Players
Nike faces stiff competition from the likes of Adidas and upcoming companies like Under Armour (NYSE: UA). Adidas is the largest sportswear manufacturer in Europe and the second largest worldwide behind Nike. The company is originally a German group and offers athletic footwear, apparel, and bags for the younger segment. The company has a market capitalization of $19.5 billion and trades on the secondary stock exchanges of US (NASDAQ) and Germany (Frankfurt Stock Exchange). It has always been Nike’s main competitor in the European Market and going forward Nike faces a huge threat from Adidas. Another competitor for Nike that may steal market share is Under Armour. It has a market cap of $5.2 billion and reported a total revenue and gross profit of $1.8 billion and $879 million, respectively in 2012. Unlike Nike, the company generates a major chunk of its revenues through the sale of its apparel; nonetheless the footwear division has been showing constant growth and is expected to compete with Nike and Adidas fiercely moving forward.
What Really Matters?
For any investor, it is highly imperative to identify if the company has the potential to innovate and constantly re-invent itself to meet the needs of a continuously evolving and rapidly changing market. Innovation is one of the key elements that have always kept Nike ahead of its competition. The company’s ability to innovate in the footwear division allows it to generate maximum revenues through this division. The company’s ability to come up with Flyknit and FuelBand is a testimony to its innovative abilities.
So far, Nike has been highly depended on indirect channels of distribution; however it has now started to invest heavily into direct to consumer segment by growing the number of self-owned stores and enhancing its ecommerce platform. The percentage growth in direct to consumer business for Nike has been consistently increasing. In the second quarter of 2012, Nike reported a 25% growth in its direct to consumer business segment, whereas the wholesale business only witness a 5% growth. We believe going forward direct to consumer business will drive the entire consumer sector.
As Nike plans to grow its direct to consumer segment, this may increase the CAPEX in the short run. An increased CAPEX can reduce the FCF in leading to a lower income and equity valuation. Nike’s stock is for an investor that has a long-term horizon and will stick with the company once the restructuring in Asia is over and the Chinese Market starts to show positive growth.
ashit04 has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!