I recommend holding Nike Inc. (NKE), a footwear manufacturing company, that currently trades at $60.36, because of its questionable future growth potential and the company recently losing ground in the market. Nike is still the world's largest footwear company and will remain a stable and profitable stock for the time being, as it still dominates the market (In April it was about 34.7% of the US athletic footwear market). However, this is declining, as in May 2016 it was 35.9%. Jordan Brand, owned by Nike dipped from 14.8% in May 2016 to 11.8% in April 2017. Adidas on the other hand is soaring, hitting a record-high 13%, surpassing the Jordan Brand for the #2 sneaker in the world, while its sales rapidly increase. It will take a while for Adidas to catch up to Nike, but this should sound alarms that Nike's stock may face future decline. Nike is facing slow stagnant growth while its competitor is soaring. Nike's market share, profitability, and liquidity still keep it as a strong company. However, until Nike can be as successful as its competitor Adidas in casual footwear and apparel, which is part of the cause of Adidas' gain in market share, I recommend holding.
Nike Inc. (NKE) is a footwear manufacturing company with several different brands to its name including the Nike brand, Jordan, Hurley and Converse. Its products are made for running, basketball, soccer, men's training, women's training, action sports, sportswear, golf, and its Jordan brand products. The company also focuses marketing efforts to cricket, lacrosse, tennis, volleyball, walking, outdoor activities, and wrestling. Several of its non-footwear products include bags, socks, sport balls, eyewear, timepieces, bats, gloves, etc. Nike also sells plastic products that include Air Sole cushioning components through its subsidiary NIKE IHM Inc. Nike sells its products through retail stores, internet retail, independent distributers and licensees. Nike also sells apparel with professional collegiate athletic team logos, with partnerships with professional leagues and teams, as well as collegiate teams.
Figure 1: Reuters – NKE share price over last 6 months
Nike has incurred some interesting changes to its stock over the past six months which reflect the concurrent news about Nike at the time. On June 29, 2017, Nike and Amazon announced an official partnership where Nike will open up its own store on Amazon. This puts more control into Nike's hands selling directly onto the most popular online retailer instead of third-parties doing it for them. That news on top of a 5% increase in company revenue over the last quarter at that time lead to a notable jump in the stock's price, increasing 12%. Nike faced a similar percentage drop in August, when its store retailers were not selling well, with its top product lines selling less than expected with it. Foot Locker and Finish Line, two stores that sells a lot of Nike shoes, reported poor second-quarter results (Foot Locker's stock plummeted 20% upon announcement). This is where one of the main concerns with Nike comes into play, having its outdated retail store focus starting to hurt them as everything moves online. Partnering with Amazon was a move to help alleviate this problem, but it also showed that Nike is now willing to let another company run the show.
Nike's quarterly report showed revenues that were unchanged and a decrease in net income for the first quarter of fiscal 2018 compared to the first quarter of 2017. The net income of $950 million was a 24% decrease from the first quarter of 2017. With revenues keeping flat, this shows weaker profit margins on the year, as Nike's costs have increased more than the money that's coming in. The company's gross margin has slipped below that of competition such as Adidas. Nike's gross margin sits at 43.7%, down from 45.5% a year ago, and Adidas sits at 50.45%. This shows potential concern about Nike's stock down the road, but the market dominance the company still holds on to in the market share and its higher liquidity still makes the stock attractive. Nike's bread and butter Nike Brand products including footwear and apparel, showed an increase in revenue, albeit a modest one. Apparel showed the only promising increase at 5%, which could have something to do with its recent releases of NBA products under its new partnership. Its footwear only increased 1%, well behind what its competitors are doing, and the total Nike Brand increased at only 2% for revenues.
Figure 2 – NKE 10-Q
Figure 3 – NKE 10-Q
1. Nike still has the strongest grip over its market, with a market cap of 98.48 B. Its closest competitor, Adidas, has a cap of 37.14B. It should remain more valuable than its competitors for a long time.
2. Nike is more liquid than its competitors. Nike's current ratio is very strong at 2.93, and a strong quick ratio at 2.01. This is a major strength for the company, showing it can pay back its short-term debts very well.
3. Nike's partnership with Amazon is a step forward for the company. With traditional retail stores struggling, Nike needed to establish itself a better online presence. With the Amazon deal, Lindsay Mann of Goldman Sachs estimated it could add $300-$500M of annual revenue for Nike.
1. Nike's biggest weakness is its stagnant growth potential, a factor in the company losing market share to Adidas. Nike's market share is so large that there's no cause for panic at the moment, though long-term investors should be cautious.
2. They have been improving somewhat, but Nike needs to continue to work on improving the working conditions of the workers who manufacture their shoes. The cheap labor Nike gets by manufacturing in sweat shops overseas is part of the reason for its historically good profit margins. It has also come with a fury of bad PR for the company over its lifetime. Nike must find a better way to balance an ethical and fiscal supply chain to keep both its profits and public image at a high level.
1. Nike has an opportunity in an area that's partly responsible for them losing market share. Nike needs to differentiate and develop different types of products. Nike has always been marketed towards athletes, and its products for athletic purposes. Nike should now start thinking about branching out into making products solely for fashion, like its competitor Adidas has done. Examples of Adidas branching into the fashion world are Kanye West's Yeezy collection which not only includes sneakers but coats, shirts, jeans, etc., but also a collaboration with Pharrell Williams.
2. Nike is a renowned global brand, being the number one global footwear brand. It can continue its global dominance by expanding into other countries.
1. As noted several times, Nike's main threat is its competitors, mainly Adidas, which is starting to gain traction in the market share. As Kanye West said, “The Yeezys jumped over the jumpan.”
Figure 4 – Yahoo! Finance – Change in market share amongst competitors
As shown in the graph, Adidas over-took Nike's Jordan Brand as the second most popular brand in the US. Kanye West, who has a deal with Adidas might have played a part in Adidas gaining popularity.
Nike's main competitors are Adidas, Under Amour, Lulu Lemon Athletica, and Puma.
The main competitor is Adidas, with Under Armour still struggling in comparison. Lulu Lemon focuses more on apparel than footwear, the opposite of Nike's focus which makes them less of a competitor. Puma is also pale in comparison to Nike and Adidas. From the chart to the left you can see Adidas having a giant recent surge in its stock price, while Nike has remained stagnant and Under Armour has decreased significantly. The trend in the market has become more casual footwear instead of athletic wear. Nike is not included in the top 5 casual sportswear, where Adidas is the leader in the market share at 23%. Nike still dominates in profitability. Nike's ROE sits at 34.38, and ROA at 18.84, Adidas at 16.74/7.13, UA at 10.7/6.08, and Puma at 3.76/2.31. LuLu is actually outperforming Nike in several profitability and liquidity metrics, but its business model is arguably much different than Nikes. Lulu has a current ratio of 4.82, quick ratio of 3.58, ROE of 25.41, a gross margin of 51.17, and a ROA of 20.42.
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