Natasha Chou
Spring 2013
Student Managed Investment Fund
Agenda
 Our Recommendation: HOLD
 Business Description
 Industry Overview
 Competitive Positioning
 Revenue and Margin Drivers
 Valuation
 Financial Analysis
 Investment Risks
 Q&A Session
Business Description
 Founding and History
 Founded in 1964 as Blue Ribbon sports - originally a distributor
 Became “Nike” in 1978 – now a global iconic brand
 Ever since Nike was established, innovation has been a key
driver to the company’s success
 Management
 Founded in 1964 as Blue Ribbon sports - originally a distributor
 Became “Nike” in 1978 – now a global iconic brand
Business Description
 Leader in Innovation





Nike Sports Watch
Nike Plus Fuel Band
iPod Nike app
Shox
Dri-Fit
Product Mix
 Corporate restructuring
 Sold Umbro and Cole Haan in 4Q 2012 to refocus business model
 Focus on Jordan, Converse, NIKE brands
 Expected: Increased profit margins and dividends
NIKE Gross Margin
47.00%
46.00%
45.00%
44.00%
Gross Margin
43.00%
42.00%
41.00%
FY 2010
FY 2011
FY 2012
Sales Mix
FY 2012 Sales Mix
Global Brand
Divisions
1%
Equipment
6%
Apparel
30%
Footwear
64%
Growth Strategy
 Focus on China




Utilizing Basketball and NBA Players to raise awareness
Targeting the youth market
17% Growth from FY 2010 to FY 2011
23% Growth from FY 2011 to FY 2012
Reveue from China
Percentage of Total
Revenue
$3,000
11.00%
$2,500
10.50%
$2,000
10.00%
$1,500
Reveue from China
$1,000
9.50%
Percentage of Total
Revenue
9.00%
$500
8.50%
$0
8.00%
FY 2010
FY 2011
FY 2012
FY 2010 FY 2011 FY 2012
Industry Overview
 Nike is the leading player in the athletic footwear industry
Company
Market Cap.
NIKE (NYSE)
$54.82 billion
Adidas (FWB)
$16.6 billion
Under Armour (NYSE)
$5.87 billion
Asics (TYO)
$3.60 billion
Sketchers (NYSE)
$1.13 billion
Industry Overview
Company
Fiscal 2010
Fiscal 2011
Fiscal 2012
Nike
Adidas Group
(includes
Reebok)
Puma
$10,301
$7,021
(€5,389)
$11,518
$8,132
(€6,242)
$13,426
$9,018
(€6,922)
$1,856
(€1,425)
$1,759
(¥165,808)
$2,006
(€1,540)
$1,857
(¥175,057)
$2,078
(€1,595)
$1,940
(¥182,807)
Asics
CAGR (20102012)
14.2%
13.3%
5.8%
5.0%
SWOT Analysis
Strengths
Opportunities
•
•
•
•
Global Market Leader with Iconic
Brand Name
Heavy emphasis in R&D
Share buyback program will restore
shareholders’ confidence in company
•
Potential to penetrate relatively
unsaturated emerging markets
Product Development – Nike is
arguably a fashion brand and has
potential to market to fashion forward
youth culture
Weaknesses
Threats
•
•
•
Labor and factory conditions has hurt the
company’s publicity
Nike has wasted resources in the past
few years by investing in a fashion
focused company
•
Fierce sponsorship competition from
Adidas and other well known brands
Possibility of having unforeseen losses
due to currency fluctuation
Porter’s Five Forces
Factor
Score
Description
Buyer’s Power
Neutral
Buyers have many different options when it comes to
which brand they choose. However, they have very little
influence over prices.
Supplier’s Power
Weak
Suppliers have very little power since they are
supplying raw materials and there is no differentiation
from one supplier to another.
Industry Rivalry
Intense
There are many different brands with similar products
offered at similar prices.
Threat of Substitution
High
There is little differentiation between products of one
brand and products of another.
Barriers to Entry
High
Brands that are already in the market have built brand
equity that can be difficult to challenge.
Valuation
 DCF: $48.91 to $57.29
 Key assumptions
 Valuation Date
 Revenue Growth
 Terminal Value
Valuation
 Comparable Model: $38.82 to $62.31




Competitors
PE
TEV/EBITDA
TEV/REVENUE
 Residual Income: $49.91 to $79.19
 LT Growth of 1.5%
Valuation
- Final Price Range $49.91 to $57.29
- Market Price at Valuation Date: $59.53
Revenue and Margin
Drivers
 Revenue Drivers
 Focus on the consumer
 Research and Development
 Margin Drivers
 Low Manufacturing Cost
 Adapting to global economies
Financial Analysis
 Revenue, Net income and Profit margin
30,000.0
12.00%
25,000.0
10.00%
20,000.0
8.00%
15,000.0
6.00%
Revenue(M)
Net income(M)
Profit Magain(%)
10,000.0
4.00%
5,000.0
2.00%
0
0.00%
2008
2009
2010
2011
2012
 Sale of Umbro to Iconix (December 2012)
EBT Excl.
Unusual Items
Restructuring
Charges
Impairment of
Goodwill
Gain (Loss) On
Sale Of Assets
Asset
Writedown
Other Unusual
Items
EBT Incl.
Unusual Items
2,442.3
2,553.0
-
2,517.0
2,844.0
-
-
(195.0)
3,007.0
3,087.0
(24.0)
-
-
-
(24.0)
-
-
-
-
-
-
-
-
-
-
(202.0)
-
-
-
-
-
2,502.9
1,957.0
2,517.0
2,844.0
2,983.0
3,063.0
(199.0)
60.6
-
 Working capital and Free cash flow
4,500
4,000
3,500
3,000
2,500
Working capital
2,000
Free cash flow
1,500
1,000
500
0
2008
2009
2010
2011
2012
• Working capital decreased by $782 million from $3,377 million in
2009 to $2,595 million in 2010 because of the increase of cash
and cash equivalents
Investment Risks
 Financial results may be adversely affected if substantial
investments fail to produce expected returns
 Risks associated with overseas sourcing, manufacturing, and
financing
 Concentration of retail market share among a few retailers
may increase Nike’s credit risk and ability to sell their
products
Conclusion
 Our Recommendation: HOLD





A global iconic brand name
Penetrating relatively unsaturated markets globally
Refocusing its business model on its core competency
Steady increase in dividends
Stock buyback program will restore shareholder confidence
Q&A Session
Appendix
Appendix