VOLUME 1
ISSUE 1
Nike Inc
19 Feb 2013
Business Overview
Inside This Issue
1
Business Overview
2
Industry Overview
3
Competitive Landscape
4
Financial Highlights
5
Valuation
6
Recommendation
7
Appendix
8
References
Incorporated in 1968, the principal business activity of the company is the
design, development and worldwide marketing and selling of footwear,
apparel, equipment and accessory products.
NIKE is the largest seller of athletic footwear and athletic apparel in the
world. The company sells its products to retail accounts, through NIKE-owned
retail stores and internet sales in over 170 countries around the world.
Virtually all of the company’s products are manufactured by independent
contractors. Virtually all footwear and apparel products are produced
outside the United States, while equipment products are produced both in
the United States and abroad.
Industry Overview
The company belongs to the Consumer Cyclical sector and Apparel,
Footwear and Accessories Industry. Companies in this industry manufacture
and sell shoes and accessories.
Apparel and footwear industries are often segregated however companies
operating in this line often sell products to both categories. These industries
serve two types of consumers: for the practical consumer, they provide
sensible and affordable clothing whose styles will not change drastically from
year to year, and for the fashion-conscious consumer.
Because many of the goods that these companies produce are nonessential in nature, this industry's performance is highly correlated to the
economy. During economic downturns, consumers have less discretionary
income and will buy fewer goods from these companies
The industry has witnessed a major downsizing in US in early 2000s right after
the major market player shifted the production facilities abroad with cost
reduction intentions. In the U.S., the annual footwear industry revenue was
$48 billion in 2012.
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NIKE INC
Competitive Landscape
Overall the industry is large with low growth and currently at maturity stage.
The competition is intense in the industry because of low level of barriers to
entry however marketing muscle and brand loyalty are critical success
factors in the industry thus it is difficult for a new entrepreneur to sustain.
Nike is the market leader in the industry especially in sportswear. Other
major players in the market include V.F Corporation, Coach Inc, Polo and
Adidas..
Financial Highlights
FY2010
FY2011
ROE
20.67
21.77
21.98
NP %
10.03
10.22
9.21
1.93
2.2
2.37
EPS
FY2012
Company
Industry
Sector
Div Yield
1.53
0.79
0.88
Div Growth
14.38
3.76
2.16
Payout
Ratio
30.72
6.98
10.74
The revenue of the company has been showing a positive trend over
past couple of years. Despite of the recent economic downturn in US
the company still managed to grow its revenue however it doesn’t
put it at par with the industrial growth in apparel and footwear. The
estimated revenue of around $26bn based on the recent growth
rates estimated by the company in an analyst briefing nevertheless
we have remained prudent while estimating the growth percentage
by considering past and industrial growth.
The NP Margin of the company is quite satisfactory if we look at
historical financial highlights. The NP Margin is higher than the industry
average which is around 7%. ROE of the company is showing a
positive trend however it is still lower than the industry. The reason of
lower ROE is the constantly increasing paid in capital in the balance
sheet of NIKE. The EPS of the company is also increasing y/y and we
estimate EPS of 2.7-2.8 based on the expected growth rate of
industry however we have made certain cut due to historical lower
growth shown by NIKE.
The company’s operating cash flows have remained positive in
previous years however the management didn’t invest the sum in
business projects which is because of the maturity stage of
company. The company repurchased the common equity shares
since it had major idle cash. Despite of the massive cash drain the
cash balance stood at $2bn by the end of FY2012. The cash flow
and satisfactory performance by management show the company
isn’t growing with significant pace and currently at the maturity level.
Although some sources believe that the e-commerce sales window
still has growth potential for the company we expect the growth in
long-term with not greater pace. Consequently the most important
aspect in the company is its dividend payments.
NIKE INC
PAGE 3
Valuation
The level of dividends paid by the company has remained quite stable on Payout ratio basis. We expect the dividends to
grow at historic growth rates and payout ratio. The DPS would be around .8$ in FY 2013 (any dividend payments made in
the recent quarters of 2013 should be subtracted from the figure).
The valuation of the NIKE shares for the FY 2013 has been estimated by using dividend discount model due to
appropriateness of the model to company cash flows. The intrinsic value estimated is sensitive to the inputs of the model.
Slight changes in growth rates and investor required rate of return may alter the price. The intrinsic value estimated by the
end of FY 2013 is $61.38. (Spread sheet shown in appendix)
Recommendation
Based upon the value estimated, in the valuation section, the share gives upside margin of 12% by the end of FY13 thus
we recommend BUY. The investment in the company should be long-term and certain price fluctuations can be
witnessed in short-term.
PAGE 4
NIKE INC
Appendix
Year
Value
DPS or TV
Calculation
PV at
11.44%
0
DPS01
0.67
1
DPS1
0.77
= 0.67 × (1 + 15.11%)
0.69
2
DPS2
0.88
= 0.77 × (1 + 13.86%)
0.71
3
DPS3
0.99
= 0.88 × (1 + 12.61%)
0.71
4
DPS4
1.1
= 0.99 × (1 + 11.35%)
0.71
5
DPS5
1.21
= 1.10 × (1 + 10.10%)
Terminal value
= 1.21 × (1 + 10.10%) ÷ (11.44% –
5
99.43
(TV5)
10.10%)
Intrinsic value of 's common stock (per share)
0.71
$61.38
Current share price
$54.95
57.85
References
1.
2.
3.
4.
5.
6.
7.
8.
SECP 10-K filing.2012.Retreived from:
http://www.sec.gov/Archives/edgar/data/320187/000119312511194791/d10k.htm
Wikiinvest.n.d. Retrieved from: http://www.wikinvest.com/industry/Footwear_and_Accessories
Wikipedia. Footwear Industry. Retrieved from: http://en.wikipedia.org/wiki/Footwear#Footwear_industry
Dr. Stephen Brokaw. Analysis of the Luxury Goods & Apparel and Footwear Industries. Retrieved from:
http://www.uwlax.edu/urc/jur-online/PDF/2004/nguyen.pdf
CSI Market. Retrieved from: http://csimarket.com/stocks/competitionSEG2.php?code=NKE
Stock Analysis. Retrieved from: http://www.stock-analysis-on.net/NYSE/Company/Nike-Inc/DCF/DDM#r
Reuters. Retrieved from: http://www.reuters.com/finance/stocks/financialHighlights?symbol=NKE.N
Morningstar financials. http://financials.morningstar.com/incomestatement/is.html?t=NKE&region=USA&culture=en-us