A Nike stock analysis

PUBLISHED Jul 7, 2024, 7:57:09 PM        SHARE

img
imgLouis Engelbert

Introduction

Nike with their iconic slogan “Just do it” is a global leader in the sports industry, primarily focusing on athletic footwear and apparel. They are known for their innovative products and massive brand awareness thanks to strong marketing campaigns and sponsorships. While Nike was founded in 1964 and started as a Japanese running shoe company, it grew to a billion dollar corporation with a market capitalization of $113 billion as well as owning multiple brands like Nike, Jordan and Converse. Their mission is to bring inspiration and innovation to every athlete in the world with a commitment towards sustainability and to drive a positive impact in communities all around the world.

However, Friday the 28th of June 2024 marked the worst day in the history of Nike’s stock price, shares fell 20% caused by a warning that revenues are going to decline more than expected in 2025. Nike is struggling with sales growth, lower consumer demand and is in need of strategic change within the company. Not only that, analysts are also worried about the long term growth and profitability trajectory of Nike.

In the rest of the article, we will delve deeper into Nike inc. in order to see whether Nike is still a good company to invest in. First, an industry overview is provided in order to better understand the market where Nike is operating in. Next, a competitive analysis is created to compare Nike to its main rivals. The latest market trends are determined to see where Nike should act upon. Finally, the financial statements are examined to see the performance of Nike in the last few years.

Industry overview

The athletic footwear and apparel industry is enormous due to high demand and rapid changing consumer preferences. As a result, there is fierce competition between companies and they try to differentiate themselves by focusing on the newest innovations, durable materials and marketing campaigns to make consumer feel more affiliated with the brand. In 2023, the global sportswear industry accounted for approximately $338 billion and is forecasted to rise over $450 billion by 2028. This corresponds to a compound annual growth rate (CAGR) of around 5% in the next few years.

The growth in sportswear comes from fitness conscious consumers who are looking for appropriate shoes, gear and other accessories that correspond to their physical activity. Technological advancements such as new fabrics and smart footwear are further driving the industry growth. But not only athletes enter this market, so do younger generations, regardless if they practice a sport or not. 64% of US millennials and generation Y reported that they bought athletic shoes is 2021. This showcases the rise of athleisure fashion worn as a streetwear and personal style. Ultimately, contributing to the growth of the consumer base.

Now and further in the future, regulations such as labor laws and environmental regulations are going to play a major role in shaping the industry. Topics like sweatshops and labor exploration are often mentioned in this industry due to outsourcing the manufacturing process. Other risks associated with the industry are pollution, the fast fashion mentality as well as a lack of supply chain transparency.

A competitive analysis

While Nike still is number one in sales within the industry worldwide, they are losing some market share to their competitors as consumers and investors lose trust in the company. Besides Nike, several key players in the sportswear market are Adidas, Under Armour and Puma.

Adidas is the biggest rival of Nike, they are the largest sportswear manufacturers in Europe and the second largest in the world. They are known for their innovative designs and priority for quality. Furthermore, Adidas is a major investor and producer of football (soccer) products as well as many other sports. One of the biggest sponsor deal they have is with Lionel Messi which is one of the most famous soccer players at the moment.

Under Armour is a relative smaller company. However, they maintain their reputation by providing performance focus apparel and connected fitness products. They focus on both professional and amateur athletes and sponsor many colleges and professional teams. Further, Under Armours business model is selling direct to the consumer as well as utilizing e-commerce. Finally, they promote innovation by also looking at digitalization such as providing a digital fitness app called MapMyFitness.

Puma has been in the market for a long time and has shown to be a consistent and well established rival in the market Their main operations consists of selling footwear, apparel and accessories. They further own Cobra Golf for all their respective golf products. The majority of the sales go through wholesale partners and they sell their products all over the world with the US being the largest market.

**Figure 1: ** image description

SWOT analysis

In order to get a better understanding of Nike’s position in the market, a SWOT analysis is created to determine where their strengths and weaknesses lie and how they potentially could improve the company in the future.

Strengths

The biggest strength of Nike is that they have global brand awareness and a strong brand value. The logo is known all over the world. This further helps Nike to promote their products as consumers feel affiliated with the brand of the quality of the products. One interesting fact is that Nike is the most favorite sneaker brand in the US.

Second, marketing and endorsements play a crucial role in Nikes success. Historical collaboration with Michael Jordan and Tiger Woods helped the company to strive in the sport industry as everyone wanted to be like the pros.

Furthermore, Nike keeps investing in innovation and sustainability in order to meet changing consumer demand as well as reducing the CO2 emissions in order to meet the Paris Agreement in 2030.

Weaknesses

One issue Nike faces is that most of the manufacturing process is outsourced which potentially leads to supply chain issues and quality control issues. Not only that, they are also facing ethical challenges as some of the factories consists of poor labor conditions such as low wages, child labor and an unsafe working environment.

Furthermore, Nike can fall trap to high operating costs due to their investments in marketing campaigns and sponsor deals. If these endorsements are not successful, this could harm their revenue growth and even reduce their profit margins.

Nike also suffers from a lack of diversification, the footwear department accounts for two thirds of Nike’s sales, The remainder of the sales comes mainly from apparel. Hence, there is a need to expand their product line.

Opportunities

The first opportunity comes from entering new market segments by expanding the product line of Nike. This can help Nike gain additional revenue streams as well as technological innovation within the company. One of the industries where Nike could find synergy in is the fitness smartwatch industry.

Next, focusing on direct to consumer sales rather than wholesale could increase the profit margins of Nike as they can avoid paying third party expenses. After the Covid pandemic, the world experienced a rapid increase in online sales which provides an opportunity to Nike.

Finally, implementing the latest technologies such as AI can help the company gain better business insights and improve their decision making. AI can be used in many ways from forecasting sales, marketing as well as logistics.

Threats

If Nike does not continue to innovate its products and adapt to changing consumer preferences they might lose out on sales and ultimately lose market share to its rivals Adidas, Puma and Under Armour.

Furthermore, economic downturns such as the Covid-19 pandemic and rising interest rates can affect consumer spending. As a result, demand towards discretionary items decreases and Nike suffers from lower sales.

Another major threat is the rise in counterfeit products. Companies and retailers that sell counterfeit nikes harm the revenue stream of Nike since consumers do not buy the original products. Another downside is that the fake nikes are often made with very bad quality which in return, harms the brand image of Nike.

To summarize, while Nike still leads the industry thanks to their brand image, reputation and iconic endorsements they are facing some challenges. Their financial performance is weakening due to a lack of product diversification and dependency on wholesalers. However, investing more in technological advancements and new products could help Nike increase its profits and revenue streams. For the future, Nike should continue to innovate to keep up with competitors products and fight the battle against counterfeit products.

Market trends

As mentioned earlier, the sportswear industry is a fast paced market with continuous changing consumer preferences. In order for companies to boost their sales and gain market share, they should innovate their products with the latest technologies, materials and more.

The first market trend is the growing demand towards sustainable products. People are becoming more environmental conscious and want to contribute to society by buying eco-friendly products. As a result, Nike is adopting eco-friendly practices such as investing in renewable energies in order to reduce their emissions within the company. They further invest more in the research of new materials that are both performance enhancing and made from sustainable materials. With the rise of e-commerce, Nike has the ability to target more environmental conscious customers in order to boost their sales and growth.

Another trend that is getting traction is wearing athletic apparel in an everyday setting. Athletic apparel is known for its functionality and comfort. Formality in the world is decreasing and people rather wear clothes they feel comfortable in when they are walking around at home or quickly get out of the house. As a result, the demand towards athletic wear increases, not only for athletes but also for the normal consumer. With respect to athletes, after the Covid-19 pandemic people became more aware of their health and condition. More people started playing sports which in return, boosted to demand for sportwear.

Another major market trend is the metaverse. In 2021 Nike acquired RTFKT with the goal to merge culture and gaming together. RTFKT is known for their innovative designs as well as focusing on the latest technological advancements such as NFTs (non-fungible tokens), blockchain technology and virtual products. Thanks to the acquisition, Nike was able to create digital sneakers in the form of an NFT. This helped Nike to integrate in the web 3 community and after a certain period of time, the digital sneaker (NFT) was able to be converted into a real pair of nikes. Hence, integrating in the web 3 space can help Nike target a younger audience and shows their commitment towards technological innovation.

Finally, artificial intelligence is the most popular topic in 2024 as it proved to be an incredible invention and every company should reap the benefits from it. AI can be implemented in many different ways and forms. First AI can help by following the latest consumer preferences and analyze potential popular designs. It can further help for inventory management and supply chain optimization. One example includes improving the logistics of the company and as a result, reduce the transportation costs. Finally, AI can also help improve the customer experience online by making personal recommendations to each individual based on the purchase history. Customers also have the opportunity to virtually try on sneakers thanks to augmented reality. Hence, implementing AI has many benefits from reducing costs, improve customer experience as well as forecasting demand.

Financial analysis

So we know that Nike is still a market leader when it comes to sales, reputation and brand image. However, the stock price has been decreasing in the last few years and Is currently trading on a 5 year low at $76 per share. In order to get a better understanding of the reason behind the price drop, a closer look is taken at the financial of Nike as well as some key financial ratios.

Figure 2 below shows the progression of the income statement of Nike in the past 5 years. Note, that all the numbers are expressed in thousands. Starting off in 2020, the covid pandemic had a significant impact on the profitability of Nike. While they remained profitable ($2.5 billion), there was a large drop in revenue due to the lockdowns and stores closing down. Fortunately, revenues picked up again in 2021 after the pandemic. With respect to the last 3 years, Nike is struggling to increase their revenues as the growth percentage was less than 10% for each year. While they are able to keep their cost of goods sold (COGS) at the same level which in return gives Nike a stable gross profit margin of around 44%, a significant amount of the gross profit is eaten by the operating expenses. These tend to be pretty high and therefore put a lot of pressure on the net income of Nike. From 2021 to 2024, the net income did not change at all. Hence, Nike is in need to either increase their revenue or decrease their costs in order to get a better net income margin. Once net income starts to increase in the future again, shareholders would gain trust in the company again and the stock price is likely to increase as well.

Figure 2: income statement progression, Nike image description

Key metrics

Based on the income statement, it becomes clear to see that Nikes performance is stagnating due to lack of sales growth, and as a result their profits do not increase either. The next step is to interpret various key metrics, shown in figure 3 in order to determine the financial health.

Starting off with the current ratio which measures the short term assets relative to the short term liabilities. The ratio ranges between 2,40 and 2.72 throughout the years. A ratio above 2 generally suggests that the company has a healthy liquidity position. However, because Nike sells a lot of products, they tend to have a large inventory as well. When looking at the quick ratio which removes the inventory from the current assets, it is clear to see that the ratio drops significantly compared to the current ratio. In 2020 the quick ratio was 1.39 and 1.85 in 2021 respectively. After 2021 the quick ratio decreased again, indicating a slight reduction in liquid assets relative to current liabilities. Following from these insights, it is possible to say that Nike has a large inventory that is potentially difficult to sell. Hence, not selling inventory would result in larger losses for Nike.

Continuing with the total debt to equity ratio, the ratio decreased over time from 1.62 in 2020 to only 0.83 in 2024. Implying a strong reduction in leverage. This was a good decision by Nike as interest rates have been rising in the last few years which increases the borrowing costs of companies. Hence, Nike successfully reduced its financial risk which corresponds to more financial stability and less dependency on debt financing.

Furthermore, the total asset turnover shows how efficient Nike is in using their assets in order to generate revenue. The ratio ranges between 1.39 and 1.21, remaining relatively stable over time. However, because the ratio is not increasing this could mean that some part of the total assets are not used efficiently. One argument could be that inventory contributes to a large part of the total assets of Nike. If they are not able to sell this inventory, this implies that assets are not efficiently used to generate revenues.

Talking about inventory, days in inventory measures the average number of days Nike takes to sell its inventory. As shown in figure 3, the days in inventory remains around 100 and 110 through out they years. Meaning that it takes Nike around 100 days before they can sell their inventory. While this looks like a lot at first sight, main competitors such as Adidas and Under Armour need a longer time period to sell their inventory. Adidas has a more longer days to inventory of around 165 and Under Armour needs around 130 days to sell their inventory. Hence, even though Nike has a large inventory, they are still able to sell their inventory relatively quickly.

Figure 3: key metrics for Nike image description

Conclusion

In conclusion, Nike remains a dominant force in the athletic footwear and apparel industry, supported by its robust brand recognition, extensive global presence, and continuous innovation. However, recent financial performance has indicated some challenges. While Nike has managed to reduce its leverage significantly and maintain a relatively efficient inventory turnover compared to competitors, the company's revenue growth has stagnated. The pressure from high operating costs and a lack of product diversification are notable concerns. The recent sharp decline in stock price underscores the need for strategic changes to regain investor confidence and drive future growth.

Despite these challenges, Nike has several opportunities to enhance its market position. Embracing technological advancements such as AI, focusing on direct-to-consumer sales, and expanding into new product segments like fitness smartwatches could provide new revenue streams and improve profit margins. Additionally, Nike's commitment to sustainability and its potential to capitalize on emerging market trends like athleisure and eco-friendly products position it well for future growth. By addressing these areas, Nike can continue to innovate and adapt, ensuring it remains a competitive and profitable player in the global sportswear market.

I/we have a position in an asset mentioned



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