Company Overview: Nike, Inc. (NYSE: NKE) was incorporated in 1967, and has its headquarters in Beaverton, OR. The company designs, develops and markets athletic footwear, equipment, apparel, and accessories, along with services for children, women, and men across the globe. The company has a solid brand portfolio, which incorporates Nike Pro, Nike+, Nike Golf, and Air Jordan. Notably, the company markets its products to ~338 retail stores in the U.S. and ~758 retail stores outside the U.S. The company has two reportable segments, namely NIKE Brand segment and Converse.

NKE Details

Higher Digital Sales & Decent Liquidity Position Aid NKE: Nike, Inc. (NYSE: NKE) is involved in offering well-designed, premium, as well as high-quality products, which is in accordance with the newest customer styles. The company’s “just do it” tagline and “swoosh” logo are famous across the globe. Nike has six key categories of product, which includes (1) running, (2) NIKE basketball, (3) the Jordan brand, (4) football, (5) training and (6) sportswear. Despite the global pandemic led by the COVID-19 virus outbreak, the company remains optimistic about its robust digital momentum across all regions. Thanks to the company’s digital ecosystem that consists of its online site, commercial, and activity apps, it remains on track to benefit from the increasing number of digital shopping by consumers owing to the virus outbreak and stay at home trend. The company is seeing strong digital sales growth across all geographic regions for the past few months. In 3QFY21, digital sales for the NIKE Brand went up by 59% and 54% on a reported basis and on a currency-neutral basis, respectively, on a year over year basis. Furthermore, on a reported basis, the company’s Direct sales went up 20%, whereas on a currency currency-neutral basis sale went up ~16% on pcp.

Looking at the period 2016-2020, the company has reported revenue CAGR of 3.7%. Also, the company witnessed a CAGR of 2.1% in its gross profit over the period of FY16 to FY20. Bolstering exposure in new markets, robust digital sales growth across all regions, and product development remain major tailwinds. During FY20, FY19 and FY18, Nike made various acquisitions focused on securing new resources to increase its Consumer Direct Offense strategy and enhancing customer experience at a global scale.

Key Trends (Source: Company Reports)

The ongoing digital shopping momentum is likely to contribute meaningful sales, going forward. Furthermore, lower selling and administrative expense owing to cost cutting initiatives, tight operating expense supervision and an effective marketing spend on brand and sports events are likely to aid the results, in the coming days.

Q3FY21 Key Highlights: During the quarter, the company reported earnings per share of 90 cents, depicting a rise of 15.4% on a year over year basis. The year over year increase was mainly due to decline in operating expenses, strong growth in the digital and direct businesses, as well as improved margins. Revenues during the quarter, came in at $10,357 million, depicting a rise of 2.5% year over year, owing to robust digital sales and growth in Greater China. Also, double-digit digital sales growth across all regions aided the top line growth.

During the quarter, the company recorded gross profit of $4,719 million, up 5% on pcp, owing to higher full-price product margins, favorable geographic mix and digital mix. Selling and administrative expenses during the quarter came in at $3,041 million, down by 7% year over year.

3QFY21 Key Highlights (Source: Company Reports)

Segmental Highlight: On a segmental basis, revenues from the NIKE Brand increased 9% year over year and came in at $9,773 million, up 9% on a reported basis. Further, the company also witnessed double-digit growth in its digital business and the Jordan Brand. Within the NIKE Brand, revenues in North America, EMEA, and Asia Pacific & Latin America declined 10%, 4%, and 7%, on a reported basis, respectively, on a year over year basis. However, revenues from Greater China, went up by 51% on a reported basis, from the prior corresponding period. The top line also profited from robust digital sales growth of 44% in Greater China region. As the market returned to normal, the company saw an increase of ~60% in NIKE-owned retail stores in Greater China.  Revenues at the Converse brand came in at $570 million, depicting an increase of 13% year over year. Revenues of the segment on currency-neutral basis increased 8% on pcp, owing to digital growth in North America and Europe.

Segmental Highlights (Source: Company Reports)

Key Metrics, Liquidity & Balance Sheet Details: The company exited the quarter with cash balance (Cash and equivalents and Short-term investments) of $12.5 billion, up $3.18 billion at the end of February 29, 2019. Long-term debt at the end of the period came in at of $9,412 million. As of February 28, 2021, inventories stood at $6,693 million, up 15% on pcp. The company has, for the time being delayed its share-repurchase activities in March 2020 to safeguard liquidity amid the COVID-19 outbreak. Nevertheless, the company expects to presume, the share-repurchasing capacity of $11 billion remaining under the current program in 4QFY21. The company paid dividend of $434 million during the quarter, depicting a rise of 14% on pcp.

In 3QFY21, gross margin stood at 45.6%, higher than 3QFY20 figure of 44.3%. EBITDA margins in the same time span stood at 18.2%, higher than 3QFY20 figure of 13.5%. ROE in 3QFY21 stood at 12.8%, higher than 3QFY20 figure of 9.2%. Current ratio of the company stood at 2.78x in 3QFY21, higher than 3QFY20 figure of 1.90x. Debt to equity of the company came in at 0.79x in 3QFY21, lower than 2QFY21 figure of 0.89x.

Profitability and Leverage Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 29.48% of the total shareholdings while the Top 4 constitutes the maximum holding. The Vanguard Group, Inc., and BlackRock Institutional Trust Company, N.A. are holding a maximum stake in the company at 8.18% and 4.88%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Chart Created by Kalkine Group 

Risk Analysis: The company’s exposure to the international markets intensifies the risk of foreign exchange volatility. For FY20, ~19% of the company’s product sales came from Greater China. This implies that the company has a substantial percentage of its product sales denominated in foreign currencies, which exposes the company to adverse movements in foreign currency exchange rates. Further, the company is exposed to short-term disruptions hindering from challenging macro-economic environment due to COVID-19 led outbreak. Also, higher supply-chain costs, stiff competition from peers, and stringent regulatory approval add to the woes.

Outlook: Despite the global uncertainty led by COVID-19 outbreak, the company remains optimistic regarding its 2021 view. It continues to expect revenue growth of low to mid-teens in FY21, as compared to the prior corresponding period. For 4QFY21, the company expects revenues to grow ~75% on a year over year basis, owing to easing of government-directed constraints in Europe and improvement in inventory transit times in North America. For 4QFY21, gross margin is expected to expand up to 75 bps on pcp, owing to shifts to the NIKE Direct business. Further, the company expects to invest higher in product development to accelerate the pace of its digital transformation.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last one month, the stock went down by ~2.1%. The stock made a 52-week low and high of $84.11 and $147.95, respectively. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at a slight premium as compared to its peer’s average, considering the growth in top-line and bottom-line in 3QFY21 strong growth in the digital and direct businesses, as well as improved margins. We have taken peers like Steven Madden Ltd (NASDAQ: SHOO), Rocky Brands Inc (NASDAQ: RCKY), to name a few. Considering the company’s decent 3QFY21 performance, geographical expansion, decent outlook, growth in the digital sales, and valuation, we give a “Buy” recommendation on the stock at the closing price of $130.71, down by 1.06% on 28 April 2021.  

NKE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.