NIKE Inc

NIKE Inc. (NYSE: NKE) is a sports and fitness company that designs, markets, and distributes athletic footwear, clothes, equipment, and accessories. North America, Europe, the Middle East, and Africa (EMEA), Greater China, and the Asia Pacific & Latin America are the company's operational segments (APLA). Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Training, and Sportswear are among the NIKE Brand product categories.

Latest News

• On May 6, 2022, NIKE, Inc. announced that its Board of Directors has declared a quarterly cash dividend of USD 0.305 per share on the Company's outstanding Class A and Class B Common Stock, payable on July 1, 2022, to shareholders of record at the close of business on June 3, 2022.
• NIKE Inc. released its fiscal 2022 financial results for the third quarter ending February 28, 2022, on May 5, 2022. NIKE's excellent results this quarter demonstrate that the company's Consumer Direct Acceleration strategy is paying off as it invests to reach its growth objectives.

Q3 FY22 Financial result

• Revenues for the third quarter were USD 10.9 billion, up 5% over the previous year. The NIKE Brand Digital business grew by 22%, thanks to double-digit growth in North America, APLA, and EMEA, somewhat offset by decreases in Greater China. The continuous normalization of traffic in owned physical retail also contributed to NIKE’s direct success.
• Margin expansion in the NIKE Direct business, driven by lower markdowns, changes in foreign currency exchange rates, and a higher mix of full-price sales, increased 100 basis points to 46.6 percent, partially offset by lower full-price product margins, largely due to increased freight and logistics costs.
• Demand generation costs increased by 20% to USD 854 million, owing to the normalization of expenditure against brand campaigns and sustained investments in digital marketing to meet increased digital demand. Operating expenditures grew 11% to USD 2.6 billion, owing to higher strategic technology investments and wage-related expenses.
• Net income fell 4% to USD 1.4 billion, while diluted earnings per share fell to USD 0.87. Due to a shift in our earnings mix, the implications of stock-based compensation, and newly enacted US tax legislation, the company's effective tax rate for the quarter was 16.4 percent, compared to 11.4 percent for the same time last year.

Balance sheet and cash position

• NIKE, Inc.'s Inventories were USD 7.7 billion, up 15% year over year, owing to higher in-transit inventories due to prolonged lead times from ongoing supply chain disruptions, which were somewhat offset by robust consumer demand throughout the quarter.
• Strong free cash flow offset by share repurchases and cash dividends, resulting in USD 13.5 billion in cash and equivalents and short-term investments, up to USD 939 million from the previous year.

Other key takeaways from Q3 FY22 results

• NIKE has a proven track record of investing to drive growth and continually improve shareholder returns, including a 20-year streak of rising dividend distributions. NIKE returned nearly USD 484 million in dividends to stockholders in the third quarter, up 12 percent from the previous year.
• USD 1.2 billion in share repurchases during the quarter, reflecting the retirement of 8.1 million shares as part of the four-year, USD 15 billion programs approved by the Board of Directors in June 2018. As of February 28, 2022, the program had repurchased 68.9 million shares at a total cost of about USD 7.6 billion.

Key Risks:

• Currency Foreign Exchange Risks - Because the brand is worldwide, shifting foreign exchange rates damages it. NIKE's financial results are reported in US dollars. Because the US dollar is volatile versus other financial currencies, this has an impact on its income.
• Counterfeit Items Risk- NIKE's income and reputation are both affected by counterfeit products. Because the corporation operates abroad, the possibility of counterfeit items has increased. Several merchandisers and shops sell fake NIKE goods at a lesser price. The low-cost items are made of low-quality materials, yet they nonetheless have the NIKE logo. Customers may believe that NIKE has started creating low-quality items, tarnishing the brand's reputation.

Outlook

NIKE expects revenue to climb in the mid-single digits this year compared to last year. In the fourth quarter, the business forecasts a revenue reduction in North America owing to year-over-year comparisons, but another quarter of sequential growth in Greater China as the company closely monitors the operational impact of recent COVID lockdowns. As robust consumer demand continues to generate high levels of full-price realization, low markdown rates, and minimal customer returns, the business forecasts gross margin to grow by at least 150 basis points year over year. Increased product costs, principally owing to higher macro input costs, supply chain expenses, and strategic initiatives to expedite product delivery in North America, are somewhat offsetting the benefits of strategic pricing expected in Q4. Despite the recent rise of the US dollar, NIKE expects foreign exchange to provide a 55-basis point tailwind this year compared to last.

Valuation Methodology: Price/Earnings Per Share Multiple - based Relative Valuation

Source: REFINITIV, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's FY1 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 past six months, NIKE's share price has corrected by 37.72%. The stock is currently leaning towards the lower end of its 52-week range of USD 103.46 to USD 179.10. We have valued the stock using the Price/ Earnings Per Share multiple-based relative valuation method and arrived at a target price of USD 125.20. We believe that the company is trading at a premium from its peer's average considering strong fundamentals, competitive advantages in profitability and cash position, and a decent dividend yield that gives bullish estimates for the upcoming near future.

Considering the strong fundamentals, robust top-line results, associated risks, positive outlook, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 107.34, as of June 17, 2022.

One Year Technical Chart, as of June 17, 2022. Data Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary:

*Entry Price as of June 17, 2022.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Note 3: The report publishing date is as per the Pacific Time Zone.