Peter Ball, 18 March 2019

The Nike brand is one of the most recognisable and valuable brands in the world

Its style and innovation setting the trends for performance in both footwear and apparel. With total revenues of US$34.4bn, Nike operates three primary segments comprising 95% of sales:

  • Footwear (61% of revenue)
  • Apparel (29%)
  • Equipment (4%)

This includes revenue from the Nike brand, Jordan brand and Hurley. The remaining 5% of revenues are generated through the company’s other brand Converse.

 Nike pie chart

Just as impressive as its products is Nike’s financial performance, which has been very strong over the last five years.

Nike has grown revenue by 7.5% on an annualised basis to US$36.4bn.

Regionally, emerging markets, particularly China, have been an important driver of growth, driven by a combination of favourable demographics (young population), rising disposable incomes and strong adoption of social media and online retail.

Nike’s balance sheet is a point of strength, with a net cash position of US$560m. Nike’s strong balance sheet and cash flow generation means increased flexibility at returning cash to shareholders through dividends and share repurchases. Nike has grown its total distribution to shareholders by 18.5% per annum over the past five years. Management remains focused on increasing returns to shareholders; the dividend is expected to grow in line with earnings (mid-teen growth) and excess cash may be used to buy back shares.

Nike bar chart

Spanning more than 30 years, innovation has been key to Nike’s competitive advantage and long-term success.

This extends to much more than its products, with management actively taking steps to transform the athletic marketplace. Their primary aim is to shift away from undifferentiated retailers and focus more on digital retail channels.

Central to these initiatives is the Nike Consumer Experience, which includes Nike’s own direct to consumer network, as well as a vastly streamlined list of wholesale distribution partners. The ultimate goal is for Nike to focus on selling more products where it can control the consumer experience. Combined with its goal of doubling the speed it takes to get its products to market, the company can be more responsive to changes in consumer demands and trends.

Nike currently works with over 30,000 retailers globally but management plans to focus on its relationship with just 40 ‘differentiated’ retailers that can provide a special branded space for Nike products. This doesn’t mean that Nike will stop selling to other retailers but management do believe that undifferentiated, mediocre retail will struggle to survive in the future.

Nike has already seen significant success from this strategy. Over the past five years revenue growth from its direct retail channel has grown by 19%, compared to just 4% for its wholesale channel and is now a US$10bn business for the company.

Nike line graph

We believe Nike is an attractive long-term investment opportunity for investors looking to gain exposure to the consumer discretionary sector

This is thanks to its strong brand and enviable market position. While we expect heightened volatility through 2019, Nike’s financial performance has historically been very resilient through very volatile economic conditions. We attribute this to Nike’s relentless focus on innovation, which has allowed the company to stay ahead of its peers. Nike’s rock-solid balance sheet, strong free cash flow generation and excess capital that can be returned to shareholders are also very attractive attributes to have in the current environment.