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Nike Company Valuation Written Report

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Table Of Contents I.

Executive Summary……………………………………………………………………...3

II.

Industry/Firm Description…………………………………………………………...….5 Fitness and Sports Apparel Industry Overview…………………………………...5 Nike Market and Competitors Overview……………………………………..........5 SWOT Analysis…………………………………………………………………….6 Key Value Drivers……...………………………………………………………….9

III.

Financial Statement and Trend Analysis……………………………………………...11 Nike Trend Analysis ……………………………………………………………..12 Competitor Benchmark Analysis: Adidas………………………………………..15 Dupont Analysis………………………………………………………………….19

IV.

Analysis of Firm Riskiness……………………………………………………………..20 Analysis…………………………………………………………………………..21 Beta and Industry………………………………………………………………...23

V.

Firm Valuation………………………………………………………………………….23 Dividend Discount Model……………………………………………………24-25 Valuation Using Multiples…………………………………………………….26 Calculation of Intrinsic Stock Price…………………………………………..26

VI.

Conclusion and Recommendations……………………………………………..26-27

VII.

Appendix…………………………………………………………………………..28-31

VIII.

References…………………………………………………………………………….32

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I. Executive Summary NIKE Inc. is the largest American corporation that designs, manufactures, and sells athletic goods such as footwear, apparel, accessories, equipment, etc. The company’s headquarters is located in Beaverton, Oregon, Portland1. NIKE Inc. became popular and has gained worldwide popularity because of their products, quality, and the iconic logo known as the “Swoosh”. NIKE’s target market2 are people from 13-50 years old males and females who are into sports and fitness apparel. Customers love Nike for its performance quality and design. Its product breadth is large and allows for customers to purchase all they need in one place. Nike also has a fantastic marketing strategy3. They made collaborations and sponsorships with famous sports legends, artists a key marketing strategy. Their sales continue to increase as their sales are influenced by these contracts. Nike’s retail locations in over 160 countries allow it to keep global brand recognition. Consumers are able to find Nike products despite their location. Nike is also able to price their products at whatever they want as their manufacturing costs are low. They are able to sell to customers who want a basic product at a reasonable price to sneakerheads who want to collect designer shoes. In 2020, NIKE generated about $34 billions in its fiscal year4. NIKE is the most valuable brand in the sport apparel market. They are ranked 89th in 2018 Fortune 500 by the most

1 “Nike Inc.” Wikipedia. Web. 25 Mar. 2020

2 “Nike’s Target Market: Everything You Need To Know”. Market Realist. Web. 25 Mar. 2020

3 “Just Do It: What We Can Learn From Nike’s 39B Marketing Strategies”. Single Grain. Web. 25 Mar. 2020

4 “Nike Inc”. Wikipedia. Web. 25 Mar. 2020

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revenue. NIKE current market stock price is $135.42. Over the past 5 years, NIKE stock price 5

has been increasing rapidly. Beside Nike brand, they also purchased other brands such as

Converse, Hurley, and Jordan which are also very famous for its iconic designs and popularity. NIKE's expected growth rate to be an estimate of 29% 6 according to Yahoo Finance due to its continuing brand image. We expected there will be a small decrease in revenue due to the pandemic, which makes many people lose their jobs, therefore they won’t be purchasing new products as often as they did before the pandemic. Overall, NIKE Inc.’s financial health is good and will continue to grow.

5 “Nike Inc.” Yahoo! Finance Web. 25 Mar. 2020

6 “Nike Inc” Yahoo! Finance Web. 27 Mar. 2020

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II. Industry/ Firm Analysis

Fitness and Sports Apparel Industry Overview Nike Inc. and companies alike are a part of the fitness and sports apparel industry. The fitness and sports apparel industry include companies that focus on creating, manufacturing, and selling fitness and sports apparel for both men and women. Fitness apparel ranges from shoes, clothing, sports equipment and accessories. The sports apparel segment has products like shoes and clothing designed toward the physical requirements of the sports. In 2018, the overall revenue of the sports and fitness apparel industry amounted to $180.96 billion7. Men account for 51% of the industry revenue while women account for 49% of the industry revenue8. Nike Market and Competitors Overview Nike Inc. sells a wide range of athletic and sports apparel ranging across various product categories like shoes, clothing, equipment and other accessories. Its main competitors within the industry include Adidas and Under Armour9. Its top competitors are selected by the breadth of products and sales revenue. Nike is the leader in sales revenue among its competitors followed by Adidas and Under Armour. The competitors in this industry try to gain competitive advantage over each other through providing the highest quality products, brand endorsements, and increasing share in emerging global markets, and sporting events. Nike is highly popular in North America as it 7 “Sports Apparel Market Forecast, Trend Analysis & Competition Tracking – Global Market Insights 2017 to 2022.” Fact.MR

8 Guyduy, Marissa. “Men's Activewear Sales Growth Continues to Outpace Women's in the U.S.” The NPD Group, 9 Mar. 2020 9 Palmer, Barclay. “Adidas vs. Nike vs. Under Armour: Which Is a Better Investment for 2021?” Investopedia, Investopedia, 15 Nov. 2020

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began with focusing on quality American sports apparel and became a household brand name with the help of celebrity endorsements and sporting events. Nike is globally popular, but its most significant market share is in North America as the brand highlights American sports9. Adidas holds a large share of the market especially in european countries however Adidas' popularity in the United States can be attributed to the fact that it trades as a American Depository Receipt (ADR)9. It allows Adidas to gain U.S. capital and investors without these investors having to pay expenses tied to listings on the U.S. stock exchange. Under Armour is the youngest of the publicly traded companies as it made the transition to public in 20059. It’s profits and stocks have continued to steadily rise, but they have not paid dividends back to their shareholders10. Under Armour is so new that it is funneling its net profits back into the business instead of paying off its loans to current shareholders.

Revenue 2019 (billions USD)

Nike

Adidas

Under Armour

39.111

11.412

5.313

SWOT Analysis (see Fig. 1) Strengths: Nike Inc. has a wide variety of strengths that lead it to be the largest fitness and sports retailer among its competitors. Nike is a household name being a core string brand easily recognizable with its classic Nike swoosh logo. Nike’s global brand recognition is one of the 10 Sharrow, Ryan. “Under Armour 'No Dividends in the Foreseeable Future'.” Bizjournals.com, 25 Feb. 2015

11 “NIKE, Inc. Reports Fiscal 2019 Fourth Quarter and Full Year Results.” Nike News, 27 June 2019

12 “Adidas Annual Report.” Adidas, 2020

13 Plank, Kevin A., and Patrik Frisk. “Under Armour About UA.” UA Newsroom, 14 Apr. 2020

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reasons people continue to purchase it’s products year after year14. The company sells a wide variety of fitness and sports apparel for sports like football, baseball, golf, volleyball, tennis, cheerleading. Not only does it sell footwear, but it also sells apparel, equipment, accessories and more15. This makes it easily accessible for customers to walk into a store and get everything that they need in one trip. In addition to their diverse variety of products, they have many successful and recognizable sub-brands underneath Nike like Converse, Air Jordan, Air Max, and more15. Nike has a large number of stores sold globally that allow it to be bought, sold, and recognized across the world15. One of the main strengths that pulls customers into Nike’s stores is its marketing campaigns. The company frequently uses brand endorsement and sponsorship deals with famous celebrities with elite sports performance15. Customers trust their favorite celebrities' endorsements with varying products and purchase them because their name is attached. Lastly, Nike has a low product cost that allows them to generate a larger net profit14. A large portion of Nike's products are manufactured in low labor cost countries like in South East Asia where labor and material costs are outstandingly low14. Since product costs are so low, it allows Nike to price their top quality products at a price that is affordable to consumers. Weaknesses: While Nike Inc. has many strengths, there are few main areas of weaknesses that leave the company vulnerable. Nike is dependent on their sales within the United States. Nearly 40% of Nike’s revenue came from within the U.S. in 201814. It’s reliance on the U.S. is dangerous as if policies, taxes, and laws were to change it could significantly reduce the companies overall revenue. Its outsourced manufacturing plays a critical role in lowering Nike’s brand image15. As Nike outsources their manufacturing to places where labor and manufacturing costs are low, it 14 Bush, Thomas. “SWOT Analysis of Nike.” PESTLE Analysis, 16 Apr. 2019 15 David, Joe. “SWOT Analysis of Nike.” Howandwhat, 30 Apr. 2019

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has been accused of contracting in countries where labor laws frequently broke. These manufacturing plants are referred to as Nike Sweatshops. These sweatshops being unearthed reduces Nike’s brand image in a time where corporate responsibility is important to mass consumers16. Another weakness facing Nike is that it does not have diversification in its apparel industry. Its diversity only lies in its footwear17. They are missing out on a large portion of revenue that come from industries like altheisure and fashionable athletic gear. Lastly, while their brand endorsement deals are critical to the companies success, they cost Nike a significant amount of their revenue. In 2018 Nike spent nearly a third of its sales on marketing and endorsement deals amounting to about $11.5 billion dollars18. Opportunities: There are a few opportunities that Nike can make to increase their net profit. As Nike is dependent on its sales with the U.S. market, they can reduce this weakness by expanding their stores and marketing to emerging markets. By focusing on increasing their sales in growing markets like South East Asia, Brazil, India, and China, they can increase global market share18. Nike also has an opportunity to expand their product variety in their apparel. Athleisure wear and fashionable workout apparel are popular industries at the moment. Nike can tap into this market by creating and selling to people within these industries and see an increase in sales. Lastly, Nike has the chance to increase their brand image by changing how they manufacture in countries with low labor and manufacturing costs19. They can put in place an increase in hourly wage and 16 New Idea. “Nike Sweatshops: The Truth About the Nike Factory Scandal.” New Idea, 11 Dec. 2019

17 Bhasin, Hitesh. “SWOT Analysis of Nike - In Depth Nike SWOT Analysis.” Marketing91, 31 Mar. 2019

18 David, Joe. “SWOT Analysis of Nike.” Howandwhat, 30 Apr. 2019

19 Bush, Thomas. “SWOT Analysis of Nike.” PESTLE Analysis, 16 Apr. 2019

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legal checks within their existing manufacturing plants. In doing this, they can penetrate the market of consumers who purchase from ethically and environmentally conscious brands. Threats: The threats facing Nike are significant and could significantly reduce the amount of net profit the company makes each year. Nike currently pays a certain amount of taxes and trades within the U.S. and the many countries it sells to. Each of them have their own trades and tax laws. This area of manufacturing and selling is incredibly unstable and is subject to fluctuations at any point. As Nike is a global brand, these fluctuations can come from any country at any time, it could mean reductions in selling and sales20. Nike also faces high competition among its competitors. Companies like Adidas and Under Armour continue to grow their market shares. Its competitors are consistently trying to produce the best products that appeal to its customers that threaten Nike’s market share21. Lastly, counterfeit Nike products are a major problem. They are available in nearly every country in person and online. Nike needs to figure out a way to combat counterfeit products such as taking legal action19. Their brand image is on the line as the counterfeit goods are low-quality and cheap products. Key Value Drivers There are several key value drivers that make Nike Inc. the #1 leading fitness and sports apparel brand across the globe. A significant value driver is Nike’s design and top quality performance of its products like its broad sports footwear lines. They provide top quality products for a range of sports and fitness that create loyal consumers22. It also had many popular 20 David, Joe. “SWOT Analysis of Nike.” Howandwhat, 30 Apr. 2019

21 Bhasin, Hitesh. “SWOT Analysis of Nike - In Depth Nike SWOT Analysis.” Marketing91, 31 Mar. 2019

22 Hazard, Taylor. “Why Buy Nike+?” Nike, Inc., 4 Dec. 2014

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sub-brands that continue to expand Nike’s product image. Nike is a one shop stop that contains nearly everything a fitness or athlete needs ranging from footwear, apparel, and accessories. Nike is also highly successful because of its incredible marketing strategy. Nike contracts brand endorsements and makes commercials with famous sports athletes sponsoring their products as a way to attract consumers. The consumers within the industry are more willing to purchase when their favorite athlete is endorsing a product. The high marketing costs are worth it as the sales revenues stay high23. Its marketing has allowed Nike to become a household name recognizable by its classic Nike “Swoosh”. Another key value driver is Nike’s global retail locations. As of March, 2019, Nike has 1,100 retail stores that are sold in more than 160 countries worldwide24. Customers are not limited to a certain continent or country when purchasing nike. This allows for Nike’s customers to continue to purchase despite traveling or moving. Nike’s brand status is continued across the globe because of its retail stores across so many countries. The final key value driver is its low-cost production that allows Nike to price their products at the price they want. Having their products manufactured overseas in low labor cost countries means that their costs stay low. As their costs stay low Nike has the ability to choose their product price25. Pricing ranges depending on the quality of the product. It appeals to customers who want a reasonable price for products and sneakerheads who are willing to pay thousands for a collector design. They are able to reach a multitude of different consumers.

23 Keller, Chris R. “How Nike Became Successful and the Leader in the Sports Product Market.” Nike Strategy How Nike Became Successful and the Leader in the Sports Product Market 24 David, Joe. “SWOT Analysis of Nike.” Howandwhat, 30 Apr. 2019

25 Bush, Thomas. “SWOT Analysis of Nike.” PESTLE Analysis, 16 Apr. 2019

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III. Financial Statement and Trend Analysis

Nike, Inc.27

Adidas AG26

Liquidity Current Ratio

2020 2.48

2019 2.1

2018 2.51

2017 2.93

2019 1.25

2018 1.44

2017 1.37

Quick Ratio

1.39

1.14

1.45

1.8

.78

.93

.79

2020

2019

2018

2017

2019

2018

2017

2.87

3.85

3.89

3.77

2.7777

3.063

2.8478

127

95

94

97

131

119

128

13.61

9.16

10.41

9.34

8.6944

8.8869

8.8927

27

40

35

39

41

41

41

1.19

1.65

1.62

1.48

1.1431

1.4037

1.4611

2020

2019

2018

2017

2019

2018

2017

31%

15%

17%

16%

66%

59%

56%

20.12

37.65

35.88

57.81

-26.08

236.8

-44.04

Profitability

2020

2019

2018

2017

2019

2018

2017

Profit Margin

6.79%

10.30%

5.31%

12.34%

8.36%

7.77%

5.17%

Return on Asset Return on

8.10% 31.52%

16.99% 44.57%

8.58% 19.70%

18.23% 34.17%

9.27% 27.18%

10.95% 26.86%

9.32% 21.04%

Asset Management Inventory Turnover Day’s Sale in Inventory Receivable Turnover Days Sales Outstanding Total asset turnover Debt Management Total Debt Ratio Times Interest Earned 27

26 “Adidas AG Financial Ratio for Analysis 2005-2020”. Macrotrends. Web. 19 Oct. 2020

27 “ Nike Inc. (NYSE:NIKE) | Valuation Ratios”. Stock Analysis. Web. 2020...