February 5, 2023

Nike Stock: Yes, I Am Buying For The Long-Term A True… – Seeking Alpha

Nike store logo, London, UK

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Introduction

Let’s start the other way around this time by looking at a chart. We are talking about Nike ( NYSE: NKE ) and we are looking at chart where we see the stock price of the past 30 years. In orange, we see another metric: return on capital employed. Now, while the stock price has been skyrocketing, the ROCE has been stuck within a range usually between 20% to 30%.

Some may already understand what my point might be. But let me ask, in any case, the question that arises: how can a rather flat line drive upwards so strongly the particular price?

Chart
Data by YCharts

The answer is simple: compounding. Nike is one of the best compounders in the world and it has been able to a long period of time to employ its capital at a high rate associated with return. Year over year this leads Nike to having a greater and greater return on its investments which is then employed once again in the business to foster its growth and obtain even bigger gains. A 20% ROCE now generates a lot more money compared to the same ROCE in 1999.

This is one of the main aspects that has led me to start researching Nike pas cher up to the point this became the part of my portfolio. Now, I am currently considering to build a bigger position taking advantage associated with the recent drop in price and the possibility that this year’s bear market might yet drive stocks down a bit.

The company

Nike is known worldwide and it currently is the 10th most valuable brand in the worlds, with an estimated value of $50. 29 billion.

Its revenues come from highly appreciated products that fall under three categories: footwear, equipment plus apparel.

As seen below, the company has a significant chunk of its income in North America (41%) with EMEA and Greater China coming in second plus third place respectively (28% and 17%). Finally the revenues are pretty much split between wholesale and Nike direct.

NIKE stock, NKE

NIKE 2022 Annual Report

In the shareholder letter that introduced the particular 2022 annual report, Nike pas cher published these highlights in order to give investors a sense of what the company has been up to in recent years. Starting from revenue performance, all of us see a 28% increase from $36. 38 billion dollars to $46. 71 billion within the fiscal year concluded on May 31st 2022. This makes me think that, simply by 2024 at the latest, the company should break the fifty dollars billion income barrier. However , while revenue increased by 28%, the EPS have had a huge surge and increased simply by 220% within 5 years.

NIKE results, NIKE stock, Invest in Nike

NIKE 2022 Shareholder Letter

The two charts below show something similar to what we saw at the beginning of the article: a higher come back on invested capital which is able to push upwards the share at the faster pace compared to SPY500.

Nike’s sales structure

Nike ends its fiscal 12 months in May. This particular is why we are presently waiting for the Q2 earnings which account for the particular months associated with September through November. Usually, revenues in the first plus fourth financial quarters slightly exceed those in the second and third fiscal quarters. Within fact, Q1 and Q4 for Nike are inside the spring as well as the summer of the northern hemisphere, when sporting plus outdoor activities increase.

The particular company’s product offerings are designed for men, women and kids. Nike also designs items specifically for the particular Jordan Brand and Converse. Within the U. S., exactly where Nike and Converse product sales account, as we have seen, for 40% of total profits, the organization operates 344 retail stores.

Outside of the U. S., where Nike pas cher grosses 61% of its total earnings, the business has 702 retail stores. It is also important in order to know that Nike doesn’t sell its products only through the stores but also via many other retailers plus, most importantly, by means of its online e-commerce.

Nike isn’t dependent on any kind of particular customer, as its three largest customers outside of the United States accounted for approximately 14% associated with total non-U. S. sales. In addition, the company disclosed that no customer paid for 10% or a lot more its income during the fiscal yr 2022.

The sports and activewear industry

Before we all take a look at Nike’s results, it is helpful to shed some light on the market Nike addresses. First of all, the particular activewear industry is being fueled by consumers who seek gear and equipment for their physical activities. This is a growing trend, as consumers become more and more careful about a healthy lifestyle.

The particular global apparel and shoes market is estimated to have reached a value associated with $1. 8 trillion in 2021. The market is also projected to grow at the CAGR of 6. 90% between 2023 and 2028. This means that simply by 2028 the market should be worth around $2. 9 trillion.

apparel market

Statista. com

The market is expanding not only thanks to the particular expansion associated with e-commerce channels but , most importantly, due to a change in people’s way of dressing that is seeing a trend towards the so-called “casualization of fashion”. For example, it is a lot more and more common, especially in young working environments or inside tech plus software companies, to go to work without the true dressing-code.

Now, according to statista. com, Nike pas cher holds 27. 4% from the market. In addition , 64% of U. H. millennials and Generation Y reported that they bought athletic shoes in 2021. This will be further proof a rise associated with streetwear style that makes younger generations look at activewear as part of their personal fashion style.

In the last 12 years , Nike has always been the most favorite clothing brand among 31% of American teens. Just to get an idea of how strong Nike pas cher is, the second favorite brand is currently Lululemon ( LULU ) with just 6%. Adidas ( OTCQX: ADDYY ) ranks 7th with 3% of American teens picking it because their favorite brand.

There is a trend which is clearly bonding sportswear to fashion and this is why women’s sportswear generated $35. 57 billion within 2021 more than men’s plus children’s sportswear combined. Traditionally, women spend more on style and this particular huge spending amount proves that sportswear is attracting more and more attention (and money) from the consumer.

It is simply no hard guess to know that the particular U. T. is the biggest player associated with the business. Here, by 2025 the activewear market should reach a value of more than $95 billion. If we look in the graph below, we see that will within the Oughout. S., Nike was the top earner, leaving competitors such as Adidas and Puma way behind. Moreover, Nike is growing at a faster pace in comparison to the particular other two, thanks to the fact that it really is more and more perceived as a true fashion brand name that is somewhat of a status symbol plus can thus understood as part of the luxury goods people want.

NKE stock, Nike versus competitors

Statista. com

What I think is important to understand is that Nike pas cher has become a brand that most people want to wear and, given this strong demand, it can price its merchandise appropriately with margins that all of us see in luxury businesses.

Accordingly, the multiples Nike trades at are those of this latter industry.

Financials

Let’s look at some associated with the majority of recent results. In financial 2022, the particular company’s revenue was up 5% YoY at $46. 71 billion dollars with a gross margin of 46% that totaled $21. 48 billion. The particular margin increased 120 basis points YoY, that is quite interesting given the fact that the past season has seen many businesses feel perimeter pressure due to fuel costs and, a lot more in general, inflation. Net income, at the end, increased 6% YoY reaching $6. 05 billion that translated into $3. 75 EPS versus $3. 56 the prior year (a 5% increase).

Speaking of margins, in the last yearly shareholder meeting, Matt Friend, Nike’s CFO, explained how the company, since the particular pandemic started, experienced the margin expansion, explaining that will a key driver was your digital business where customers can purchase Nike’s products in direct connection with Nike pas cher itself:

Over the last 2 years, our gross margins have expanded by over 260 foundation points in order to 46%. And as you’ve heard earlier, our own financial performance this year was led by solid double-digit development in our own digital company now representing 24% share of our overall brand revenue. And that compares to 10% share within fiscal 2019. One of Nike’s longstanding competitive advantages is the deep relationships that we have with our consumers. And we know that the consumer wants to have a direct connection with Nike.

Nike’s balance sheet is something I furthermore appreciate as its cash and money equivalents is almost equal to its long-term debt ($8. 57 billion and $8. 92 billion dollars respectively). This means that will the company is not levered along with a net debt position. In inclusion, its net debt/EBITDA ratio is around 0. 15 which tells us exactly how financially strong this company is.

The things i like the bit less is some thing I find in the consolidated statements associated with cash flows. Talking about the free cash flow, the company’s free cash flow has already been trending slowly upwards, yet not while consistently like other metrics.

Nike free cash flow, Nike stock, NKE stock

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Nevertheless , what I find a bit concerning from a shareholder point of view may be the exponential increase in stock-based compensation, which, as we can see from your chart below, offers almost doubled from 2019 until now, moving from $325 million in order to $638 million in fiscal 2022. This is right now equivalent to 22% associated with the total free income, which, in my opinion is a bit too much.

NKE stock-based compensation

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We also have in order to consider Nike’s share repurchase program. In 2018, it approved a $15 billion share repurchase program that was finished in August 2022. Within June 2022, Nike authorized a new four-year, $18 billion program to repurchase shares of its class B common stock.

However , while in fiscal 2022, the organization repurchased a little more than $4 billion dollars of its personal stock, this also issued new shares for a good amount that is equal to $1. 15 billion, partially offsetting its share repurchase program. As the company explains in the annual report:

The Stock Incentive Plan provides for the issuance of up to 798 mil previously unissued shares associated with Class B Common Stock in link with equity awards granted under the particular Stock Motivation Plan. The particular Stock Incentive Plan authorizes the grant of non-statutory stock options, incentive commodity, stock appreciation rights, and share awards, including restricted stock and restricted stock units.

Overall, the organization is still generating the lot of free money flow and it is reducing its share count. However, I am watching closely the organization from this point associated with view because, though sometimes forgotten, it can have a big impact on total returns since the issuance of new stocks and stock-based compensation possess a diluting effect for the particular other shareholders.

But one of the things I like the many about Nike is that it is able to achieve a very high ROIC, which usually, at the end of financial 2022 reached 46. 5%, down 230 basis points from fiscal 2021. However, though this decreased, we are even now before a very high return on the particular invested funds.

Here is how the company calculates its ROIC, which, as most readers understand, is a non-GAAP financial measure. The company uses the formula NOPAT/Total spent capital.

Nike stock, NIKE ROIC

NIKE 2022 Annual Report

I must acknowledge that this metric we possess just observed enticed me personally strongly to buy into the stock.

Problems of the particular last quarterly report

When Nike published its Q1 2023 outcomes investors were concerned regarding two main issues. The particular first one was already known: China. In fact, although the company continues to be rated the number one cool and the number 1 favorite brand in the country, Nike pas cher has noticed its revenues decrease in 2022, as shown below.

NKE stock

NIKE 2022 Annual Statement

In the first quarter 2023, China dropped a further 16% YoY. Nevertheless, it is clear why it did so: Covid-19 restrictions. Therefore , We strongly believe that many investors are usually underestimating the impact that will Nike will see on the results as soon as these limitations ease upward, as they have began. We may actually see a couple of quarters, if not really a whole calendar year, of what is often called revenge-spending.

The other issue was high inventory in The united states which caused the general gross margin to shrink by 220 basis factors to 44. 3%. As the business wrote in its report: “the overall reduction in margins was primarily driven by United states, which took measures in order to liquidate excess inventory through NIKE Direct markdowns and wholesale marketplace actions”.

While this may be a headwind in the particular short term, I would like to explain the reason why I am not very concerned. First of all, high inventories have got been triggered all more than the places by supply chain bottlenecks. It is usually not caused by mismanagement. Furthermore, demand is so strong with regard to Nike’s items that through markdowns plus discounts the business can lower its stock while selling them still at very good margins (44. 3% instead of 46. 5%). It is definitely not something that chopped gross margin in half.

Valuation

A few look from three standard metrics that are often used in order to get a quick understanding associated with how cheap or expensive a stock is. When considering the PE ratio (purple line), we all see that we have been in the lower part of a range that will can stretch out to 40 and with times even over 60. The EB/EBITDA ratio (orange line), though it has been trending slowly upwards, is now upon a dip and this is back to is pre-pandemic levels. When we appear at the price to free cash flow ratio (blue line), we see that the Nike has become more expensive over time, but it is now back to the higher part of the pre-pandemic range. Meanwhile, Nike provides become an even stronger brand name. Overall, I think we are in a buying territory.

Chart
Information by YCharts

If I check also with my simple discounted cash flow model, I achieve a similar conclusion, we are on the beginning of the buy zone. If I actually plug in a 6% growth for next year, then decreases over the next decade by 0. 25% every year (it is my way to factor within any possible recession) and I keep the EBITDA perimeter at 17% and increase taxes at 11%, we can see that, based on three possible price/free income exit multiples, we are usually before the stock which has more upside than downside.

Nike valuation

Author, with data from SA

If I plug-in more aggressive price/free cash flow many, which are more in line with what Nike pas cher usually will be granted, we note that the particular upside becomes quite interesting as all of us have a bull case scenario that could even deliver something a lot more than 2x.

NKEstock, NKE valuation

Author, along with data through SA

In any case, I believe that regarding a stock like Nike it can be important that investors hold it for a long period of time period. It is the power of compounding that rewards greatly traders. But compounding needs time and not always it really is immediately understood simply by investors. Inside this shaky and volatile market, I believe Nike is among the best plus safest picks I am buying intended for the extensive.

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