We have maintained our long-term Neutral recommendation on Nike Inc. (NKE). Nike is the industry leader by a stretch in the U.S. footwear and athletic apparel industry. Furthermore, a strong portfolio of globally recognized brands, Cole Haan, Converse, Chuck Taylor, Hurley and Umbro provide a competitive advantage to the company and bolsters its dominant position in the market.
Moreover, during the quarter under review, the company’s revenue grew by 18%, primarily driven by growth in every region, where it operates except the Western European region. Besides, there is a rise of 16% in worldwide future orders for Nike-branded footwear and apparel, scheduled for delivery from September 2011 through January 2011. This indicates that the company is rapidly gaining market share.
Further, Nike raised its fiscal year 2015 revenue target in between $28.0 and $30.0 billion from $27.0 billion forecasted earlier. In an effort to achieve its long-term sales target, Nike plans to aggressively expand operations in the emerging markets while focusing on non-Nike brands.
Moreover, the company also intends to boost its direct-to-consumer division by opening 250-300 Nike-branded stores over the next five years. Consequently, this offers a strong upside potential for the company.
Additionally, the company has a strong balance sheet with cash and cash equivalents of $1,608.0 million for the quarter ended August 31, 2011 and long-term debt of only $238.0 million, or roughly 2.3% of total capitalization, which offers it the financial flexibility to drive future growth.
However, the company’s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn, the company’s growth and profitability.
In addition, the company’s footwear products are entirely manufactured outside the U.S. in the developing countries, such as China, Vietnam, Indonesia and Thailand. Accordingly, the company is exposed to political, social and economic risks associated with operations in these countries.
Above all, Nike faces intense competition in both domestic and international markets from local players as well as established players, such as Adidas AG (ADDYY) (including Reebok). All these companies are primarily in athletic wear and want to grab market share in active wear or lifestyle consumer products.
Moreover, the athletic footwear and apparel industry is characterized by rapidly changing customer preferences and technology, which requires continuous innovation in order to stay ahead of trends and competitors.
