Nike Inc. NEUTRAL ZACKS CONSENSUS ESTIMATES (NKE-NYSE)

Transcription

1 December 31, 2014 Nike Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 12/31/2014 Current Price (12/30/14) $96.88 Target Price $ Week High $ Week Low $70.51 One-Year Return (%) Beta 0.80 Average Daily Volume (sh) 3,863,399 Shares Outstanding (mil) 862 Market Capitalization ($mil) $83,463 Short Interest Ratio (days) 2.61 Institutional Ownership (%) 65 Insider Ownership (%) 17 Annual Cash Dividend $1.12 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 10.1 Earnings Per Share (%) 12.1 Dividend (%) 15.3 using TTM EPS 28.7 using 2015 Estimate 27.1 using 2016 Estimate 23.5 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page (NKE-NYSE) SUMMARY We remain impressed with Nike s strong growth and product innovation that have facilitated consistent positive earnings surprises for 10 straight quarters, alongside strong revenue growth. The company also boasts a robust financial status, as is evident from its recent dividend hike. Nike aims to increase its global reach and market share by expanding its operations in the emerging markets, while focusing on direct-to-consumer business and other brands. However, we remain slightly uncertain about the company s future owing to unfavorable currency fluctuations coupled with the impact of recent currency devaluation in the developing markets. Further, soft future orders and macroeconomic headwinds may undermine Nike s future prospects. Hence, we downgraded our recommendation on the stock to Neutral. Risk Level * Below Avg., Type of Stock Large-Growth Industry Shoes&Rel Apprl Zacks Industry Rank * 117 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Aug) (Nov) (Feb) (May) (May) ,669 A 5,955 A 6,187 A 6,697 A 25,313 A ,971 A 6,431 A 6,972 A 7,425 A 27,799 A ,982 A 7,380 A 7,672 E 7,829 E 30,863 E ,606 E 8,058 E 33,595 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Aug) (Nov) (Feb) (May) (May) 2013 $0.63 A $0.57 A $0.73 A $0.76 A $2.69 A 2014 $0.86 A $0.59 A $0.76 A $0.78 A $2.97 A 2015 $1.09 A $0.74 A $0.85 E $0.90 E $3.58 E 2016 $1.21 E $0.87 E $4.12 E Projected EPS Growth - Next 5 Years % 14 (Note: Qtly. fig. may not add up to the annual fig. due to rounding off) 2014 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Headquartered in Beaverton, OR, NIKE Inc. was instituted in The company is engaged in the business of designing, developing and marketing of footwear, apparel, and equipment and accessory products for men, women and children worldwide. With the help of a strong brand portfolio, including Nike Pro, Nike Golf, Nike+ and Air Jordan, it offers premium, well-designed and high quality products in line with the latest customer trends. Nike Inc. is the global leader in athletic footwear, apparel, equipment and sports-related accessories with operations in over 160 countries. With the help of its retail stores in the U.S. and abroad, Nike Inc. sells its products to more than 23,000 retail accounts in the U.S. and more than 24,000 retail accounts outside the U.S. to reach a wide array of customers. Nike s swoosh logo and just do it tagline are widely recognized across the world, while its association with celebrity sportspersons, such as Michael Jordon and Roger Federer as well as top professional and college teams ensure a strong brand recall in the key U.S., U.K., Japanese and Chinese markets. Nike currently reports its operating results under 2 segments, namely NIKE Brand segment and Converse. NIKE Brand is divided into six divisions, primarily on a geographical basis: North America (contributed 46% of total NIKE Brand sale in second-quarter fiscal 2015), Western Europe (19%), Central & Eastern Europe (5%), Greater China (11%), Japan (3%) and Emerging Markets (16%). NIKE Brand 2Q15 Revenue Breakup Nike 2Q15 Segment Revenue 16% North America 6% 3% Western Europe 11% 46% Central & Eastern Europe NIKE Brand Greater China Converse 5% Japan 19% Emerging Markets 94% REASONS TO BUY Brands and Innovation Strategy Strengthen Nike s Position: Nike is the industry leader in the U.S. footwear and athletic apparel industry. The company s strong portfolio of globally recognized brands, Nike, Converse, Chuck Taylor, Hurley, All Star, One Star, Star Chevron, and Jack Purcell along with focus on innovation has helped in further strengthening its leadership position. These attributes also provide Nike with a competitive edge over its peers, Adidas and Brown Shoe Co. Nike Remains Focused on Global Expansion: Nike continues to seek opportunities for increasing its global footprint and market share. In the process, over the years it has acquired renowned brands such as Converse, Hurley and others. In order to better manage its global operations, the company recently appointed Tom Peddie as GM and VP of its Emerging Markets region, as his appointment is expected to complement the company s goal of expanding in premium markets. Another major tool used by Nike to broaden its ambit is the development of direct-to-consumer business model. Taken Equity Research NKE Page 2

3 together, these strategies not only facilitate enhancement of market share but also provide a competitive platform. Further, the company is in the process of doing away with its underperforming brands in order to boost its bottom line. Nike Results Gain on Innovation, Stock Appears Promising: We are impressed by the strong growth and innovation that Nike has been demonstrating every quarter, which has resulted in robust performance for over a year. The company has delivered positive earnings surprises for 10 consecutive quarters, representing an average surprise of 8.7%. Moreover, it has been consistently recording strong revenue growth. Based on Nike s remarkable topline growth as well as margin expansion, we believe the stock will be a sound asset for yield-seeking investors in the near term. EPS Surprise History Zacks Consensus Estimate Reported $1.09 $0.86 $0.73 $0.76 $0.76 $0.78 $0.74 $0.63 $0.57 $0.59 $0.56 $0.50 $0.67 $0.74 $0.78 $0.58 $0.73 $0.76 $0.88 $0.70 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 Financials Look Strong: Nike boasts a strong balance sheet, which offers it financial flexibility to drive future growth. Further, the company remains committed toward enhancing shareholder return, as evident from its regular practice of returning value to shareholders in the form of share repurchases and dividend. The company recently hiked its quarterly dividend by 17% to $0.28 a share, marking its 13th year of dividend increase in a row, reflecting management s confidence in its future prospects. Also, during the second quarter, the company bought back 5.1 million shares for about $425 million. As of quarter-end, Nike has nearly $3.3 billion worth of authorization left under its four-year, $8.0 billion stock repurchase program approved in Sep REASONS TO SELL Downward Estimate Revisions on Soft Future Orders: Nike s future orders slated for delivery from Dec 2014 through Apr 2015 came in lower than expected, indicating sluggish demand for the third quarter. This led the company to remain conservative on its third quarter and fiscal year guidance. We believe that these factors triggered a downward revision in the Zacks Consensus Estimate for both, the current quarter and fiscal 2015, over the past 30 days. Currency Headwinds to Hinder Growth: The positivity surrounding Nike s strong quarterly performance and momentum of its business growth may be subdued by the unfavorable currency fluctuations coupled with the impact of recent currency devaluation in developing markets. Due to its exposure in the international market, Nike remains prone to currency fluctuations. The weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or contract profit margins in locations outside the country. An increase in product price may have a direct impact on consumer demand. Macroeconomic Headwinds: Nike s customers remain sensitive to macroeconomic factors, including increase in input costs, fuel and energy costs, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn, the company s growth and profitability. Political, Social and Economic Conditions in Countries with Business Operations Affect Profitability: The company s footwear products are entirely manufactured outside the U.S. in the Equity Research NKE Page 3

4 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. RECENT NEWS Nike Beats on Q2 Earnings - Dec 18, 2014 Nike posted second-quarter fiscal 2015 results, where its global future orders, slated for delivery from Dec 2014 through Apr 2015, grew 7% year over year, at the quarter-end, owing to weak global currencies. On a currency neutral basis, future orders increased 11%, lower than analyst expectations. This, in turn, indicates sluggish demand for the third quarter that led the company to tweak its guidance. Nike now envisions gross margin for the full year to expand in a range of basis points (bps), down from its previous guidance of 125 bps. For the third quarter, the company projects gross margin to increase by 100 bps. Coming to the earnings, the company s second-quarter fiscal 2015 earnings of $0.74 per share soared 25% year over year and surpassed the Zacks Consensus Estimate of $0.70. Results were driven by an impressive top line, improvement in gross margin and a decline in average share count, partly impacted by a rise in selling, general and administrative (SG&A) investments made in the company s brands and business capacities. Delving Deeper The company s top line surged about 15% to $7,380 million and also came ahead of the Zacks Consensus estimate of $7,161 million on the back of robust growth across all geographies and categories apart from Golf. Sales also jumped 18% on a currency neutral basis. Revenues at the company s NIKE Brand surged 17% year over year to $7 billion on a currency neutral basis. The segment registered growth across every product type, every region and all categories except Golf. Further, at the company s Converse subsidiary, revenues soared 24% to $434 million on a currency neutral basis, resulting from increased conversions in Europe and Asia as well as persistent growth in its current direct distribution centers. Moreover, the company s direct-to-consumer revenues soared 18% in the quarter, driven by 18% comparable-store sales growth, new stores and significantly higher Nike.com revenues. Gross profit escalated 18% to $3,327 million with gross margin increasing 120 bps to 45.1%. The increase in gross margin was aided by a mix shift to higher margin products, decent gains from foreign exchange and sustained growth in direct-to-consumer operations with high margins, partly offset by greater product input expenses. SG&A expenses rose 17% to $2,438 million, on account of an 11% rise in demand creation cost and a 19% surge in operating overhead costs. Demand creation costs surged on account of marketing efforts to support product launches, other customer-related events and digital brand marketing. On the other hand, operating overhead costs Equity Research NKE Page 4

5 were pushed by increased expenses related to the expansion of direct-to-consumer businesses and investments made toward enhancing digital capacities and operational infrastructure. Balance Sheet Nike ended the second quarter with cash and short-term investments of $4,713 million, compared with $5,187 million last year. Higher share repurchases and dividend payments as well as increased capital investment more than offset the higher net income benefit. Inventories improved 11% to $4,150 million. Nike s long-term debt (excluding current maturities) stood at $1,084 million, compared with $1,201 million in the previous fiscal. Shareholders equity was $11,700 million at the end of the second quarter, as against $11,265 million as of Nov 30, Share Repurchase During the quarter, Nike bought back 5.1 million shares worth $425 million. This buyback was part of the 4-year authorization worth $8 billion, approved by the company s board in Sep So far under the program, the company has bought back 67.6 million shares worth nearly $4.7 billion. Outlook Following the impressive results, Nike anticipates its constant dollar revenues for the third quarter to increase in low teens and for fiscal 2015, it continues to expect the same to grow in the low-doubledigits range on the back of strong customer demand in its largest markets and categories, specifically in the direct-to-consumer business. On a reported basis, revenue is expected to grow 2 to 3 points lower than the projected currency neutral revenue due to a stronger dollar. Operating overhead expenses for the third quarter and for the full year are projected at a high-teens rate. This cost guidance is based on increased variable direct-to-consumer expenses and investments in digital innovation and key operating capabilities. The company s effective tax rate for fiscal 2015 will be nearly 24.5%. Conclusion Nike s solid quarterly performance reflects its concentration on adopting innovations to keep up with its customers. In spite of foreign currency headwinds, the company s results remain impressive, backed by its continuous focus on exploiting growth opportunities along with efficient risk management. Going forward, Nike plans to follow these standards in order to enhance shareholder value in the long run. However, we remain slightly uncertain about the company s future performance due to unfavorable currency fluctuations coupled with the impact of recent currency devaluation in developing markets. Nike Names GM & VP of Emerging Markets- Dec 9, 2014 Nike named Tom Peddie General Manager ( GM ) and Vice President ( VP ) of the company s Emerging Markets area. Prior to Peddie s appointment, the post was held by Roland Wolfram. Wolfram will retire on Jan 9, 2015, after having served the company for 16 years. Equity Research NKE Page 5

6 Before being selected for this role, Peddie was working as VP of Global Sales with Nike. Moreover, this 24-year old veteran has held various other senior positions in the company s global sales organizations, including VP Sales for North America and Asia Pacific. Management believes that Peddie is most likely to take the company forward with his able leadership skills and strong history of enhancing Nike s management strategies, internationally. His knowledge and experience are expected to complement the company s goals of solidifying its brand, building robust customer bonds and expanding in premium markets. Nike s focus on expansion is evident as it continuously seeks opportunities for increasing its global footprint and market share. Over the years, it has acquired renowned brands such as Converse, Hurley and others. Another major tool used by Nike to broaden its ambit is the development of its direct-to-consumer business model. Further, Nike enjoys a healthy financial status which supports its expansion and innovation strategies. Recently, the company hiked its quarterly dividend by 17% to 28 cents a share, marking its 13th year of dividend increase in a row, reflecting the management s confidence in its future prospects. Being the industry leader in the U.S. footwear and athletic apparel industry, this Zacks Rank #1 (Strong Buy) stock boasts a strong portfolio of globally recognized brands including Nike, Converse, Chuck Taylor, Hurley, All Star, One Star, Star Chevron and Jack Purcell. The company s commitment to innovation further provides it with a competitive edge over its peers like Adidas, Skechers and Brown Shoe Co. Equity Research NKE Page 6

7 VALUATION Nike s current trailing 12-month earnings multiple is 28.7x compared with the 19.4x industry average and 19.2x for the S&P 500. Over the last five years, Nike s shares have traded in the range of 16.9x to 29.5x trailing 12-month earnings. The stock is trading at a premium to the industry average, based on forward earnings estimates. Our target price of $102.00, 28.5x 2015 EPS, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Nike Inc. (NKE) Industry Average S&P Adidas AG-ADR (ADDYY) Carter s Inc. (CRI) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B P/B ROE D/E Div Yield 5-Yr High 5-Yr Low Last Qtr. Last Qtr. Nike Inc. (NKE) EV/EBITDA Industry Average S&P N/A 1.9 N/A Equity Research NKE Page 7

8 Earnings Surprise and Estimate Revision History Equity Research NKE Page 8

9 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of NKE. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1121 companies covered: Outperform %, Neutral %, Underperform 5.7%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research NKE Page 9