Investment Thesis
Nike (NYSE: NKE) is not going anywhere, they have a solid consumer base, and despite their premium price point in today’s troubled economy they have proven to be able to sell through full price items. Additionally, digital revenues increased 79%, showing huge amounts of interest in the Nike brand. However, it is difficult to sustain these numbers especially with Nike’s premium price point, and the challenge of other competitors. The stock has run up dramatically from a 52-week low of $60. Between the 52-week low and the 52-week high (a span of around 3 months), the increase is nearly 64.05%.
And while Nike is one of the most reliable stocks in the apparel sector, the stock has hit close to its all-time high, and considering the rockiness of the upcoming back-to-school season and holiday season, the stock may be priced to fall lower and at this time there is very little room to go higher. Additionally, Nike’s price to free cash flow is 45.99 which is comparable to Under Armour (NYSE: UAA) and V.F. Corp. (NYSE: VFC) which are both around 45. This is still a heavily-inflated number and Nike has room to come down from this. Considering Nordstrom's (NYSE: JWN) price to free cash flow is 10.57, Nike is fairly expensive. And despite the fact that Nike is more of a growth stock than Nordstrom, it still is very overvalued. Hold off on the stock as there is still a lot of uncertainty, and the stock has run up quite a bit.
Data by YCharts
Numbers
Nike’s long-term debt has increased 172% from 2019 for a total of $9.4 billion up from just $3.4 billion. Inventories are up nearly 31%, and Stockholders' equity is down 11% and has dropped by nearly $1 billion. On the flip side, cash and cash equivalents have nearly doubled from around $4 billion to $8 billion, and there has been a 24% rise in current assets. Overall, Q4 revenue decreased 38%, and gross margin declined 820 basis points due to higher product costs (brought on by factory cancellation charges and other product-related difficulties), even with the higher than average selling prices. From the three months ended on May 31st, footwear declined 35% from last year, apparel declined 42% from last year, and equipment declined 53% from last year. While that is a considerable decline in revenue, their digital revenue increased by 79% in Q4, and though it is difficult to sustain such numbers going forward, it shows that Nike is still a relevant brand in the eyes of the consumer.
Brand Value
Nike is arguably one of the strongest retail companies to date. Not only do they have one of the most recognizable brand names that still remain relevant today, they have huge amounts of capital to back them up. Older Nike brands such as the Jordan brand saw a revival due to the airing of the ESPN documentary The Last Dance which gave a boost to the much-loved brand. And out of all of Nike’s brands, the Jordan brand was the only one able to turn a positive growth rate of 15% compared to Converse which saw sales drop by -38%.
Nike’s digital revenues grew 79% in Q4 and they surpassed $1 billion in annual digital revenue in both Greater China and EMEA. Nike still attracts and garners overwhelming interest in its offerings, and while it is a premium brand they have the brand name to back them up. Additionally, Nike’s renewed focus on the women’s market has translated into growth in the women’s category being twice that of the men’s category this quarter.
Digital Enterprises
With the launch of the Nike app in Q3, which has garnered over 11 million downloads, Nike has sought to increase its digital presence. Across all digital platforms, Nike saw 25 million new members registered. And weekly active users grew by triple digits. This comes as a surprise as news broke that Under Armour was looking to sell its digital fitness app MyFitnessPal. And it comes as even more of a shock as Under Armour saw connected fitness growth of 8.9% in Q1. Either way if Under Armour sells the MyFitnessPal app it only gives Nike more room to play in the space and expand.
Apparel Industry
Nike faces very little competition in the footwear industry as Nike is one of the most established and trusted shoe brands in the world, and there are very few mainstream brands that come close to competing with Nike (adidas (OTCQX:ADDYY), Under Armour, Vans, etc.). However, Nike’s ambitions to further grow its apparel business are much more difficult. Not only are there a million different competitors who offer more affordable prices, Nike’s brand name can only take them so far. Nike’s style of clothing is relevant in today’s market, but at a time where consumers are under increased pocket pressure, Nike may lose out to more affordable vendors. However, women’s full price apparel grew by 200%, indicating that consumers regardless of the price point are excited for Nike’s offerings. And Nike is also offering additional discounts which gives them an edge.
Additionally, consumers have begun moving away from fast fashion enterprises to buying fewer but higher-quality pieces that will last a long time. This can play to Nike's strengths as they offer higher quality products though at a higher cost. And they offer that timeless streetwear style that consumers enjoy despite the price point.
(Source: Nike.com)
Conclusion
Nike is a valuable company that has risen quite a bit since the start of this crisis. While they have the tools to weather this crisis, there are still many more hurdles left, including a questionable back-to-school season and holiday season. And despite the health of the Jordan brand, and Nike’s renewed strength in the women’s category, they are still a premium company at a time where consumers are under pressure. The stock has increased nearly 64% from its 52-week low in March. And with further uncertainties in the future, it could be best to hold off on the stock and bide your time till a price drop.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
The Link LonkJuly 13, 2020 at 10:42PM
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Nike: A Strong Company But The Stock Has Gone Up Too High - Seeking Alpha
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