Nike Inc. (NKE, Financial), the renowned global sports apparel and footwear company, witnessed a significant drop of nearly 12% in its share price in a single trading day. This decline was attributed to the company's recent earnings results, which failed to meet consensus expectations.
Since the end of September, Nike has enjoyed a strong performance, with its stock price climbing from $91 to $120.40. However, following this recent drop, the share price has settled at $108, with market expectations of further decline.
Business segment
Nike, renowned for its top quality and designs in sports, holds a dominant global market share of 38.2%, making it the top choice among consumers. The company operates across three main business categories: Footwear, Apparel and Equipment.
In 2023, the Footwear segment was the most significant revenue contributor, generating $35.3 billion, which accounted for 68.9% of Nike's total revenue. The Apparel segment followed, bringing in $13.9 billion in sales and representing 27.2% of the total revenue. Meanwhile, the Equipment segment, though smaller, contributed $1.8 billion, amounting to 3.4% of the total revenue for the year.
Sluggish revenue increase, but double-digit growth in earnings per share
In the second quarter of fiscal 2024, Nike's revenue increased marginally by 1% to $13.4 billion. However, when adjusted for currency fluctuations, it decreased by 1%. This revenue figure fell slightly short of analysts' expectations of $13.43 billion. The most promising regions for the company's sales growth were Asia, Latin America and China. During the quarter, China experienced a sales growth of 4%, while the ALAP region saw a significant jump of 13%. Despite these gains, North America, traditionally the largest market, faced a 4% decline in sales.
Nonetheless, Nike's net income showed a robust increase. It surged by 19% to reach $1.6 billion, and the diluted earnings per share saw an impressive growth of 21% to $1.03. This higher earnings per share can be attributed mainly to a lower cost of goods sold, reduced income tax expenses and a decreased share count.
A history of growing operating performance
Over the past decade, Nike has consistently achieved both revenue and operating income growth. The company's revenue climbed from $25.3 billion in 2013 to $51.2 billion in 2023. Similarly, its operating income increased, rising from $3.24 billion to $5.9 billion over the same period. However, there was a contraction in both revenue and operating income in 2020. This downturn, triggered by the Covid-19 pandemic, led to a 4.4% decrease in revenue and a significant drop of nearly 35% in operating income.
In the decade between 2013 and 2023, Nike demonstrated a generally upward trend in its operating and free cash flow, albeit with some fluctuations. The operating cash flow grew from $3 billion to $5 billion, achieving an annual compounded growth rate of 5.24%. Similarly, free cash flow also increased, rising from $2.43 billion to $4.87 billion. This represents compounded annual growth of 7.2%.
Nike has grown its revenue, profitability and cash flow, and it has also done so with remarkable efficiency, consistently achieving a high return on invested capital over time. Over the past decade, the company's ROIC, despite some fluctuations, has remained within a range of 15% to 33.35%. In 2023, it settled at 23%.
Solid financial position
Nike's solid balance sheet offers reassurance to shareholders, demonstrating the company's financial stability. As of November, the company reported shareholders' equity of approximately $14.15 billion, which includes $7.92 billion in cash and cash equivalents and $2 billion in short-term investments. These short-term investments are highly liquid, with maturities of more than three months. The company's interest-bearing debt stood at a manageable $8.93 billion, and its operating lease obligations were around $3.24 billion, resulting in a debt-to-equity ratio of just 0.63.
The company has adeptly managed its long-term debt, securing loans at low interest rates ranging from 2.38% to 3.88%, with extended maturities. The next significant debt maturity is scheduled for 2025, with a principal amount of nearly $1 billion. With its operating cash flow growing to $5 billion, Nike can comfortably meet its interest and principal payments.
Source: Nike's 10-K
2024 revenue and valuation
For the full year of 2024, Nike's revenue is projected to be approximately $52.2 billion. However, considering the company's management recently anticipated a softer revenue outlook for the second half, let's consider a 10% reduction in this forecast, bringing the expected revenue down to $47 billion. With Nike's average 10-year Ebitda margin standing at 15%, this revised revenue estimate suggests an Ebitda of around $7 billion. Applying a five-year average Ebitda multiple of 30 to this figure, Nike's enterprise value would be estimated at $210 billion. This represents a 26% increase over its current valuation.
Conclusion
Despite the recent turbulence in its share price, Nike's overall financial and operational health remains robust. The company's consistent growth in revenue, operating income, operating cash flow and free cash flow over the past decade underscores its resilience and strategic acumen. Nike presents a stable investment opportunity with a solid balance sheet, a low debt-to-equity ratio and efficient long-term debt management. The company's adaptability in navigating market changes and its strong foothold in key global markets, particularly in Asia and Latin America, are promising signs for future growth. Looking ahead to 2024, even with a conservative revenue estimate, Nike's projected enterprise value indicates a decent potential for appreciation.
