Nike: Trust The Brand Equity

Investment Thesis - Nike holds a dominant position in the athletic footwear and apparel industry, with sales more than double that of its closest competitor, and is poised for sustained growth despite facing several headwinds [2] - The company's ability to maintain brand equity, driven by innovation, is crucial for its competitive advantage and future growth strategy [2][45] - The stock is currently trading near its 52-week lows, presenting a potential investment opportunity for those who believe in a new growth cycle [2][45] Company Overview - Nike is the largest seller of athletic footwear (65% of sales) and apparel (27% of sales) globally, with a diverse sales channel including owned stores (20%), digital platforms (24%), and wholesale customers (56%) [3] - North America accounts for 42% of Nike's sales, followed by EMEA (26%), China (14%), and Asia/Latin America (13%) [3] Financial Performance - Despite consistent profitability, Nike's EBIT margin fell to 12.1% in 2023, a decline of 220 basis points compared to 2016, influenced by COVID-19 and strategic missteps [3] - From 2021 to 2023, Nike's top-line growth was 11.2%, lagging behind a peer group average of 19.1% [4] Strategic Direction - CEO John Donahoe emphasizes a multiyear innovation cycle aimed at long-term revenue growth through "must-have" products and enhanced customer connections [5] - The company plans to increase its digital and direct-to-consumer channels, targeting a future share of 40% in digital and 60% in direct sales [5] Market Trends - Nike's performance in China has weakened since 2021, with a decline of 5 percentage points in market share from its peak in 2019, although recent growth in local currency showed an average of 8.7% year-on-year [14][18] - The company faces increased competition from local brands like Anta and Li Ning, which have been gaining market share in China [17][21] Future Outlook - Nike expects to benefit from strategic price increases, lower input costs, and improved supply chain efficiency, with management forecasting cost-saving opportunities of up to $2 billion over the next three years [12] - The company anticipates a modest revenue growth of approximately 1% for fiscal year 2024, with expectations of improvement in fiscal year 2025 [12] Valuation Insights - Nike's shares are currently trading at a discount, but not considered a bargain, with historical averages suggesting a normalized EV/EBITDA of 21.9X and P/E of 28.5X [24][28] - The valuation model incorporates two scenarios (base and bull case) with a 12-month price target of $113.00, indicating a potential upside of 20% from current levels [32][38]