- Nike’s commitment to the consumer via innovation keeps sales hopping.
- Nike stays focused on keeping costs under control.
- Nike also demonstrates financial prudence by maintaining a solid balance sheet.
Shareholders of athletic footwear, apparel and equipment giant Nike (NYSE:NKE) have a lot to celebrate. Over the past five years, Nike stock price has soared 204% versus 74% rise in the S&P 500 (see chart below). Nike doesn’t stay complacent in maximizing value for its shareholders. It works hard to maintain its market leadership. Let’s take a look at five ways that Nike continues to “Just do it” for shareholders.
Nike's Expanding Fundamentals
One of Nike’s stated goals is “Delivering innovative, premium products that command higher prices while maintaining a balanced price-to-value proposition for consumers”. The company definitely believes in delivering interesting new products that interest consumers to the point that they willingly pay higher prices for its products. For example, demand for higher priced footwear drove average selling prices higher in FY 2015.
Nike’s direct-to-consumer (DTC) business is strong. Consumers, wanting the latest Nike products, flock to its retail stores. Same store sales at Nike stores increased 16% in FY 2015, which isn’t too bad for an established brand name. Moreover, Nike’s website represents a growing portion of its DTC business, another plus in an age where consumers increasingly by-pass brick and mortar retail establishments in favor of online shopping. Nike’s online channel accounted for 18% of Nike branded DTC sales in FY 2015 versus 15% in FY 2014. Also, Nike’s website accounted for 17% of Nike branded DTC sales in Q1 FY 2016 versus 14% in Q1 FY 2015.
Nike’s focus on innovation has really paid off for its shareholders over the long-term. Over the past five years, Nike saw its revenue, net income and free cash flow increase 61%, 72% and 31%, respectively. Nike’s revenue and net income increased 5% and 23%, respectively, in Q1 FY 2016. However, its free cash flow declined 59% YoY, due to unfavorable accruals in accounts payable, accrued liabilities and income taxes payables as well as prepaid expenses and other current assets. Increased capital expenditures also contributed to the decline in free cash flow. Nike can still turn this around over the next three quarters.
Nike Keeps Costs Under Control
Nike’s management exhibits a strong desire to keep costs under control and to expand margins. Higher prices combined with increased consumer engagement and operating efficiency contributed to increases in profit margins across the board in FY 2015 (see table below).
|Nike (FY 2015)|
|Operating Cash Flow Margin||15.3%||10.8%||41.1%|
|Free Cash Flow Margin||12.2%||7.7%||58.2%|
Source: SEC filings and author calculations
Nike Maintains A Strong Balance Sheet
Another way that Nike demonstrates financial prudence is through its balance sheet. In the most recent quarter, Nike’s $5.4 billion in cash equated to an incredible 42% of its stockholder’s equity. Even more incredible in this age of low interest rates, Nike reduced its long-term debt 10% year-over-year in FY 2015. Nike’s long-term debt stood at 8.5% of stockholder’s equity at the end of FY 2015 versus 11% at the end of FY 2014. In the most recent quarter, Nike’s long-term debt remained the same as it did at the end of the last fiscal year. However, the percentage declined to 8.4% due to a higher stockholder’s equity balance.
Increased Value Of The Nike Brand
Nike’s commitment to consumers via product innovation helped improve its brand value and maintained its market share. Nike maintains the No. 1 spot in terms of global market dominance equating to an 8.5% global market share, according to the Bloomberg leaderboard. Its market dominance results in a huge ubiquitous presence increasing brand recognition and brand value. Nike resides in the No. 17 spot on Interbrand’s 2015 list of most valuable brands. Interbrand puts Nike’s brand value at roughly $23 billion representing a 16% year-over-year increase.
Nike Pays A Solid Dividend
Nike’s dividend resides in a safe position. In FY 2015, Nike’s dividend payout equated to 24% of its free cash flow, which represents a conservative readout. Nike currently pays its shareholders $1.28 per share per year equating to a 1% dividend yield.
One downside: Nike Stock Is Expensive
One downside to buying into Nike stock right now is its high valuation. The stock market is well aware of Nike’s prosperity. Currently, Nike shares trade at a P/E ratio of 34, a five year high (see chart below), meaning that its market price risk is high. This also compares to a P/E of 19 for the S&P 500, which also resides at a five year high. Nike’s stock price could correct harder than the S&P 500 in case of a market correction.
Nike’s management really knows how to keep an eye on the ball. It doesn’t abide by stagnation on any fronts. It continues to put out new products that consumers want while also keeping costs under control. Nike also increasingly sells on websites, which more than likely represents the future of consumption, while malls and retailers slowly go into extinction. However, it looks like a great deal of Nike’s future prosperity is already baked into the stock price. Investors may want to take a small position in Nike Stock at the current valuations, while adding more in case of a market correction.