- Nike recently announced their goal of reaching $50 billion in annual revenue by 2020.
- They face certain barriers to achieving this goal.
- Nike hopes that growth in e-commerce and their female market, can fuel revenue growth.
Nike (NYSE:NKE) Chief Executive, Mark Parker recently announced the ambitious aim of reaching $50 billion in revenue by the year 2020. This has divided investors. Some think this is rather unrealistic, while some welcome the strong appetite for growth. It is worth noting that Nike has come under a lot of competition from Under Armour.
Additionally, it took Nike 13 years to grow its annual revenue from $10 billion to $30 billion. Therefore, they will have to grow at a stratospheric rate. Some might argue that the announcement by Mark Parker was designed to excite investors in order to drive up Nike stock price, which is already quite high. However, if Nike has a plan in place to reach $50 billion, it will cement their place as the number 1 sports clothing retailer.
Nike Fundamental Analysis
In order to reach $50 billion in annual revenue, Nike will have to be more aggressive in terms of marketing and in its investments. Therefore, it is worth taking a look at the fundamentals of Nike in order to deduce whether they are stable enough to do this. Moreover, it allows us to infer whether this is a company capable of reaching such a mark.
1) Nike's revenues are up 5%. This is impressive; however, considering revenue for fiscal year 2014 was $27.8 billion, there is still a long way to go.
2) A significant increase in net income and as a result of hedging activities means that cash and longterm investments have swollen by $829 million.
3) Nike stock's price to earnings ratio (33.4x) goes against the industry average of (26.8x). Therefore, this is a cause of concern for investors.
4) Nike's ROIC is impressive at 41.7%; and this is a sign of good management decisions and efficient running of the company.
Nike's financials allow us to deduce that Nike is a fairly 'healthy' company; however, this doesn't take away from the fact that the goal of $50 billion in annual revenue requires great strides to be made in the next 5 years.
The Nike swoosh is one of the most recognizable logos on the planet. And with strong sales in all corners of the world, Nike has built a prosperous business based on aligning their brand with top sportspeople. Although Michael Jordan retired 16 years ago, the 'Air Jordans' footwear range remains one of Nike's cash cows. In fact, it generates $2.25 billion in yearly revenue and is considered a right-of-passage by urban youth across the globe.
Nike can also boast of brand ambassadors such as Neymar, Cristiano Ronaldo, Kobe Bryant, and Roger Federer.
Saying this, Nike has a largely male audience for its products. This presents ample growth opportunities in the female market. The fact is, women sports don't receive as much wide coverage by the press. Therefore, Nike will have to aggressively market to the personal fitness market. Plus with the rise of yoga, Zumba, and other activities aimed at women, Nike has a huge opportunity for growth.
Nike currently 3-d prints some of its footwear. However, it has plans to increase the scale of this operation. Therefore, this will drive down labor and transportation costs. As a result, the time taken to get a product to the consumer will be significantly less, thereby allowing for an increase in profit.
This quest to constantly innovate how they do business is one of Nike's greatest strengths.
Nike has plans to increase its foray into the e-commerce industry. $1 billion of Nike's annual revenue stems from e-commerce, but there are plans to increase to an astounding $7 billion. Due to a consumer market which is increasingly comfortable with the prospect of shopping online, this can be possible. When we combine this with Nike's investments in 3-D printing, this ambition is certainly achievable.
However, the same reasons why Nike can grow its e-commerce revenue is the same reason why they might struggle to do so. A growth in e-commerce will also introduce more competition into the marketplace; however, Nike hopes that its brand power can cement their place in this growing region.
Speaking of competition, Nike faces some from other sportswear brands such as Under Armour (NYSE:UA), Skechers (NYSE:SKX) and Adidas (OTC:ADDYY). For Nike to balloon to $50 billion, they will have to outclass their rivals. And with approximately 20% market share, Nike has a huge slice of the market. Additionally,things into perspective, Under Armour's 4 year plan could allow it to have 17% of Nike's current size. Nonetheless, Under Armour's share value growth rate (773%) is far greater than Nike's (208%) over the past five years.
In conclusion, whether Nike is able to reach its lofty growth goal is somewhat irrelevant. Next year's Olympic games will provide an opportunity to parade their stable of stars onto the global stage. Plus, Nike's plans to introduce a new generation of footwear with memory foam will encourage customers to upgrade thereby increasing annual revenue.