Company overview - NIKE, Inc. is engaged in the design, development, marketing and selling of athletic footwear, apparel, equipment, accessories and services. The Company's operating segments include North America, Western Europe, Central & Eastern Europe, Greater China, Japan and Emerging Markets. Its portfolio brands include the NIKE Brand, Jordan Brand, Hurley and Converse. As of May 31, 2016, the Company focused its NIKE brand product offerings in nine categories: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Men's Training, Women's Training, Action Sports, Sportswear (its sports-inspired lifestyle products) and Golf. Men's Training includes its baseball and American football product offerings. It also markets products designed for kids, as well as for other athletic and recreational uses, such as cricket, lacrosse, tennis, volleyball, wrestling, walking and outdoor activities. The Company sells a range of performance equipment and accessories under the NIKE Brand name.

NKE Details

Witnessing growth across geographies: For FY17, Nike Inc (NYSE: NKE) reported a 6% year on year (yoy) revenue growth at $34.4 billion, and up 8% on constant currency basis, primarily driven by higher revenues for the NIKE Brand and Converse. All NIKE Brand geographies delivered higher revenues for fiscal 2017 as it continued to deliver innovative products, deep brand connections through NIKE-owned & retail partner stores. During the year, revenue growth was broad-based as Greater China, Western Europe, Emerging Markets and North America each contributed approximately 2 percentage points of the increase in revenues. On a currency-neutral basis, NIKE Brand footwear and apparel revenues increased 8% and 9% respectively, while NIKE Brand equipment revenues decreased 3%. On a category basis, the increase in NIKE Brand footwear revenue was driven by strong growth in Sportswear, the Jordan Brand and Running. Footwear unit sales for fiscal 2017 increased 7%, with higher ASP (average selling price) per pair contributing approximately 1 percentage point to revenue growth, driven by higher full-price and off-price ASPs. Further, the constant-currency increase in NIKE Brand apparel revenues for fiscal 2017 was fuelled by growth in several key categories, most notably Sportswear, Men’s Training and Running.


Financial summary; (Source: Company reports)

Expanding DTC (Direct to Consumer) business:  While wholesale revenues remain the largest component of overall NIKE Brand revenues, the company continues to expand DTC businesses in each of geographies. NIKE Brand DTC operations include NIKE-owned in-line and factory stores, as well as NIKE-owned digital commerce. For fiscal 2017, DTC revenues represented approximately 28% of total NIKE Brand revenues compared to 26% for fiscal 2016. On a currency-neutral basis, DTC revenues increased 18%, driven by strong digital commerce sales growth of 30%, the addition of new stores and 7% comparable store sales growth. On a reported basis, digital commerce sales through NIKE-owned websites and mobile applications (not included in comparable store sales) increased to $2.2 billion for fiscal 2017 compared to $1.7 billion for fiscal 2016 and represented approximately 24% of total NIKE Brand DTC revenues compared to 22% for fiscal 2016. On a wholesale equivalent and currency-neutral basis, fiscal 2017 NIKE Brand Men’s revenues increased 6%, driven by significant growth in Sportswear, Running and the Jordan Brand, while Women's revenues increased 8%. Notably, revenue for Young Athletes' business increased 8%, with growth across multiple categories and largely led by the Jordan Brand.


Divisional revenue break-up; (Source: Company reports)

Gross margin impacted by adverse currency exchange rates and higher product costs: Gross margin declined 160 basis points to 44.6% as higher average selling prices were more than offset by the negative impact of changes in foreign currency exchange rates and higher product costs. Further, selling and administrative expenses increased 1% to $10.6 billion, and demand creation expense increased 2% to $3.3 billion, due to higher sports marketing costs and significant investments around the Olympics and the European Football Championship in the first half of the fiscal year. Operating overhead expense remained flat at $7.2 billion, as continued investments in DTC (Direct to Consumer) were offset by administrative cost efficiencies and lower variable compensation.


Gross Margin performance; (Source: Company reports)

United States Market:  For fiscal 2017, NIKE Brand and Converse sales in the United States accounted for approximately 46% of total revenues, compared to 47% for fiscal 2016. The company sells NIKE Brand, Jordan Brand, Hurley and Converse products to thousands of retail accounts in the United States, including a mix of footwear stores, sporting goods stores, athletic specialty stores, department stores, skate, tennis and golf shops and other retail accounts. Moreover, in the United States, it utilizes NIKE sales offices to solicit such sales. During fiscal 2017, three largest customers accounted for approximately 23% of sales in the United States. Direct to Consumer operations sell NIKE Brand, Jordan Brand, Hurley and Converse products to consumers through digital commerce and mobile applications.

International Markets: For fiscal 2017, non-U.S. NIKE Brand and Converse sales accounted for 54% of total revenues, compared to 53% for fiscal 2016. The company sells products to retail accounts, through its own Direct to Consumer operations and through a mix of independent distributors, licensees and sales representatives around the world. In many countries and regions, including Canada, Asia, Europe and some Latin American countries, it has a futures ordering program for retailers similar to the United States futures ordering program. Importantly, during fiscal 2017, NIKE’s three largest customers outside of the United States accounted for approximately 12% of total non-U.S. sales. In addition to NIKE and Converse owned digital commerce websites in over 45 countries, its Direct to Consumer business operates the retail stores outside the United States.


Non - U.S retail stores; (Source: Company reports)

Manufacturing and supply chain capabilities: The company has a supply from approximately 127 footwear factories located in 15 countries. The largest single footwear factory accounted for approximately 8% of total fiscal 2017 NIKE Brand footwear production. Virtually all footwear is manufactured outside of the United States by independent contract manufacturers who often operate multiple factories. For fiscal 2017, contract factories in Vietnam, China and Indonesia manufactured approximately 46%, 27% and 21% of total NIKE Brand footwear, respectively. NKE also has manufacturing agreements with independent contract manufacturers in Argentina, India, Brazil, Mexico and Italy to manufacture footwear for sale primarily within those countries. For fiscal 2017, five footwear contract manufacturers accounted for greater than 10% of footwear production, each; and in the aggregate accounted for approximately 69% of NIKE Brand footwear production. On the other hand, it is supplied by approximately 363 apparel factories located in 37 countries. The largest single apparel factory accounted for approximately 13% of total fiscal 2017 NIKE Brand apparel production. For fiscal 2017, contract factories in China, Vietnam and Thailand produced approximately 26%, 16% and 10% of total NIKE Brand apparel, respectively. Importantly, for fiscal 2017, one apparel contract manufacturer accounted for more than 10% of apparel production, and the top five contract manufacturers in the aggregate accounted for approximately 43% of NIKE Brand apparel production.
 

Footwear Production (Source: Company reports)

Identifying opportunities to leverage new technologies: Technical innovation in the design and manufacturing process of footwear, apparel and athletic equipment received continued emphasis as the group strives to produce products that help to enhance athletic performance, reduce injury and maximize comfort while reducing waste. In addition to its own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, engineering, industrial design, sustainability and related fields, it also utilizes research committees and advisory boards made up of athletes, coaches, trainers, equipment managers, orthopaedists, podiatrists and other experts who consult and review designs, materials, concepts for product and manufacturing process improvements. Employee athletes, athletes engaged under sports marketing contracts and other athletes wear-test and evaluate products during the design and development process. As the company continues to develop new technologies, it is simultaneously focused on the design of innovative products incorporating such technologies throughout product categories. Notably, using market intelligence and research, various design teams identify opportunities to leverage new technologies in existing categories responding to consumer preferences.


HyperAdapt 1.0 is the first step into the future of footwear; (Source: Company reports)

To drive on innovation and premium products:  The company is focusing on expanding gross margin by delivering innovative, premium products that command higher prices while maintaining a balanced price-to-value equation for consumers.  Further, the group is making its supply chain have a competitive advantage by investing in new technologies that increase automation, help reduce waste and have long-term potential to increase both customization of products and speed to market; and driving growth in higher gross margin DTC business, led by digital commerce, as part of an integrated marketplace growth strategy across its DTC and wholesale operations. On the expenses side, it is optimizing selling and administrative expense by focusing on investments in consumer engagement that drive economic returns in the form of incremental revenue and gross profit.


Earnings before interest and taxes; (Source: Company reports)

Stock performance: The stock has moved up 11% in the past three months, while it is up 3.7% in the past one year (as on August 17, 2017). Notably, the company has a robust capability in product innovation, designing in line with the market demand and consumer preferences. Further, its partnership with the Amazon to sell directly on e-commerce site and expansion of DTC business augur well with the company’s aim to have an edge in the long term. The company is expected to get a boost from rising population with an increasing sect seeking a strenuous exercise regime. Given the prospects, many hedge funds and other institutional investors have been noted to have modified their holdings of the company. The company is expected to report its FY18 quarterly results in September 2017. We give a “Buy” recommendation on the stock at the current market price of $58.54


NKE Daily chart; (Source: Thomson Reuters)

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