Product Portfolio Transition And Digital Cleanup Will Create New Opportunities

Key Takeaways

• Nike's shift toward sports performance products could drive growth, decrease reliance on declining lines, and positively impact revenue.
  
• Strategic focus on key markets, brand storytelling, and digital integration aims to enhance margins, engagement, and long-term growth.
  
• Revenue and margin pressures from sales declines, high inventories, and macroeconomic uncertainties threaten Nike's earnings growth and financial stability.

Catalysts

Engages in the design, development, marketing, and sale of athletic footwear, apparel, equipment, accessories, and services worldwide.

• Nike is accelerating the transition of its product portfolio, aiming for sport performance dimensions to drive growth. This could positively impact revenue by increasing the contribution of new products and reducing reliance on classic footwear franchises that are currently declining.
  
• The company is repositioning NIKE Digital within an integrated marketplace to reduce promotional days and markdown rates. This is expected to improve net margins by stabilizing and gradually increasing organic traffic as brand marketing investments ramp up.
  
• Nike is taking aggressive steps to clean up the marketplace and reduce excess inventory, particularly in its classic footwear lines. This is likely to enhance gross margins once inventory levels and supply chain align better with demand.
  
• The focus on key countries and cities, and enhancing the retail experience there, aims to strengthen brand engagement and local market relevance. This strategic investment will likely contribute to both top-line growth and brand equity, potentially benefiting net margins in the long term.
  
• Nike’s investment in demand creation and brand storytelling, including high-impact marketing campaigns around major sports events, aims to reignite brand momentum. This should boost earnings by creating stronger brand loyalty and driving full-price sales.

NIKE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NIKE's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.0% today to 8.6% in 3 years time.
• Analysts expect earnings to reach $4.4 billion (and earnings per share of $2.95) by about September 2028, up from $3.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $5.8 billion in earnings, and the most bearish expecting $3.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.3x on those 2028 earnings, down from 33.8x today. This future PE is greater than the current PE for the US Luxury industry at 19.8x.
• Analysts expect the number of shares outstanding to decline by 0.78% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.59%, as per the Simply Wall St company report.

NIKE Future Earnings Per Share Growth

Risks

• Revenue declines in major markets such as North America, EMEA, and Greater China, driven by double-digit declines in digital sales and decreases in Nike Sportswear and Jordan brand sales, pose risks to overall earnings growth.
  
• Gross margins have decreased significantly due to higher markdowns, wholesale discounts, inventory obsolescence, and product costs, impacting net margins negatively.
  
• The company's strategic shift towards reducing promotional days and tightening distribution may limit digital traffic and slow revenue growth in the short term.
  
• Persistently high inventory levels and challenges in cleaning up the marketplace might prolong financial strain, particularly affecting earnings.
  
• Geopolitical dynamics, new tariffs, volatile foreign exchange rates, and macroeconomic uncertainties could further affect consumer confidence and result in unpredictable revenue and margin impacts.

Valuation

• The analysts have a consensus price target of $78.909 for NIKE based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $120.0, and the most bearish reporting a price target of just $38.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $50.7 billion, earnings will come to $4.4 billion, and it would be trading on a PE ratio of 33.3x, assuming you use a discount rate of 8.6%.
• Given the current share price of $73.6, the analyst price target of $78.91 is 6.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.