Repositioning Strategy And Sports Innovation Fuel Growth With NBA And NFL Partnerships

Key Takeaways

• Repositioning to a full-price model and reducing promotions aim to improve gross margins by attracting full-price sales and decreasing markdowns.
  
• Strategic focus on sports categories and partnerships with NBA, NFL aims to drive demand and boost net revenue through targeted marketing.
  
• Challenges in inventory management and partner relationships, along with reliance on discounts, threaten NIKE's margins, brand perception, and long-term revenue growth.
  

Catalysts

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

• Repositioning NIKE Digital to a full-price model and reducing the percentage of business from promotional activity are expected to improve gross margins by attracting full-price sales and decreasing markdowns.
  
• The acceleration of new product innovation through sports-focused teams segmented by demographic and sport is expected to stimulate revenue growth once these new offerings reach scale in the marketplace.
  
• The strategic refocus on major sports categories and strong marketing partnerships (NBA, NFL) is anticipated to drive increased demand and boost net revenue from sports performance areas.
  
• Resetting inventory levels and cleaning up excess aged inventory are intended to enhance operational efficiencies and gross margins by reducing the burden of high markdowns across channels.
  
• Strengthening relationships with wholesale partners and reinvesting in consumer engagement is expected to enhance future sales growth and improve earnings by creating a more integrated and consumer-led marketplace.

NIKE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NIKE's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.0% today to 9.4% in 3 years time.
• Analysts expect earnings to reach $5.0 billion (and earnings per share of $3.58) by about December 2027, up from $4.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $6.0 billion in earnings, and the most bearish expecting $2.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.9x on those 2027 earnings, up from 23.4x today. This future PE is greater than the current PE for the US Luxury industry at 18.7x.
• Analysts expect the number of shares outstanding to decline by 2.03% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.38%, as per the Simply Wall St company report.

NIKE Future Earnings Per Share Growth

Risks

• The financial performance in Q2 showed an 8% drop in revenues and a decline in gross margins due to higher markdowns and wholesale discounts, indicating potential risks to future revenue growth and net earnings.
  
• NIKE is dealing with excess inventory, particularly impacting its classic footwear franchises, and intends to reduce aged inventory, which could continue to pressure gross margins in the near term.
  
• Traffic in NIKE Direct (digital and physical) has softened, impacting the health of the marketplace and profitability, as increased promotional sales have hurt brand perception and sales margins.
  
• The reliance on digital promotions has shifted NIKE Digital towards a platform that captures rather than creates brand demand, affecting long-term revenue sustainability, as indicated by a need for brand reinvestment.
  
• There are challenges with partner relationships and marketplace positioning, especially in competitive regions like Greater China, which could impact revenue growth if NIKE fails to effectively manage global market dynamics and rebuild key wholesale partnerships.

Valuation

• The analysts have a consensus price target of $86.48 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 $50.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $53.1 billion, earnings will come to $5.0 billion, and it would be trading on a PE ratio of 29.9x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $76.79, the analyst's price target of $86.48 is 11.2% higher.
  
• 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.