VALUATION HIGHLIGHTS

1. Nike Brand Footwear constitutes 64% of the Trefis price estimate for NIKE's stock.
2. Nike Brand Apparel constitutes 26% of the Trefis price estimate for NIKE's stock.

WHAT HAS CHANGED?

Nike Q1 Snapshot

The company reported diluted earnings per share (EPS) of $0.70, surpassing analysts' consensus estimate of $0.52. However, its revenues of $11.59 billion came in about 0.5% below the analysts' forecast of $11.64 billion, and other metrics were disappointing.

The company experienced a 10% year-over-year decline in revenue in the fiscal first quarter, which ended Aug. 31. Nike brand digital sales saw a 20% drop, a stark indicator of decreased online engagement. That accounted for the largest share of Nike Direct's 13% revenue decline to $4.7 billion. Meanwhile, wholesale revenue declined by 8%. The company faced broad-based sales declines in every geographical region: Revenues were down 11% in North America; down 13% in Europe, the Middle East, and Africa; down 4% in Greater China; and down 7% in Asia Pacific and Latin America.

Note: Nike's FY'24 ended on May 31, 2024. Q1 FY'25 refers to the quarter that ended on August 31, 2024.

Change of CEO

Nike has lost its growth momentum after an excellent couple of years following the onset of the pandemic. Consequently, the company ousted CEO John Donahoe to bring back former executive Elliott Hill to lead the company's turnaround.

Sure, there is competition, but Nike is still bigger than most of its primary competitors combined. It still has the deepest pockets, the largest advertising budget, and a list of top-tier sponsorships, including Michael Jordan, LeBron James, Caitlin Clark, and dozens more. Nike is the de facto leading Olympic apparel brand and owns licensing deals with the NFL, NBA, and MLB.

Dealing With Margins

In Q1, Nike's gross margin improved by 120 basis points to 45.4% due to factors such as lower product and warehousing costs, and strategic pricing actions taken over the previous year. Nike's marketing spending - which the company tags as a "demand creation expense" - soared by 15% to $1.2 billion, reflecting an intensified focus on brand marketing amid major sports events.

Looking Ahead

Due to the CEO transition, the company is pulling its guidance for the year and postponing the Investor Day conference it had planned for November. For the fiscal second quarter, it expects revenue to fall 8% to 10% and gross margin to decline by 150 basis points, indicating another sharp drop in earnings per share.

Management hinted that fiscal 2025 will be a transition year, emphasizing the continued need for innovation and logistical efficiencies to rebound from current challenges. Reinvigorating digital engagement will be crucial for its efforts to regain lost ground (20% drop in Q1).

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Nike's value that present opportunities for upside or downside to the current Trefis price estimate for Nike:

• Nike Footwear Revenues: Nike Footwear Revenues have consistently grown over the years and stood at $33.4 billion by the end of Fiscal 2024. This can be attributed to strong marketing spend and innovation to enhance the product line. Trefis expects this figure to increase to around $43 billion over the forecast period. If this metric increases to $48 billion by the end of our forecast period, there could be a 5% upside to the Trefis estimate. On the other hand, if it increases to only $39 billion, it represents a 5% downside to the Trefis estimate for Nike.
• Nike Brand Footwear Gross Profit Margin: Nike Brand Footwear Gross Profit Margin decreased from nearly 46% in FY 2022 to 44.5% in FY 2023. Trefis expects this figure to increase to around 47% over the forecast period. In case the gross margin increases to 50% by the end of the Trefis forecast period, there can be a 5% upside to our price estimate for Nike's stock. On the other hand, if it declines to about 43%, there could be an 5% downside to the Trefis price estimate.

For additional details, select a driver above or select a division from the interactive Trefis split for Nike at the top of the page.

BUSINESS SUMMARY

Nike specializes in designing, manufacturing, and marketing athletic footwear, apparel, and equipment. Its brands include Converse, Hurley, and Nike Golf, and its proprietary technologies include Nike Air, Zoom, and Flyknit. Nike typically outsources the manufacturing of its products to Asia and focuses on innovation and product design.

Recently, Nike has focused on product innovation and enhancing its digital engagement platforms. Its strategic emphasis has been on bolstering its brand strength and consumer connection - key competitive factors in a highly dynamic retail landscape.

SOURCES OF VALUE

The primary sources of Nike's value are footwear and apparel sold under the Nike brand, and together they contribute about 90% of Nike's value. Nike Brand Footwear is more valuable than Nike Brand Apparel and Converse Brand Footwear for the following reasons:

Nike Footwear is more valuable than Nike Apparel

Nike's footwear revenues stood at $33.4 billion in FY 2024, more than double that of its apparel revenues which were around $14 billion. As the economy improves in the U.S. and Europe, and demand increases in China and emerging markets, we expect footwear revenues to continue to rise. With aggressive marketing and innovation, Nike branded footwear has been able to capture a significant chunk of the global sports footwear market.

KEY TRENDS

Nike is expanding its own stores which provide higher margins

In the footwear business, producers and distributors jointly earn a profit per shoe of about 12%, while retailers earn a profit of 13%. By selling through its own retail stores, Nike is able to capture both margins. The total number of Retail stores for Nike in the U.S. has increased from about 344 at the end of the fiscal year 2022 to around 377 stores at the end of FY 2024. Just by looking at the numbers, one can see how much Nike is focused on growing its DTC networks and increasing sales in the stream.

Demand for low-performance athletic wear is increasing

In the last few years, demand for low-performance footwear in the U.S. and Europe has grown significantly. Low-performance footwear refers to footwear that is not intended for athletic use. In this segment, Nike faces competition from low-cost manufacturers that are trying to establish a foothold in the U.S. and other international markets. Nike has gradually increased its focus on selling low-performance footwear through its Converse and Hurley brands. However, the brand is facing stiff competition from competitors like Adidas that threaten to level the playing field.

High growth potential in China and emerging markets

With the rapidly growing economies of China and other emerging markets such as Brazil, these regions have emerged as key markets for Nike. The company is experiencing strong growth in virtually every one of its business segments in these regions, and the trend is expected to carry forward. China, in particular, is leading the charge with immense growth coming in from the region at a time when demand in North America is shrinking marginally. The company earned $7.5 billion (up 4% year-over-year) in Greater China in FY 2024.

Growth of digital platform

NIKE Digital has achieved impressive growth over the last few quarters. Both the SNKRs app - which sells limited-edition shoes using collaborations with athletes, celebrities, and universities - and the newly launched NIKE app are resonating strongly with consumers. NIKE Direct drove the majority of Nike's incremental revenue growth, with Nike Direct constituting approximately 44% in FY 2024. We expect growth momentum in Nike Digital to continue with increasing digitization and Nike's increasing investment in order to expand its digital ecosystem.