Thesis Nike (NYSE:NKE) is a global leader in the athletic footwear, apparel, and equipment industry. Established in 1967, Nike is currently the largest supplier of athletic footwear and apparel worldwide. Although the company faced a significant decline in earnings in 2020 due to the pandemic, it has managed to recover. However, instead of experiencing growth, Nike is showing signs of a potential slowdown, including stagnant market share, increasing inventory, and cost-cutting measures. Additionally, the company is facing tax-related issues that could result in a fine of $530 million. Given these challenges, it is crucial to analyze Nike’s financial performance in the equity market.
Stagnant/Falling Market Share
Nike’s footwear segment generates the majority of its revenue, accounting for 64% of total revenues. The company’s overall performance heavily relies on the athletic footwear market and its positioning within it. However, Nike’s market share has remained stagnant at 27.4% for a significant period. This lack of growth in market share is concerning for Nike’s future performance in the athletic footwear sector. Furthermore, the number of Nike retail stores has been declining, indicating further challenges for the company.
Weakening North American Demand
Nike relies heavily on the North American market, which is its largest market for athletic footwear. The graph above shows a weakening demand for athletic footwear in North America, posing a significant challenge for Nike. To cut costs, the company has decided to lay off employees, indicating the difficulties it faces in generating revenue. Additionally, the decreasing growth rate of online sales further adds to Nike’s challenges.
Accumulating Inventory and Reduced Profit Margins
Nike’s slower sales growth has led to a growing accumulation of inventory, as shown in the figure above. This trend has resulted in reduced profit margins for the company. These factors contribute to the belief that Nike will face headwinds and a reduced fundamental value in the upcoming financial year.
Tax-Related Issues
Nike has encountered tax payment-related issues that could have financial and reputational repercussions. Reports suggest that approximately 25% of contractors employed by Nike may have been misclassified, increasing the company’s financial obligations. The potential financial impact of misclassification exceeds $530 million, with significant liabilities in the US, UK, Netherlands, and Belgium. The Biden administration’s increased focus on companies violating rules related to independent contractors poses a regulatory threat to Nike.
Explorations into Emerging Markets
Nike has been expanding into emerging markets such as India and China, which offer significant growth opportunities. However, these markets are known for their unpredictability in terms of consumer behavior and policies, posing potential risks for Nike’s future growth.
Financial Performance
Nike’s net sales and profits fell in 2020 due to the pandemic but have since rebounded. However, the gap between net sales and net income is expected to widen in the future, indicating slower net income growth. Cash flow and liquidity issues are also evident from the decrease in operating cash flow and free cash flow.
Valuation
A discounted cash flow (DCF) valuation performed on Nike suggests a slower revenue growth rate in the coming years due to divestments in certain markets and the company’s focus on mature economies. This valuation indicates the potential challenges Nike may face in achieving future growth.
In conclusion, Nike is facing headwinds in various aspects of its business, including stagnant market share, weakening demand, tax-related issues, and financial performance challenges. These factors suggest that Nike’s fundamental value may be reduced in the upcoming financial year.
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