Nike: Reset my bullish position (NKE)

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Robert Road

Nike (NYSE: NKE) is one of the most stable companies in the United States and the world with multiple sales avenues in the athletics, athleisure and general footwear and apparel industries. They hold physical stores, an online mega portal and also sell through third-party websites and e-commerce behemoths like Amazon (AMZN) and others.

With the recent spike in inflation during the COVID-19 pandemic, when supply chains were constrained and other headwinds emerged, the company attempted to mitigate a good portion of those headwinds. raising prices for consumers and reducing operational costs to increase efficiency.

Now that inflation is slowing from 8.3% to 7.7% in the last report, I believe the company’s profit margin will increase over the next few years and exceed its current profit growth expectations. per share. As a result, I believe the company continues to be a solid long-term investment with a renewed focus on improving earnings.

Part 1: Where We’ve Been

From a purely business perspective, Nike has consistently done well over the past few decades as it has used every tool at its disposal to effectively market and channel trends, as well as set them.

Marketing and market trends

They did this through an aggressive marketing campaign, which includes running hundreds of social media accounts on Instagram, Facebook (META) and Twitter (TWTR), as well as partnering with the world’s most famous athletes like LeBron. James, Cristiano Ronaldo and many, many Sequel.

They have invested heavily in different parts of the sports and sportswear markets in order to diversify and immerse themselves in the fastest growing sectors of the business. In 2017 and 2018, the athletics market was one of the fastest growing and fastest growing in the industry, which was a combination of the athletics and recreation markets. The company has invested heavily in introducing new lines of clothing and shoes and they have taken full advantage of it and reaped billions as a result.

Online presence and the COVID-19 pandemic

When the COVID-19 pandemic hit, when many other businesses were going through tough times, the company used its online presence so successfully that it generated around 30% of its sales through its online avenues. In 2019, their online presence was so successful that they stopped selling their products wholesale to e-commerce giant Amazon.

While they saw a drop in sales from around $11 billion per quarter to around $6.5 billion in the May 2020 quarter when the pandemic was at its steepest decline in public opinion , they quickly recovered and are now back to quarterly sales growth over previous years.

Overall, the company’s sales fell from $39 billion in 2019 to $37.5 billion in 2020, but quickly recovered and jumped to over $44 billion in 2021 and reached $46.7 billion in 2022, the last full reporting year. (Source: Seeking Alpha NKE Financials income statement). The real boost, however, was the company’s margins.

Margins & Costs Volatility

While in some quarters of 2020, when the pandemic crippled the global economy, the company faced supply chain issues for its raw material deliveries, finished product deliveries and movement of goods, it passed on most of these costs to consumers.

After the major cost headwinds subsided, they continued or maintained the higher price environment even though costs were down. This translated to an increase in their gross profit margin from approximately 44.7% to just under 46% in the most recent full reporting year.

Although some analysts predicted that these higher prices would discourage some sales growth, this simply did not materialize and the company has already reported increased sales at the higher prices in the last 2 quarterly financials.

With continued price increases, the company is now investing in new trends and new markets, while working to improve operational efficiency.

Part 2: Where are we going?

With respect to the company’s gross margins, their price increases will, I believe, continue to drive gross profit margin expansion for years to come as inflation declines and the cost of their revenue decreases. As inflationary costs come down, which includes the cost of energy and transportation, I believe the business will post a higher profit margin in the coming quarters.

Additionally, the company has been working to reduce operating costs to revenue over the past several years. That doesn’t mean they’re laying off workers or freezing hiring like many companies are doing in today’s economy. They really aren’t. But what they do is work to integrate acquisitions and close some underperforming stores (move staff to other locations) to maximize and capitalize on their superior online presence.

This has resulted in lower operating costs (selling, general and administrative) relative to revenue. In 2019, the company reported total operating costs of $12.7 billion on revenues of $39.1 billion, for a total operating cost margin of 32.5%. In its latest full-year 2021 results, the company reported operating costs of $14.8 billion in revenue of $46.7 billion for an operating cost margin of 31.7%.

Income statement Seeking Alpha NKE

NKE Operating Expenses / Sales (Seeking Alpha NKE Income Statement)

These multiple margin expansions should help the company, I believe, easily exceed industry analysts’ current expectations. Let’s take a look at these and see how they form in relation to my investment thesis.

Expectations: can easily exceed

Currently, the company operates in a market that is expected to grow at a CAGR (compound annual growth rate) of 6.6%, according to leading market experts. However, they are expected to increase their sales slightly, which means experts believe they should gain market share. This comes as no surprise, as they are investing heavily in bringing new athletic gear, apparel, and footwear to market.

Here are those expectations, based on Seeking Alpha’s analyst expectations aggregator for Nike’s sales over the next 5 years:

Looking for an Alpha NKE sales aggregator

NKE Sales Estimates (Research Alpha Projection Aggregator)

Let’s dive into the numbers with my aforementioned expectations. I think a gross profit margin of 48% on average over the next few years is appropriate given the decline in inflation (or even deflation from current cost structures).

On top of that, an average operating cost structure of 30% is appropriate I think given their continued transition to online sales and less need for higher cost operating expenses in physical stores underperformers. This 30% is not gross profit, but revenue, which is why the numbers are larger.

After that, I expect the company to incur $150 million in net interest expense, due to its cash investments generating more than $140 million to offset its $300 million in interest expense. annual interest on long-term debt. After that, I think a historically accurate income tax rate of 15% should be applied, because I think that over the next few years there may be an increase in effective corporate tax rates.

Here are the final numbers:

2023 2024 2025 2026 2027
Sales $48.9 billion $52.9 billion $57.7 billion $63.4 billion $69.7 billion
G. Profit $23.5 billion $25.4 billion $27.7 billion $30.4 billion $33.5 billion
O. Expenditure $14.8 billion $15.9 billion $17.3 billion $19.0 billion $20.9 billion
Tax rate $1.3 billion $1.4 billion $1.5 billion $1.7 billion $1.9 billion
Net revenue $7.25 billion $7.95 billion $8.75 billion $9.55 billion $10.6 billion

Given that the company has 1.575 billion shares outstanding, I expect the company to report approximately the following earnings per share for the following years:

2023 2024 2025 2026 2027
Project. PES $4.60 $5.05 $5.56 $6.06 $6.73

It’s worth noting that while there’s an argument for lower overall gross profit margins this year, with the company’s last quarter seeing a slight decline, the company is expected to continue its $18 billion share buybacks. , meaning that over the next 5-year period, we’ll likely see the number of shares fall below 1.575 billion, which should offset any temporary headwinds in gross profit margins.

These numbers show a serious acceleration in net income growth over the company’s current EPS expectations, which you can find here. This means, I believe, that with a multiple of around 18x for future earnings per share, the company presents a superior investment opportunity as it has the potential to grow around 15% per year over the next 4 to next 5 years. I believe this growth rate will easily outpace the broader market.

Conclusion of the investment

Nike has an extremely consistent revenue stream as a leading global sportswear and athletic apparel brand and those sales are expected to grow at a slightly faster rate than the overall industry as they capture share. Steps.

With my belief that margins will increase as they continue to shift to online sales and close underperforming retail stores – I believe they will easily outperform the wider market and have the potential to grow d about 15% to 20% per year. while the market is expected to continue to show an annual growth rate of 7%.

These are the factors that make me re-initiate my bullish stance on the company’s long-term prospects.

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