Nike, a role model of growth stocks in non-tech industry

Since I have described in detail how to screen for super growth stocks in the book “The Rules of Super Growth Stocks Investing”, Chapter 5 of the book also mentioned that I own Nike (ticker: NKE) stock before, but I focus on the book Everyone is talking about technology stocks, and there are still many friends who want me to have the opportunity to talk about non-technology stocks. That’s why I wrote an article on my blog last year, “Discover the possibility of super growth stocks in the civilian production industry “, and I have also talked about a lot of non-tech stocks in this blog. This article is about a company listed on the US stock market that I think is very respectable, from all aspects, Nike is very admirable.

Have strong and loyal customers

We usually use Apple’s (ticker: AAPL) product popularity and a large number of loyal customers as an example of whether a company has an ecosystem. Indeed, having a large number of loyal customers is one of the important criteria for judging the corporate ecosystem. Nike is not far behind in this regard. Its products have long been popular with American teenagers. Every year, various polls have confirmed that Nike’s products have long been the first in the apparel category.

According to a Piper Sandler survey of 7,100 U.S. teens with an average age of 16.2 in 44 states from February 16 to March 22, 2022. Nike has been the favorite clothing brand of teenagers for 11 consecutive years, followed by American Eagle (ticker: AEO) and Lululemon (ticker: LULU), which is also a sports and leisure brand. Nike is also the teen’s favorite footwear brand, followed by Nike’s Converse and then Adidas (ticker: ADDYY).

Teenagers are the largest group of sportswear consumers.

Nike’s competitors

Including Adidas, ASICS, Lululemon, Puma (ticker: PUMSY) and Under Armour (ticker: UAA).

Nike’s business units

Nike divides its financial metrics into three main divisions:

  • Nike brand
  • Converse
  • Enterprise

The Nike Brands segment can be further subdivided into geographic regions: North America, EMEA, Greater China, Asia Pacific and Latin America, and the Global Brands segment. Nike’s brand segment, which accounts for 95% of the company’s total revenue, will perform as follows in the fourth quarter of 2021:

Business and Brands segment RevenueEBIT
Brands segment -North America$3.9 billion +8.9%$967 million -0.3%
Brands segment – Europe, Middle East, Africa$2.8 billion +6.5%$713 million +33.8%
Brands segment – Greater China$2.2 billion -5.2%$784 million -19.4%
Brands segment – Asia Pacific and Latin America$1.5 billion +11.1% $478 million -17.2%
Converse $567 million -0.5%$168 million +12.0%
Enterprise-$19 million-$412 million元

Nike’s Converse division designs, distributes, licenses and sells casual athletic footwear, apparel and accessories; owns several important trademarks:

  • Converse
  • Chuck Taylor
  • All-Star
  • One Star
  • Star Chevron
  • Jack Purcell

Nike’s corporate segment revenue consists primarily of foreign exchange hedging gains and losses related to revenue generated by other segments of Nike.

The share of revenue generated by each of Nike’s product lines in the fourth quarter of 2021 is:

  • Footwear (66%)
  • Clothing (30%)
  • Equipment (4%)
  • and others — including revenue from licensing operations in the Global Brands segment and Converse segment, and foreign currency hedging gains and losses in the Enterprise segment.

The sales channel is changing to direct sales to consumers

Revenues from Nike’s sales channel in the fourth quarter of 2021 are as follows:

  • Sales to wholesale customers accounted for 55%, down 2.4% year over year
  • Direct-to-consumer sales (i.e. NIKE Direct) accounted for 44%, up 15.9% year over year
  • The rest can be ignored

However, Nike’s biggest strategic change in recent years is to change the wholesale sales method that it relied on in the past to direct sales to consumers. “Over the past four years, we have reduced the number of global wholesalers by more than 50%, while achieving strong growth through Nike Direct and our remaining wholesale partners,” the company’s chief financial officer said in the fourth quarter 2021 earnings call.

The move has grown in importance since the pandemic began disrupting manufacturing and logistics supply chains. In terms of financial prospective, selling to wholesalers is less profitable than selling direct to consumers. In the nine months ended February 28, gross profit margin also rose by nearly 200 basis points to 46.4% (TSMC in the technology industry is only 50%, but Nike is a traditional industry). This is up from 44.4% a year earlier.

But there’s a risk in doing so, and if it proves unable to generate enough sales from its own direct sales pipeline, it could be a double-edged sword by reducing the overall profit despite the improved margins.

Market valuation

IndexNumber
Share price129.38
Market Capitalization203.61 billion
P/E34.19
P/S4.4
Dividend yield0.94%

Stock performance

As shown in the chart below, its stock price has risen by 131.66% in the past five years. Please note that this is a five-year push back from 4/7/2022, so the result of the sharp correction of the US stock market in the first quarter is included. This result is actually more than many Tech stocks are doing fine.

Disclaimer

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