Nike: Can It Continue To Dominate?

Quick Summary

Nike (NKE) is the largest global athletic footwear and apparel brand in the world. Its product categories are footwear (67% of sales), apparel (30%), and athletic equipment (3%). In addition to the core namesake brand, Nike also sells products under the Jordan (high-priced basketball footwear and apparel) and Converse (casual footwear and apparel) brands. Nike's offerings are sold both wholesale to retailers like Dick's Sporting Goods (DKS) and Foot Locker (FL) (61% of sales), as well as direct to consumers through Nike's 7,000 store network and online channels (39%). This is very much a global company, shipping to more than 190 countries and 59% of sales coming from outside the North American market.

Photo by Josh Redd on Unsplash

Does The Company Have Rising and Recurring Revenues?

SOMEWHAT. Nike's 3-year revenue growth figure of 3% annually is not particularly impressive, although it rises closer to 7% if you back out the pandemic year of 2020, when sales declined over 5%. Longer-term, we believe 7-9% growth rates are likely, which is below the threshold of 10% we like to see for growth. Nike's opportunities continue to be outside the U.S., where it is not as penetrated and where organized sports are still being developed. Like many strong brands, Nike is also embarking on efforts to increase their direct-to-consumer sales, where the company can keep a larger piece of the sale, avoiding discounting and increasing gross margins. Nike sells consumer-based hard goods that are not structurally recurring, although they are consumables and need to be replaced in relatively short time intervals.

Does The Company Have Durable Competitive Advantages?

YES. Nike is a textbook example of a dominant CONSUMER BRAND, with its brand the recognized and long-time leader in athletic footwear and apparel all over the world. Many consumers shop for Nike products by default and are willing to pay more for the brand's quality and fashion cachet. The Nike brand has ranked in Forbes' Top 20 global brands for decades. Nike's worldwide market share in athletic footwear is about 27.5%, up from 16.8% a decade ago. Its revenue is 35% higher than its next closest competitor (Adidas). Nike has exclusive sponsorships with most of the world's most popular athletes across all major sports, including LeBron James (basketball), Cristiano Ronaldo (soccer), Mike Trout (baseball), Serena Williams (tennis), and many others. Over 75% of NBA players wear Nike or Jordan shoes! Nike has maintained its dominance for close to 40 years, despite aggressive competition from Adidas, Puma, Under Armour, New Balance, and many others.

GreenDot Rating: Yellow

Nike straddles the line between a GREEN and YELLOW rating. It owns three of the great consumer brands in the entire world in Nike, Jordan, and Converse; has dominated athletic footwear and apparel since the 1980s; has delivered 19% annual returns to investors over the last 15 years, and generates returns on invested capital in the mid-20% range. All of these are indicative of a truly great company - and investment. However, Nike is so ubiquitous that out-sized sales growth will be difficult to achieve going forward. Also, Nike's sales are not really structurally recurring. These factors limit its long-term investment potential - this is unlikely to be a stock that doubles or triples in 3 years. Dividends and share buybacks, along with an attractive valuation, will be key to continued market-beating investment returns. Nike should continue to do well, but it still profiles as more of a YELLOW (somewhat attractive) than GREEN business at this point in its lifecycle.