Consumer Discretionary Nike, Inc. (NYSE: NKE)

We believe that the large companies in sports apparelwill continue to utilize the outsourcing and internationalexpansion to boost sales because the US market is matureand the revenue in US market grows at a stable level.Porter Five Forces AnalysisPower of buyersThe customers’ purchase power is moderate. Footwear &apparels are essential items for customers. There is noother substituted commodities. Customers who are pricesensitive choose the inexpensive products. As thecustomers are gradually knowledgeable about the qualityof shoes and apparels, they are willing to buy highquality ones and expensive ones. The price range of thefootwear and apparels is from 100-- 500, not as high asthe price range of luxury goods. So the power of buyersis moderate. xPower of SuppliersThe main suppliers in this industry is the manufacturers.Companies in this industry are cooperating with thedeveloping countries’ manufacturers to decrease cost ofmaterials and labor cost. For instance, Nike hasoutsourcing contract with suppliers in developingcountries such as China, Mexico and India. The suppliersdo not have negotiate power with the companies becausethere are many suppliers for substitution worldwide. Sothe power of suppliers is moderately low.Threats of New EntrantsThe obstacles for new companies to the entry is relativelylow. The only requirements to start a new sportsapparel& footwear retail store are source of the suppliersand store to operate. But survival for the new stores isdifficult. The first threat is price competition. Largecompanies can discount their retail price to attractcustomers and increase sales. But small companies cannotafford the loss of discounted price. The second threat isbrand images. The new companies are difficult to berecognized by most customers in a short time. When theycan want to try other sales ways such as online sales, theycannot get positive effect because the customers are notfamiliar with the new companies, few of them would risktrying the new ways. So the threats of new entrants arevery high.Threats of substitutesThe threats of substitutes are very low. The apparel andfootwear are necessity for customers so the customerswill not replace them with other thing. They will onlychange the types of the products. So there is no worryabout the threats of substitutes.Competition of IndustryThe competition of the sports apparel& footwear industryis high because large companies occupy most marketshares.Source:StatistaAs data are shown on the form, Nike took 69% ofmarketshares in this industry. So it is high competitiveamong the apparel& footwear retailers. Other newretailers or small retailers cannot compete with it. In thisindustry, the small companies will seek acquisition by thelarge companies to expand their sales and avoid theintense competition. For example, the converse wasmerged by Nike and Reebok was acquisted by Adidas.So the apparel& footwear industry keeps intensivecompetition.Peer Comparison& Leaders in industryThe major companies in this industry can be defined asleaders. The determinants we define the best companiesinclude market cap, revenue, profit margin, P/E ratio, andreturn on equity (B)Revenue(B) Margin P/EROE103.85B 31.03B11.25% 30.87 29.08%18.86B3.69B5.82%89.40 15.39%3.97B3.00B7.47%17.55 20.43%6.33B1.90B14.05% 24.00 24.01%3.45B2.30B7.23%20.89 12.52%Source: Yahoo FinanceOur team think Nike is the leader in this industry basedon several items. First, Nike’s Market Cap is highestamong its competitors. The sum of the other fourcompanies’ market cap is much less than that of Nike.Important disclosures appear on the last page of this report.

Second, Nike’s higher P/E ratio compared to itscompetitors indicates that it has higher growth and higherprofit. Even though Under Armour’s PE reached to89.40, this number is too high and suggests that UnderArmour has high volatility. So the Nike is safer to investthan Under Armor. Third, Nike and Lululemon have over10% profit margin among these companies, butlululemon’s revenue is not as much as Nike’s. Nike’shighest ROE among its peers signifies that the companyutilize its equity value better to generate profit thanothers. So we believe that these signals about Nike’sprofitability will bring the investors advantages.Catalyst for Growth/Change: The recovery of U.S economy New Designs of the products Online services to attract more customersdesigns new products with high quality and sell them to thecustomers. Nike merged Converse, Hurley, and Jordan todevelop its multiple business.Product Lines and MarketsNike’s main products are divided into four categories:Footwear, Apparel, Equipment, and OtherFootwear: Nike’s footwear products are designed for bothathletic training and leisure. It innovates new designsannually. The Sportswear, Running, Basketball, and Football(Soccer) footwear are Nike’s top selling products.Apparel: Nike’s apparels are designed primarily for athletictraining use. Sportswear, Men's Training, Running andFootball (Soccer) are Nike’s focus on apparel. It alsosponsors the university sports teams and professional leagues.Equipment & other: Nike sells a series of sports equipmentand accessories under its brand name. It also sells differentplastic products to other manufacturers. xiiiKey Investment Positives Increasing demand for footwear Innovative design of the products International Expansion Large companies’ brand recognitionKey Investment Negatives Child labor scandals Intense Price Competition affecting profit marginsSource: Nike’s Financial Statement in FY 2015We think that Nike will continue to put focus on the footwearsales as the revenue from the footwear accounted for morethan half of the total sales.Company AnalysisCompany introduction:Nike, Inc. became a legal corporate in 1967. Its main businessactivity is the design, development and marketing and sale ofathletic footwear, apparel, equipment, accessories and otherservices. Nike sell its products through Nike-owned retailstores, other independent retail store such as Foot Locker, andonline retailers. Nike’s all apparel and footwear aremanufactured by the factories outside the United States andequipment products are produced both domestically andabroad. Nike has no significant customers since no customeroccupy 10% or more of the company’s net sales in recentthree fiscal years. xiLife CycleNike Inc. is in the mature stage of life cycle. From 2012, therevenue growth rate decreased from 19.78% to 4.88% thencame back to about 10% in recent three years. xiiSo we thinkthat the revenue growth rate come to a stable level. In order tokeep its current popularity among the customers, NikeAnalysis of recent earnings releases:On September 24th, Nike announced its first quarter earningsin Fiscal year 2016. The Earning per Share (EPS) is 1.34/share, beating the estimation— 1.19/share. Nike’searning report wrote that the reason why Nike had a highearning is the huge increase in Chinese sales. The sales inChina increased about 30% than previous quarter. (WSJ)Another factor is the slight increase in selling price.According to Nike’s 10-K report, the company wrote that itraised the retail price slightly to increase the gross margin andcompensate high input costs caused by labor cost inflationand shifts in combination of high-cost products. xivProduct DistributionNike distributes its products to over a thousand retail storesacross the world. In US market, Nike has 339 retail storesincluding the Converse stores and Hurley stores. Outside ofthe US market, it has 592 retail stores. Furthermore, Nike hasImportant disclosures appear on the last page of this report.

the hedging orders at a fixed price maturing almost half of ayear.Nike has 146 footwear factories located in 14 countries andabout 95% of footwear production comes from Vietnam,China, and Indonesia. Nike is supported by 408 apparelfactories in 39 countries. Top five contract manufacturers areresponsible for 36% of the total apparel production. Nikecorporates with the independent raw materials suppliershaving no risk failing to meet the requirement for theproduction. xvCompetitionNike competes with Lululemon athletica, Skechers, UnderArmour, Columbia, and others in different aspects: earnings,product characteristics such as quality and design, brandpopularity, and operating ways including sourcing anddistribution. xviNike gains more popularity than other competitors as itsponsors professional leagues such as NFL and NBA, over100 university athletic teams, and about 100 national sportsteam. On the other hand, Nike operate longer than its directcompetitors. Based on the profitability, popularity, operatingefficiency, we think that Nike is more competitive than itspeers. xviiiResearch& DevelopmentWhen developing the products, Nike hires the experts in thefields of biomechanics, chemistry, exercise physiology andother related fields. Nike also consults with the advisoryboard consisting of different athletics and sports experts toensure the safety and quality of the products. xixPayout PolicyNike’s dividend per share increases in recent three years—from 0.81 per share to 1.08 per share.The dividend payout ratio increased from 27% to 32% during2011-2013. Then in recent two years, the payout ratiodecreases slightly. But we believe that Nike will increase itsdividend payout ratio because Nike announced the programabout increasing the repurchase amount and the strongearnings report have enough resource to pay dividend to theshareholders. So there are more benefit to the shareholdersthan before and investors will be more confident about thecompany. xxCatalyst for GrowthSource:Yahoo FinanceWe believe that Nike has the highest profitability among itscompetitors because Nike has 3.95 earnings per share, higherthan other four competitors shown above.Source:Yahoo FinanceAccording to 10-k of each company, we found that Nike haslarge scale size of the production—over 500 factories andother competitors have just over 100 factories. Even thoughNike have large quantity of inventories, it can still operateefficiently. We can found Nike’s inventory turnover is thesecond highest, but Lululemon’s revenue is much less thanNike’s. xviiNike depends on the sales of footwear so we think that Nikewill innovative design on footwear to attract more customers.We also expect that Nike’s revenue growth in recent yearcontinue to increase because Nike expands its businessinternationally. In addition, better economy will stimulate thedemand for footwear and consumer’s preference on brandrecognitions will make the Nike competitive. Sponsorshipwith professional league, university athletic teams, andnational sports teams make Nike popular among theconsumers.Key Investment Positives Leading in the industry because of the highprofitability, large scale of production, effectiveoperation, and high popularity. Innovative Research & Design on footwear to attractmore customers International Expansion Various sales channel Increasing Demand for footwear CEO honored by Fortune Magazine xxi Corporation with Flex on manufacturing andsuppliesImportant disclosures appear on the last page of this report.

Key Investment Negatives Intense competition Increase Counterfeits in products xxii Dependence on other suppliers and manufacturersrevenue growth rate will increase in recent two yearsto 15%. Then the growth rate will decrease to asteady rate about 9%. Apparel: The apparel is the second largest Nike’srevenue stream. As Nike did not utilize too manyresearches& designs on this part, we assume that thegrowth rate will not have great change. In recent twoyears, the growth rate will increase because goodeconomy increase the demand for apparel for shortterm. Equipment: The equipment only accounts for asmall proportion of Nike’s total revenue. Equipmentrevenue decreases 2% in Fiscal Year 2015. We thinkthat the equipment has its duration for about 2 or 3years. So people will purchase to replace the oldones after 2 or 3 years. The growth rate in recent twoforecast year can be still be negative, but it will comeback to 1% after the steady growth period. Others: Other business include the accessories andsome services. Since it takes only a small part oftotal revenue, we assume that the growth rate is 2%,higher than inflation rateValuation AnalysisWe valued Nike by using the models including DiscountedCash Flow (DCF) model, Economic Profit (EP) model,Discounted Dividend Model (DDM), and Relative Model.After we calculated the values of four models, werecommend to buy Nike. From Nike recent earning reportsand economic announcement, we are optimistic about Nike.The results are different from each other. The DCF&EPmodels calculated an intrinsic value of 127.27 per share,which is 3.8% higher than the price as of November 17, 2015,The DDM Model we calculated showed a value of 153.51,about 20% higher than the current price. For the relativemodel, we got P/E 2016 estimated relative intrinsic price of 89.12 and P/E 2017 estimated intrinsic price of 90.96.These two results have 30% discount and 28.53%discount respectively when compared to the current price.Valuation 000.00DCFDDMRelative P/E Relative P/E17E16EGeneral AssumptionsContinuing Value (CV)When we determined the continue value growth rate, we usedthe long-term real GDP growth as an important factor. TheGDP historical average rate is about 3%. So we assumed thatthe CV growth rate is 3.3% the same rate as we predict longterm GDP growth. We believe that the recovery of theeconomy will stimulate the demand for footwear and sportsapparel. So we are optimistic about the growth.Revenue DecompositionWe searched the data from Nike’s 10-K to define the itemswe forecast. We divided the products category into four parts:Footwear, Apparel, Equipment, and others. Footwear: The footwear revenue growth rateincreases in recent 3 year because the demand for thefootwear increases and the selling price increasesslightly. The revenue of footwear accounts for 60%of total revenue. So we think that Nike’s footwearCost of Goods SoldThe cost of goods sold include the payment to independentsuppliers and manufacturers since Nike has no brand-ownedfactories. Nike decreases its cost of finished good bycooperating with other independent firms. We assume thatcost of goods sold margin will keep constant in recent fiveyears because we think that Nike spends time to find anothercost-saving materials or other cost-saving manufacturingprocess. From the steady growth period, we expect that thecost margin will decrease about 1% because Nike can findcost-saving ways to operate its business.Capital ExpendituresNike’s investing cash flow is mainly capital expenditurealmost without any other investment activities. The capitalexpenditure focuses on purchasing property for research&design or leasing capital. From Nike’s 10-K, we believe thatit will continue to increase its expenditure to make innovativedesign to be competitive in the market. We used the last fiveyears’ gross PP&E average increase to forecast the futurevalue of the gross PP&E. The remaining life time of the grossPP&E we assume is about 10 years since the 10-k reportestimate 5—15 years. xxiii The depreciation is calculated by astraight-line basis.Weighted Average Cost of CapitalNike’s Weighted Average Cost of Capital is about 7.2%. Itdid not conclude any preferred stock in fiscal year 2015.We calculated the cost of equity by using Capital AssetPricing Model (CAPM). Nike’s beta is 0.78 from Bloombergterminal, indicating that Nike is relatively stable comparedImportant disclosures appear on the last page of this report.

with other companies whose betas are larger than 1 whenmarket has changes. We choose today’s 30-year U.S.Treasury Bond (3.05%) as our risk free rate. The riskpremium is selected from 30 years average premium 4.42%.We found that the cost of equity was 6.54%. We used theyield to maturity of Nike’s 30-year bond. The value of debtinclude short-term debt, current portion of debt, long-termdebt and present valued of operating lease. The value ofEquity is measured by market value of stocks. Afterdiscounting the effect of tax, we calculated the final result ofWeighted Average Cost of Capital: 6.42%.economic profit and plus the Initial capital expenditure to getthe intrinsic value.We think that these two models provided us the bestestimation of Nike’s intrinsic value as the models includemore adjustments about the revenue, tax shields, and capitalexpenditure.Sensitivity AnalysisBeta vs. CV growth of NOPLATDiscounted Dividend ModelThe intrinsic value of Discounted Dividend Model is about 154.04 after adjustments. This model only uses thediscounted dividend in recent forecast years and continuevalue from calculation of EPS, CV ROE, and CV growth.Nike did not announce any news about its increase ondividend payout so we keep the dividend payout ratioconstant. We assume the CV growth rate for EPS is 3.3%because we think the profit growth rate will equal to the longterm real GDP rate from the steady growth rate. The DDMmodel only considers about the earnings, so we did not focustoo much on this model.Relative Price to Earning ModelThe results of this model are much less than the current stockprice. The reasons why the results is much lower than thecurrent stock price are the low P/E ratio of selectedcompanies and small EPS of these companies. We justchoose the Columbia Sportswear and LuLulemon becausetheir P/E ratios are not in outliers. Under Armour has a P/Eratio about 90 and Skechers’s P/E is lower than 15.Moreover, Nike’s P/E is much higher than Columbia andLuLulemon. If we use the relative P/E model with lower P/Eratio, we will lower the expectation about the Nike. Nike’searning is higher than its peers, so it is not accurate toestimate Nike’s price by using its peers with lower EPS.Discounted Cash Flow& Economic ProfitThe result of Discounted Cash Flow model is a closeestimation about the intrinsic value of Nike because thismodel considers different assumptions. We use the NetOperating Profit Less Adjusted Taxes (NOPLAT) to subtractcapital expenditure to get the Free Cash Flow (FCF). TheWACC estimation is better than cost of equity because itcontains mor

Nike, Inc. (NYSE: NKE) November 17, 2015. Current Price 122.58 . Target Price 127.7 . Nike Comes Back We recommend investors to buy Nike. We also believe that Nike will rise to our target price and refresh its 52 week high record. Nike’s CEO Mark Parke