Nike, Inc. (NKE) is increasingly investing in its digital sales, hurting smaller competitors like Foot Locker (FL). I’m bullish on the stock based on my estimates on its Q3 2022 earnings and fair value of the stock. The company’s demand creation spend grew from $729 million in Q2 2021 to $1,017 million in Q2 2022, up 40%, meaning it’s getting bigger. Despite supply chain challenges in recent quarters and its inventory constraints, Nike’s digital sales grew 12% in the second quarter of fiscal 2022 compared to the same period last year. I estimate Q3 2022 revenue at $11.9 billion for the company. Also, I estimate the stock to be worth $165.
NKE Q2 2022 financial results
In a YoY analysis, Nike reported a promising financial result in the second quarter of fiscal 2022. “Nike’s strong results this quarter provide further evidence that our strategy is working,” the CEO said. The company’s diluted EPS increased by 6% from Q2 2021 to Q2 2022. Additionally, NKE’s gross margin increased by 280 basis points from Q2 2021 to Q2 2022. Additionally, digital sales from Nike grew 9% year-on-year. But in a QoQ analysis, NKE’s Q2 2022 financial results were weak. In the second quarter of fiscal 2022, Nike reported revenue of $11.4 billion, compared to revenue of $12.2 billion in the first quarter of 2022, down 6.6% . Additionally, the company reported 2Q 2022 diluted EPS of $0.83, compared to 1Q 2022 diluted EPS of $1.16, down 28%. NKE’s gross margin increased from 46.5% in the first quarter of fiscal 2022 to 45.9% in the second quarter of fiscal 2022. Additionally, in the 2nd quarter of 2022, Nike’s digital sales increased by 12%, compared to 29% in the 1st quarter of 2022. Thus, a YOY analysis indicates that NKE is in a good position; however, a QoQ financial analysis does not support the COE’s claims. What happens next?
Estimated NKE revenue in 3Q 2022
In the second quarter of fiscal 2022, NKE reported total Nike-branded footwear revenue of $9.78 billion, compared to total Nike-branded footwear revenue in the first quarter of 2022 of 7. $82 billion, down 12.2%. Based on Google Trends data from August 31, 2019 through February 26, 2022, I estimate Nike’s footwear revenue in the third quarter of fiscal 2022. Figure 1 shows Nike’s interest over time based on web searches in the shoe shopping category in relation to Puma and Adidas. This indicates that user interest in Nike is higher than in Adidas and Puma.
Figure 1 – Google users’ interest in Nike and its competitors
I used data from Google Trends and NKE’s quarterly revenue totals for shoes to see if there is a correlation between online search and sales. Figure 2 shows a positive correlation between Nike’s quarterly shoe revenue and Nike’s web searches within the shoe shopping category in Google Trends.
Figure 2 – A correlation between Nike’s quarterly shoe revenue and Nike’s average weekly interest in the shoe shopping category according to Google Trends
Does this correlation imply a causal relationship between web searches and NKE revenue? Let’s look at the facts:
1) Invocation reported that 81% of retail shoppers research online before buying.
2) Adapting small businesses announced that nearly three-quarters of in-store shoppers conduct research online before visiting stores.
3) Oberlo reported that 63% of buying opportunities start online.
So, running a simple regression, I estimate Q3 2022 footwear revenue at $7.42 billion, up 9.4% YoY and 14% YoY. Additionally, using the ratio of NKE’s footwear revenue to total revenue from 2Q 20202 to 2Q 2022, I estimate total 3Q 2022 revenue for the company to be $11.9 billion; up 4.9% quarter-on-quarter and 15% year-on-year (see Table 1).
Table 1 – Estimated revenue and total revenue of Nike in the 3rd quarter of 2022
Nike has a dividend yield of 0.82% and its forward dividend yield is 0.88%, which is unattractive compared to its peers. Adidas has current and future dividend yields of 1.46%, while Nike’s forward dividend yield is more than 55% below the industry median of 1.99% (see Figures 3 and 4 ).
Figure 3 – Nike Dividend Yield
Figure 4 – Nike Dividend Yield vs Peers
Generally speaking, a higher dividend yield shows that the stock can generate more income. However, to dig deeper into the circumstances that affect dividend yields, I study other company metrics to provide a better picture of Nike’s performance. Nike’s payout ratio is 28.24% and its current payout ratio is 3.06, which is above the peer average of 2.09%. Meanwhile, Adidas has the lowest current ratio, 1.66. Generally, a higher general liquidity ratio reflects a company’s ability to meet its obligations because it has a greater proportion of current assets (see Figure 5).
Figure 5 – Current and distribution ratios of Nike compared to its peers
Besides NKE’s total equity up 85% to $14,924 million since 2020, the company’s net debt fell to -$2,380 million. In addition, NKE has managed to improve its liquidity by achieving negative net debt over the past two years. This means that the company has generated enough cash or profit to maintain its healthy financial position.
In addition, NKE has increased its cash and equipment by 28% to $10,751 million since 2020. Thus, its capital structure indicates that Nike can pay dividends or buy back shares. Looking ahead, NKE’s capital structure and growing cash generation show that there is a low likelihood of liquidity issues (see Figure 6).
Figure 6 – Capital structure of NKE
I am using the Discounted Cash Flow (DCF) model to value NKE stock. DCF indicates that the stock is fundamentally undervalued. Using the DCF method, I estimate the stock’s fair value to be approximately $165 per share. The advantage of the DCF is that the model does not require any comparison with similar companies and calculates the absolute value of a share. Additionally, I use the DCF model because the model reflects the financial health of a company (see Table 2).
Table 2 – NKE valuation based on the DCF model
Nike’s total return price indicates that the stock is profitable and, compared to other peers, such as Adidas, it is in a good position. So, I believe Nike has every chance to go up and get to $165 per share (see Figure 7).
Figure 7 – NKE vs peers
Additionally, as shown in Figure 8, Seeking Alpha Quant Rating indicates that over the past 90 days, most Wall Street analysts were long on this stock. Moreover, Figure 9 shows that the price target range is from $132 to $203.
Figure 8 – Breakdown of Wall Street analysts
Figure 9 – NKE price target
Besides the analysis mentioned, if you want to consider my recommendations on NKE shares, keep an eye out for the following risks:
1) From a price/earnings perspective, NKE’s forward PE ratio is 37.8x, which is higher than that of its peers. It may indicate that investors are paying dearly for every dollar of the company’s profits. In addition, the company’s forward PEG ratio is well above that of its peers, which may lead to the risk that NKE’s P/E ratio is not in line with growth (see Figure 10).
Figure 10 – Forward P/E and PEG ratios of NKE compared to its peers
2) NKE’s forward dividend yield is 0.88%, compared to the industry median of 1.97%. As a result, the company’s performance is 55% lower than that of the sector. This means that NKE’s market price is well above its dividend payments to shareholders. A low yield can affect the demand for the stock and cause its price to fall.
3) Chart 3 shows that the EV/sales is 4.6x, which is above the peer average of 1.5x. But, Adidas (OTCQX:ADDYY) has a P/E ratio of 19.34x, which is 13% lower than the peer’s average, and Under Armor’s (UAA) EV to sales ratio is 1.36x, which is 47% less than peer. Medium. Thus, only a significant increase in NKE’s sales compared to its competitors can justify its multiples.
Table 3 – NKE vs peer ratios (as of February 28, 2022)
In the second quarter of fiscal 2022, Nike reported strong year-over-year and weak quarter-over-quarter financial results. The stock’s EV/sales and P/E imply that NKE needs higher sales to stay on track. The company’s capital structure and strategies justify Nike’s multiples. I estimate Nike’s Q3 2022 revenue at $11.9 billion, up 4.4% QoQ. Also, using the DCF model, I estimate that NKE is worth $165 per share. In a nutshell, stock is a buy.