What you need to know about Nike stocks before investing

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business model

Nike (NYSE: NKE) is the world’s largest seller of athletic footwear and apparel. Nike sells directly to consumers, through its retail stores and digital platforms (known as “NIKE Direct”).

However, most of Nike’s sales come from sales to sales representatives. These can be wholesale partners such as department stores, sporting goods specialists and thousands of retail businesses. Nike distributed its products to them, who in turn then sold them to buyers.

Nike is also a globally diverse company with operations in hundreds of countries. It is therefore likely that no matter where you live, you will be able to buy Nike products!

Some products

There are six key categories in Nike’s offerings: Running, NIKE Basketball, Jordan Brand, Football (Soccer), Training and Sportswear.

NIKE product categories into (i) footwear, (ii) apparel and (iii) equipment.

Shoe

Nike is best known for its athletic shoes, with a wide variety of models to choose from. You can even design your own pair of Nike shoes!

NIKE shoes are designed for specific uses. Still, a large number of products are worn for casual purposes.

Currently, its sportswear, Jordan brand, and Running are the top-selling shoe categories.

Clothes

If you visit a Nike store, you will know that in addition to shoes, Nike is also very important for clothing. Sportswear, training, football (soccer) and running are currently the top-selling categories in clothing.

Equipment

Finally, Nike sells performance gear and accessories. This includes bags, socks, sports balls, glasses, digital devices, bats, gloves, protective gear and more.

Converse

Unknown to most, Converse is also a subsidiary of Nike. Converse also designs, distributes and licenses casual sneakers, apparel and accessories.

Various business departments

Product research, design and development

As consumers, we can see Nike as just another company that sells shoes. But, Nike puts a huge emphasis on innovation and high-quality construction. These ideologies are integrated into the development and manufacture of its products.

Nike’s research and development efforts focus on producing products that improve athletic performance, reduce injury and maximize comfort. In recent years, creating a sustainable manufacturing process and reducing waste has also become a priority for them.

To achieve this goal, Nike has its own team of specialists in all these key areas. Additionally, the company also uses research committees and advisory boards. They are athletes, coaches and other experts that Nike will seek advice from to improve its product and manufacturing process.

Then, using this market information and research, Nike design teams leverage new technologies to meet consumer preferences.

Constant innovation and the pursuit of excellence have built the brand image of Nike. This creates customer loyalty as Nike shows that it wants to offer the best to its customers.

Manufacturing

Today, almost all Nike shoes and apparel are made outside of the United States. It has more than 15 main independent contractors.

These factories are in countries like Vietnam, China, Indonesia and Cambodia. Currently, Vietnam is Nike’s largest manufacturing hub. About 51% of Nike shoes and 30% of Nike clothes come from Vietnam.

Thesis

Nike holds the largest market share in the global sports footwear and apparel market. And because of its continuous development, it should be able to maintain its dominant position.

The global sports footwear industry generated $109.70 billion in 2020. This huge industry is expected to grow further. It is expected to generate $165.00 billion by 2030, delivering a CAGR of 4.2% over the next decade. Since Nike is the dominant player in this industry, I expect it to grow with the industry.

In fact, management has announced high single-digit to low double-digit revenue growth for the next few years. They are confident that its earnings per share can grow even faster.

Nike Customer Experience

Another great innovation that Nike is working on is its customer service. Nike is revamping the way it sells its products to customers. It is becoming increasingly selective in choosing which retailers to partner with. And it focuses more on direct sales, as e-commerce accounts for a larger portion of its sales.

To consolidate its distribution channels, Nike identifies only 40 commercial partners with which to work. These trading partners must provide the best access to customers and must provide a differentiated commerce experience.

Nike is removing generic retailers that are unable to provide customers with an above-average retail experience. Their goal is to generate 80% of its wholesale business in North America through these differentiated retailers in 2023, up from 40% in 2017.

Next, Nike is also striving to have a greater percentage of its sales through its own channels. These include its suite of apps, including SNKRS, where it releases limited-release products.

Direct sales tend to have better margins because there is no middleman. It also gives Nike more direct connections to customers and their data; and they allow Nike to have more control over its brand.

By 2025, it expects direct sales, driven by its digital channels, to reach 60% of its business. Currently, direct sales accounted for 39% of total Nike sales as of FY21.

Go online

Nike’s decision to move to a digital-first organization has proven to be a good one. More and more consumers are turning to its website and app to shop for sneakers and apparel. This is true even when retailers started to reopen after the pandemic.

The company is on track to have its digital sales account for 50% of its total revenue in the coming years. Nike has very successfully embraced the structural shift in consumer shopping habits from traditional brick-and-mortar to digital.

Yet Nike hasn’t exploited the full potential of online sales. Therefore, the growth of its digital sales will continue to be a key factor in the future.

finance

Its revenue grew by an average of 8.27% CAGR from 2011 to 2021.

Revenue Breakdown – Product Type

Footwear accounts for about two-thirds of Nike’s revenue. Its apparel segment accounts for less than a third of Nike’s revenue. And gear is now just a small percentage of Nike’s revenue.

Other than that, Converse accounts for about 5% of Nike’s total revenue.

Revenue Breakdown – Sales Channel

Currently, its sales to wholesale customers account for approximately 61% of Nike’s total revenue. Its Nike Direct constitutes about 39% of sales.

In fiscal 2021, the pandemic-ridden year, NIKE Direct grew 30%, driven by 60% digital growth, while wholesale revenue grew only 10%.

Many consumers have to turn to Nike’s online stores during the lockdown. This shows how crucial it is for Nike to have a digital strategy to keep up with changing consumer spending habits.

Breakdown of revenues by geographical area

Today, the bulk of Nike’s revenue still comes from North America. 41% of total revenue came from North America, 27% from EMEA, 19% from Greater China and 13% from Asia-Pacific.

Risk: highly competitive sector

On the risk side, Nike faces issues with its supply chain and factories. However, I think the competition might be his biggest challenge right now.

The sports footwear, apparel and equipment industry is highly competitive on a global scale. Nike competes with a significant number of established brands, including Adidas, Anta, ASICS, Li Ning, Lululemon Athletica, Puma, Under Armour, and VF Corporation, among others. Nike should therefore continue to spend heavily on innovation and marketing to win the hearts and minds of consumers.

Summary

Nike is one of those companies that leaves a deep impression in your mind. Its slogan “Just Do It” is one of the most successful marketing campaigns of all time. The brand has created a strong following and reputation as a supplier of high quality athletic footwear and apparel.

Although already of considerable size, Nike still sees itself as a growing company. There are key growth areas for the business. For example, its digital commerce currently offers the biggest growth opportunity for the company. Other growth opportunities include increased demand for its “Women” and “Children” segments. Finally, the rise of developing countries like China will also be a key growth area for Nike.

With a sustainable company and an innovative culture, I think Nike is one of the most stable companies in the future.

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