Just Do It.
Updated: May 1, 2020
Why we like Nike…
Nike – a name derived from the ancient Greek goddess of victory – is one of the most iconic names in the world of sport. The company is the leading seller of athletic footwear, apparel and equipment, with revenue of more than $34bn from sports including basketball, running, and football. Nike is well placed to benefit from attractive industry growth, driven by the continued focus on health and fitness, the rising middle class in emerging markets, and fashion trends in sportswear.
In addition to the strength of its brand, Nike’s competitive advantage is derived from its product quality and innovation, scale, relationships with some of the world’s greatest athletes, a strong connection with the consumer, and effective sourcing and distribution. In a fast evolving and competitive environment, with an increasingly demanding consumer, Nike operates a ‘triple-double’ strategy which aims to double the company’s pace of innovation, speed to market, and direct sales. Investment in innovation has created the third largest design patent portfolio in the US and a strong pipeline of new products, including improved footwear cushioning, Flyknit, and personalised digital products. The result is expanded opportunities for growth, with Nike skilled at getting more out of each innovation across brands and across sports. The company is increasingly addressing the needs of the consumer through direct channels, such as nike.com and Nike+ membership.
Nike generates 45% of its revenue in the US and is the market leader in a number of other countries. The company has a tremendous opportunity for growth in new markets given that current per capita spend on Nike products in fast growing developing markets is less than one tenth of that in developed markets.
The company has strong pricing power and has increased its sales on average by almost 10% p.a. since 2005, with a similar rate of growth expected over the medium term. Increased direct sales and greater efficiency in manufacturing is expected to increase the group’s industry leading margins and, we believe, grow its share of industry profitability. As a result, high returns on invested capital and strong cash flow generation are expected to continue. Capital allocation is sensible, with the company selling underperforming brands and exiting unattractive markets.
The group is financially strong – cash and short-term investments stand at $6.2bn – and has consistently returned capital to its shareholders via share buybacks and dividends. Overall, we believe Nike is thoroughly deserving of its position on the podium of attractive long-term investment opportunities.