NIKE, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

NIKE, Inc. is a global sportswear giant, renowned for its iconic brand, athletic apparel, footwear, and equipment, sold through a diverse network of retail and wholesale channels.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview and Competitive Landscape NIKE’s operations are multifaceted, spanning across various product lines and geographical regions. Its business is divided into two major reportable segments: NIKE Brand and Converse. The NIKE Brand segment is what the company is most known for which includes NIKE Brand footwear, apparel, equipment, and accessories. It operates through a diverse network of both wholesale, direct to consumer (DTC) digital, and retail. The brand is one of the most recognizable in the world. The Converse segment which accounts for about 6-7% of total revenues, consists of casual sneakers and clothing.

Nike’s revenue model relies on:

  • Wholesale: Sales to retailers, including department stores, athletic specialty stores, and other retailers globally.
  • Direct-to-Consumer (DTC): Sales through its own retail stores (both physical and digital) and websites.
  • Licensing: Revenue generated from licensing the NIKE brand to various other companies. This diversified revenue stream gives it flexibility to face changing consumer preferences. The industry in which NIKE operates is fiercely competitive. Nike faces competition from athletic-wear companies like Adidas and Under Armour as well as casual athletic companies like Lululemon and others. The sportswear and athletic footwear markets are intensely global and are vulnerable to changes in consumer preferences, trends, and demographics, as well as shifting trade dynamics and geopolitical events.

Nike’s financial performance largely depends on innovation, consumer trends, and competitive activity. There is heavy competition between Adidas, Nike, and other brands that compete in these areas, meaning their financial results can be quite variable from quarter to quarter. They do have a strong brand identity, large market share and considerable R&D that puts them in a favorable position when competing against other companies.

The gross margin for NIKE varies across product categories and geographic locations. Higher-margin products and regions often result in a higher overall gross profit. For example, their direct to consumer channel tends to have higher gross margin. They have recently shifted focus to increasing their DTC sales. The company has done better in sales over the last few quarters with strong demand. The overall gross profit was up in Q4 2024 on a reported basis and was due to the company’s continued emphasis on full price selling.

Management expects that for FY 2025, gross margins should increase due to the company’s focus on driving full price sales and lowering markdowns. Operating expenses are expected to be flat with a slightly higher percentage of total revenue.

NIKE is vulnerable to supply chain disruptions. They have had issues with inventory levels in the past years. They have tried their best to reduce inventory levels by selling goods at discounted prices in outlet and stores. Nike also faces pressure on their earnings by having to invest significantly in marketing to stay top of the brand, and by continuing to innovate in design and materials to stay up to date with trends and keep their competitive advantage.

Moat Analysis (3/5): While NIKE boasts a powerful brand and extensive distribution network, its moat is arguably not ‘wide’. Their brand loyalty is strong, but can be weakened due to changing trends and increasing marketing and R&D costs needed to keep the edge. Their distribution network is vast, but is not hard to replicate, and as direct to consumer becomes a bigger percentage of their sales, they have had lower and varying margins. Here are factors affecting NIKE’s moat:

  1. Brand Recognition: Nike’s brand is a substantial asset and results in brand loyalty and willingness to pay for premium price.
  2. Scale: They produce at massive scales and have a very large brand presence and network, and can spread fixed costs over many more units than competitors.
  3. Innovation: NIKE is always looking for new designs and technology for new shoes and athletic gear, which does help in securing their position in the industry.
  4. Distribution: Their expansive global reach and partnerships give it an edge. However, the market has many retailers that carry NIKE products. That means the customers are not as tied to NIKE, as they can buy the goods elsewhere.

Risks to the Moat:

  1. Changing Consumer Preferences: Their brand could suffer if the brand is unable to meet the ever-changing tastes of its consumers. As fast fashion, sustainability becomes a larger part of peoples lives, they can quickly lose their advantage.
  2. Competitive Pressures: The sportswear industry is highly competitive. Competitors could launch disruptive products or strategies that diminish Nike’s brand appeal.
  3. Technological Disruption: New technologies in fabrics or manufacturing could render current Nike production methods less efficient.

Business Resilience: Despite threats to their moat, they remain incredibly resilient. The brand is strong, is recognized by most customers and they also have a very large and diversified network of sales channels. Also, the scale of operations for NIKE is incredibly large compared to its competitors. Even though returns on capital may vary in future periods, the brand is able to return to profitability relatively quickly.

Financial Overview: NIKE’s most recent 10Q for the 3rd quarter fiscal year 2024 shows:

  • Revenue has been growing with a 3% increase on a reported basis and a 6% increase on a currency-neutral basis. NIKE has had to push sales at wholesale to keep revenues up because DTC has been underperforming in key markets.
  • Gross margin decreased slightly to 44.2% due to increased freight and logistic costs and higher markdowns, which is quite high as compared to many competitors in the retail industry.
  • Operating expenses increased but at a lower rate than revenue growth, which improves profits.
  • Net income decreased by 9% to $1.1 Billion due to an increase in taxes.
  • Inventory levels continue to be high because they anticipated high customer demand but that demand was not as strong as anticipated. They have also started reducing their inventory at the end of the previous fiscal year.

The company has a high level of revenue ($12.4B in just three months) and high levels of earnings. This shows a strong company that generates consistent cash flow and has high profitability. They have a mix of high and low-margin areas that helps to cushion the effect of underperforming segments.

Their 10K for 2023 showed that they had around $10.4 Billion in cash, $4.9 Billion in short term investments, and $1.1 Billion in long-term investments. They also had $6.9 Billion in long term debt. This shows they are in a good financial position, with enough liquidity and cash for investments or acquisitions. The stock has a beta of 1.27. This means that the stock is correlated with market fluctuations.

Recent Concerns and Management Response: In the earnings call, management has focused on actions they are taking to get inventory back in line, and to manage their DTC channels more efficiently. There were several concerns about their operations in China, where they have seen a decline. Management stated they have had to take a more balanced approach to China by increasing local product offering and making the product more desirable to local consumers, as well as expanding their digital presence.

Understandability (2/5): While NIKE sells well known products, and its financial statements are well laid out, it’s complicated to understand the interrelation of all its segments and regions with its brand dynamics and supply chain. Understanding the effect of currency rates, local economies, and competitor actions on NIKE’s financial results requires a deep understanding of the business, making it a low scoring company in terms of understandability.

Balance Sheet Health (4/5): NIKE has a strong balance sheet with large cash reserves, short and long-term investments, and a healthy equity base. However, they also have significant debt that can add risk if they are unable to pay it, or if interest rates increase. Their debt is still well below its assets, indicating good financial health. Given the risk of a slowdown in the future and the high inventory levels that will require discounts to clear, management may have to re-evaluate debt usage if business conditions worsen. Their debt-to-equity ratio is high, but considering their size and profitability, they are not in a position of financial distress.