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Nike company designs and sells athletic footwear, apparel, equipment, and accessories worldwide, through six segments: Running, NIKE Basketball, The Jordan Brand, Football, Training, and Sportswear.
Although Nike is the industry leader, short-term headwinds may negatively impact the share price. Therefore, we are neutral on the stock. (See Nike stock charts on TipRanks)
Measuring Competitive Advantage
We can measure Nike’s competitive advantage by comparing its earnings power value to the value of reproducing the business. Earnings power value is measured as adjusted EBIT after tax, divided by the weighted average cost of capital, and reproduction value can be measured using total asset value. If earnings power value is higher than reproduction value, then a company is considered to have a competitive advantage.
Nike’s average EBIT margin in the past 5 years was 12.6%. Using its revenue for the last 12 months, its adjusted EBIT is as follows:
46.192 billion x 0.126 = 5.8202 billion
Using a marginal tax rate of 21%, the after tax adjusted EBIT is:
5.8202 billion x (1 – 0.21) = $4.598 billion
Nike’s weighted average cost of capital is 7.8%. The earnings power value is:
4.598 / 0.078 = $58.9487 billion
Finally, its total asset value is $37.9 billion. As a result, Nike has a competitive advantage, because its earnings power value is greater than the reproduction value of the business.
Short-Term Headwinds
Although Nike is an industry leader with a measurable competitive advantage, the company will be facing some material headwinds in the coming months. Just like other companies, Nike is not immune to the supply chain issues that have been impacting businesses around the world.
In fact, in the latest earnings call, management noted that its manufacturers in Vietnam and Indonesia had been forced to shut down over the summer. Although operations in Indonesia have fully reopened, the ones in Vietnam remain completely closed, due to government mandates.
This disruption means that 10 weeks of production have already been lost in Vietnam; factories plan on reopening in phases, beginning in October. Thus, production won’t return to full capacity for another several months. As a result, Nike’s growth will be impacted, going forward, with management revising its guidance downwards for fiscal year 2022. Instead of low double-digit growth, Nike now expects mid-single-digit growth.
Moreover, this comes at a bad time, with the holiday season around the corner. Retail companies tend to make the most money at the ending quarter of the year. If Nike doesn’t have enough inventory for the holiday season, it could risk upsetting customers and losing some market share to competitors.
As of Q2 2021, Nike’s market share was 34.57%, meaning that approximately one-third of all industry sales belonged to the company. This illustrates just how important it is for Nike to have an adequate supply of inventory.
Wall Street’s Take
Turning to Wall Street, Nike has a Strong Buy consensus rating, based on 18 Buys and three Holds assigned in the last three months. The average Nike price target of $185.14 implies 25.9% upside potential.
Final Thoughts
Nike is a leading brand, and it has seen strong growth in the past year. However, the company is not immune to the global supply chain issues that are currently present. With its growth outlook cut in half, the stock price may see more headwinds in the short term. As a result, we believe it is better to watch from the sidelines for now.
Disclosure: At the time of publication, Stock Bros Research did not have a position in any of the securities mentioned in this article.
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