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Some investors who acquired Nike (NKE) shares in 2021 when they were overvalued, wouldn't consider buying shares now that they are undervalued.
Other investors who fixate on stock charts will look at NKE's mid-September 2019 share price and the current share price (~$90 as I compose this post) only to find they are fairly similar and for this reason, would deem NKE to be a potentially terrible investment.
If we delve into the numbers, however, we see that in FY2019 (May 31, 2019), NKE reported:
- Revenue: $39.117B
- Operating Margin: 12.2%
- Net Profit: $4.029B
- Free Cash Flow: $4.784B
- Diluted EPS: $2.49
- Diluted weighted average common shares outstanding: 1,618.4 million
In FY2023 (May 31, 2023), NKE reported:
- Revenue: $51.217B
- Operating Margin: 11.55%
- Net Profit: $5.070B
- Free Cash Flow: $4.872B
- Diluted EPS: $3.23
- Diluted weighted average common shares outstanding: 1,569.8 million
If we factor inflation, $90 in 2019 is roughly the equivalent of ~$108 today (see US Inflation Calculator).
Given the above, would you rather pay ~$90/share for NKE shares in mid-September 2019 or in late September 2023?
Sure, NKE is certainly facing headwinds. With an increasing number of consumers experiencing financial strain, some analysts are downgrading NKE. If, however, you think NKE is likely to remain a dominant force in the 'Footwear and Accessories' industry, would it not make sense to acquire shares while it faces temporary headwinds and the valuation suggests NKE is on the ropes?
In my July 8 Nike (NKE) post, I concluded that a share price below the mid-$90s is the level at which I would consider adding to my exposure. So....on September 27, I acquired another 100 shares @ ~$90/share bringing my NKE exposure to 722 shares in a 'Core' account within the FFJ Portfolio. My daughter holds NKE shares in a taxable account and I also increased her NKE exposure. I do not, however, disclose details regarding her investments.
Let's have a quick look at NKE now that Q1 2024 results are available.
Financial Review
Q1 2024 Results
NKE's most recent results are accessible in this Earnings Release.
NKE's inventory metric is closely monitored following an inventory glut that has plagued it for the last several quarters. Analysts had anticipated inventories of $8.84B but NKE reported ~$8.7B versus ~$9.66B in Q1 2023.
Direct-to-consumer sales, a closely watched growth metric, increased to $5.4B, a ~6% increase from Q1 2023.
Revenue in Greater China has been a key concern since NKE has significant exposure to China and there are geopolitical risks and reports of slower economic growth in the Chinese economy.
Looking at the chart below, we see that NKE generated $1.735B of revenue from the Greater China market versus $1.656B in Q1 2023.
On the Q1 earnings call, NKE executives noted that:
Sport is back in China, you can just feel it. That gives us great confidence about the future and the Chinese consumer in our segment regardless of the macroeconomic outlook there.
Another area of concern is Foot Locker's warning about a month ago of a slowdown in its footwear business due to 'price-sensitive' consumers. About 64% of Foot Locker's sales are the NKE brand and if Foot Locker struggles to offload NKE inventory, it is reasonable to question the impact on NKE's wholesale market. On the Q1 earnings call, however, management highlighted that no retail partner represents more than a 'mid-single' digit portion of NKE's overall sales.
Management also stated on the earnings call that:
Working capital efficiency is improving with a normalized supply chain. Gross margins are expanding on an operational basis, excluding the effects of foreign exchange, and transitory headwinds are abating.
Free Cash Flow (FCF)
NKE is highly profitable and repeatedly generates strong Free Cash Flow ($1.261B, $2.434B, $2.133B, $3.717B, $2.256B, $2.741B, $3.927B, $4.784B, $1.399B, $5.962B, $4.43B, and $4.872B in FY2012 - FY2023). The Q1 2024 consolidated statement of cash flow is not yet available as I compose this post.
FY2024 Outlook
NKE continues to expect reported revenue to grow mid-single digits in FY2024.
Expectations are for 140 - 160 basis points (bps) gross margin expansion. This includes 50 bps of negative impact from foreign exchange headwinds.
Selling, general and administrative expenses (SG&A) are expected to be at the high end of mid-single digits which will outpace revenue growth.
The forecast for other income and expenses, including net interest income, remains at ~$0.225B - $0.275B.
Management continues to expect the effective tax rate to be in the high-teens range.
In Q2, reported revenue growth is expected to be up slightly versus Q2 2023 as NKE faces its most challenging comparisons from FY2023.
The gross margin in Q2 is expected to expand by ~100 bps versus the prior year. This increase reflects the benefits of strategic pricing, improved markdowns, and lower ocean freight
rates, partially offset by higher product input costs.
Risk Assessment
NKE's Q1 Form 10-Q is currently unavailable, however, $8.929B of long-term debt reflected in the Form 8-K released on September 28 is similar to $8.927B at FYE2023.
We see from this schedule that NKE is borrowing at VERY attractive rates. Furthermore, the scheduled maturity suggests that NKE should easily be able to retire its obligations.
Source: NKE - FY2023 Form 10-K
NKE's domestic senior unsecured long-term debt credit ratings remain unchanged from the time of my last review; Moody's assigns an A1 rating while S&P Global assigns an AA- rating.
Moody's rating is the top tier of the 'upper-medium grade' investment-grade category. S&P Global's rating is one notch higher at the bottom tier of the high-grade investment-grade category.
Moody's rating defines NKE as having a STRONG capacity to meet its financial commitments. It is, however, somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
S&P's rating defines NKE as having a VERY STRONG capacity to meet its financial commitments with its rating differing from the highest-rated obligors only to a small degree.
Dividend and Dividend Yield
On August 3, NKE announced that its Board declared a $0.34/share dividend on the outstanding Class A and Class B Common Stock payable on October 2, 2023, to shareholders of record at the close of business on September 5, 2023; this marks the 4th consecutive quarterly dividend at this level.
While NKE has increased its dividends for 22 consecutive years, dividend metrics are of little relevance in my investment decision-making process. My interest lies in an investment's TOTAL potential shareholder return. I would much rather a company retain funds or repurchase attractively valued outstanding shares if these methods of capital allocation will generate superior returns than what could be attained from dividend distributions.
When I wrote my July 2021 review, NKE's $1.10 annual dividend yielded ~0.68% based on the current ~$162 share price.
At the time of my March 22, 2022 post, NKE's share price was ~$133. Based on NKE's $0.305 quarterly dividend, the dividend yield was ~0.09%.
When I wrote my July 5, 2022 post, shares traded at ~$101. Based on the current $0.305 quarterly dividend, the dividend yield was ~1.2%.
On November 15, 2022, NKE declared a $0.34 quarterly dividend and on July 5, 2023, it distributed its 3rd quarterly dividend at this level. Using the current ~$104.50 share price, the dividend yield was ~1.3%.
Looking at NKE's recent dividend increases, it is not unreasonable to envision that NKE will declare a ~$0.03 increase to its quarterly dividend in mid-November. If this materializes, then the four next quarterly dividends will amount to ~$1.48 ($0.37 x 4). Using the current ~$90 share price, the forward dividend yield would be ~1.64%.
NKE has been a prolific buyer of its issued and outstanding shares.
Throughout FY2023, NKE repurchased 50 million shares for $5.5B. Of this total, 6.5 million shares were repurchased for $0.7B under the previous four-year, $15B program approved by the Board in June 2018. The remaining 43.5 million shares repurchased for $4.8B were retired under the current four-year, $18B program approved by the Board in June 2022.
In Q1 2024, NKE repurchased $1.1B, reflecting 10.5 million shares retired as part of the current share repurchase program.
As of August 31, 2023, NKE had repurchased 54 million shares under the program for a total of ~$5.9B.
The weighted average number of outstanding shares in FY2011 - 2023 (in millions rounded) is 1,943, 1,879, 1,833, 1,812, 1,769, 1,743, 1,692, 1,659, 1,618, 1,592, 1,609, 1,611, and 1,570. The diluted weighted average common shares outstanding in Q1 2024 have been further reduced to ~1,543!
Valuation
NKE's FY2012 - FY2023 diluted PE is 21.86, 26.75, 28.62, 30.34, 22.39, 27.08, 55.74, 35.42, 79.93, 43.75, 33.05, and 27.92.
When I wrote my March 22 post, NKE shares were trading at ~$133. Adjusted diluted EPS estimates from all the brokers which cover NKE had yet to be provided but using what was available, these were the valuations based on what was currently available.
- FY2022 - 34 brokers - mean of $3.69 and low/high of $3.42 - $4.01. Using the mean estimate, the forward adjusted diluted PE is ~36.
- FY2023 - 34 brokers - mean of $4.64 and low/high of $4.10 - $5.19. Using the mean estimate, the forward adjusted diluted PE is ~28.6.
- FY2024 - 23 brokers - mean of $5.48 and low/high of $5.10 - $6.00. Using the mean estimate, the forward adjusted diluted PE is ~24.2.
At the time of my July 5, 2022 post, shares were trading at ~$101. NKE's valuation based on adjusted diluted earnings estimates was as follows:
- FY2023 - 32 brokers - mean of $3.93 and low/high of $3.46 - $4.85. Using the mean estimate, the forward adjusted diluted PE is ~25.7.
- FY2024 - 30 brokers - mean of $4.73 and low/high of $4.00 - $5.59. Using the mean estimate, the forward adjusted diluted PE is ~21.4.
- FY2025 - 12 brokers - mean of $5.66 and low/high of $5.07 - $6.51. Using the mean estimate, the forward adjusted diluted PE is ~17.8.
When I wrote my July 8, 2023 post, shares were trading at ~$104.50. NKE's valuation based on adjusted diluted earnings estimates was:
- FY2024 - 32 brokers - mean of $3.74 and low/high of $3.48 - $4.00. Using the mean estimate, the forward adjusted diluted PE is ~28.
- FY2025 - 32 brokers - mean of $4.40 and low/high of $3.90 - $5.0. Using the mean estimate, the forward adjusted diluted PE is ~23.75.
- FY2026 - 13 brokers - mean of $5.11 and low/high of $4.59 - $5.81. Using the mean estimate, the forward adjusted diluted PE is ~20.5.
Using my recent ~$90 purchase price and current adjusted diluted earnings broker estimates, NKE's valuation is:
- FY2024 - 35 brokers - mean of $3.71 and low/high of $3.50 - $3.89. Using the mean estimate, the forward adjusted diluted PE is ~24.3.
- FY2025 - 34 brokers - mean of $4.35 and low/high of $3.81 - $4.82. Using the mean estimate, the forward adjusted diluted PE is ~20.7.
- FY2026 - 16 brokers - mean of $5.03 and low/high of $4.29 - $5.80. Using the mean estimate, the forward adjusted diluted PE is ~17.9.
Final Thoughts
NKE was not a top 30 holding when I completed my mid-2023 Investment Holdings Review and it is still not in the top 30. Nevertheless, I view NKE as a high-quality company and am prepared to increase my exposure at opportune times.
I am concerned about the financial state of NKE's end markets. If interest rates remain elevated much longer, I would not be surprised if NKE were to report lacklustre results over the next few quarters. Despite this risk, I invest for the very long term and am grateful when NKE shares are undervalued.
NKE's debt load is extremely manageable with no major debt repayments scheduled before March 27, 2025. Between now and then, I envision NKE's strong FCF generation capabilities will permit it to aggressively repurchase shares. This is all the more reason why I would like NKE's share price to remain under pressure.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long NKE.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.
