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Natasha Chou
Spring 2013
Student Managed Investment Fund
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Agenda Our Recommendation: HOLD Business Description Industry Overview Competitive Positioning Revenue and Margin Drivers Valuation Financial Analysis Investment Risks Q&A Session
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Business Description
Founding and History Founded in 1964 as Blue Ribbon sports - originally a distributor Became “Nike” in 1978 – now a global iconic brand Ever since Nike was established, innovation has been a key
driver to the company’s success
Management Founded in 1964 as Blue Ribbon sports - originally a distributor Became “Nike” in 1978 – now a global iconic brand
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Leader in Innovation Nike Sports Watch Nike Plus Fuel Band iPod Nike app Shox Dri-Fit
Business Description
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Product Mix Corporate restructuring
Sold Umbro and Cole Haan in 4Q 2012 to refocus business model Focus on Jordan, Converse, NIKE brands
Expected: Increased profit margins and dividends
FY 2010 FY 2011 FY 201241.00%
42.00%
43.00%
44.00%
45.00%
46.00%
47.00%
NIKE Gross Margin
Gross Margin
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Sales Mix
Footwear64%
Apparel30%
Equipment6% Global Brand Divisions
1%
FY 2012 Sales Mix
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Growth Strategy Focus on China
Utilizing Basketball and NBA Players to raise awareness Targeting the youth market 17% Growth from FY 2010 to FY 2011 23% Growth from FY 2011 to FY 2012
FY 2010 FY 2011 FY 2012$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
Reveue from China
Reveue from China
FY 2010 FY 2011 FY 20128.00%
8.50%
9.00%
9.50%
10.00%
10.50%
11.00%
Percentage of Total Revenue
Percentage of Total Revenue
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Industry Overview Nike is the leading player in the athletic footwear industry
Company Market Cap.
NIKE (NYSE) $54.82 billion
Adidas (FWB) $16.6 billion
Under Armour (NYSE) $5.87 billion
Asics (TYO) $3.60 billion
Sketchers (NYSE) $1.13 billion
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Industry OverviewCompany Fiscal 2010 Fiscal 2011 Fiscal 2012 CAGR (2010-
2012)Nike $10,301 $11,518 $13,426 14.2%
Adidas Group (includes Reebok)
$7,021 (€5,389)
$8,132 (€6,242)
$9,018 (€6,922)
13.3%
Puma $1,856 (€1,425)
$2,006 (€1,540)
$2,078 (€1,595)
5.8%
Asics $1,759 (¥165,808)
$1,857 (¥175,057)
$1,940 (¥182,807)
5.0%
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SWOT Analysis
Strengths• Global Market Leader with Iconic
Brand Name• Heavy emphasis in R&D• Share buyback program will restore
shareholders’ confidence in company
Opportunities• Potential to penetrate relatively
unsaturated emerging markets• Product Development – Nike is
arguably a fashion brand and has potential to market to fashion forward youth culture
Weaknesses• Labor and factory conditions has hurt the
company’s publicity• Nike has wasted resources in the past
few years by investing in a fashion focused company
Threats• Fierce sponsorship competition from
Adidas and other well known brands• Possibility of having unforeseen losses
due to currency fluctuation
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Porter’s Five Forces
Factor Score Description
Buyer’s Power Neutral Buyers have many different options when it comes to which brand they choose. However, they have very little influence over prices.
Supplier’s Power Weak Suppliers have very little power since they are supplying raw materials and there is no differentiation from one supplier to another.
Industry Rivalry Intense There are many different brands with similar products offered at similar prices.
Threat of Substitution High There is little differentiation between products of one brand and products of another.
Barriers to Entry High Brands that are already in the market have built brand equity that can be difficult to challenge.
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Valuation
DCF: $48.91 to $57.29
Key assumptions Valuation Date Revenue Growth Terminal Value
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Valuation
Comparable Model: $38.82 to $62.31 Competitors PE TEV/EBITDA TEV/REVENUE
Residual Income: $49.91 to $79.19 LT Growth of 1.5%
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Valuation
- Final Price Range $49.91 to $57.29- Market Price at Valuation Date: $59.53
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Revenue and Margin Drivers
Revenue Drivers Focus on the consumer Research and Development
Margin Drivers Low Manufacturing Cost Adapting to global economies
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Financial Analysis Revenue, Net income and Profit margin
2008 2009 2010 2011 2012 0
5,000.0
10,000.0
15,000.0
20,000.0
25,000.0
30,000.0
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
Revenue(M)
Net income(M)
Profit Magain(%)
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EBT Excl. Unusual Items
2,442.3
2,553.0
2,517.0
2,844.0
3,007.0
3,087.0
Restructuring Charges
- (195.0)
- - (24.0)
(24.0)
Impairment of Goodwill
- (199.0)
- - - -
Gain (Loss) On Sale Of Assets
60.6
- - - - -
Asset Writedown
- (202.0)
- - - -
Other Unusual Items
- - - - - -
EBT Incl. Unusual Items
2,502.9
1,957.0
2,517.0
2,844.0
2,983.0
3,063.0
Sale of Umbro to Iconix (December 2012)
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Working capital and Free cash flow
2008 2009 2010 2011 20120
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
Working capital
Free cash flow
•Working capital decreased by $782 million from $3,377 million in 2009 to $2,595 million in 2010 because of the increase of cash and cash equivalents
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Investment Risks
Financial results may be adversely affected if substantial investments fail to produce expected returns
Risks associated with overseas sourcing, manufacturing, and financing
Concentration of retail market share among a few retailers may increase Nike’s credit risk and ability to sell their products
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Conclusion
Our Recommendation: HOLD A global iconic brand name Penetrating relatively unsaturated markets globally Refocusing its business model on its core competency Steady increase in dividends Stock buyback program will restore shareholder confidence
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Q&A Session
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Appendix
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Appendix
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