Report
David Swartz
EUR 850.00 For Business Accounts Only

Morningstar | Wide-Moat Nike’s Globally Powerful Brand Provides the Edge Over Its Many Rivals; FVE Increased

We maintain our wide moat rating on Nike but raise our fair value estimate to $98 from $80. We have reduced our long-term tax rate forecast on Nike to 15.5% from our prior view of 22.0%. Nike’s tax rate has declined over the past few years as it has avoided taxes by using offshore accounts in low-tax jurisdictions. We expect it will continue this practice. We have also changed our view on Nike’s willingness to raise leverage to fund stock buybacks, having reduced our fiscal 2028 long-term debt forecast to $5 billion from $12 billion.

Our wide moat rating is based on Nike’s intangible brand asset, as we believe it will maintain premium pricing and generate economic profits for at least the next 20 years. We think Nike’s strategies allow it to hold its leadership position in categories like running and basketball. Nike is reducing its exposure to undifferentiated retailers while increasing distribution through a small number of retailers, like Foot Locker in the U.S. (where Nike accounts for nearly 70% of sales), that bring the brand closer to consumers. We think Nike’s consumer plan, led by its Triple Double strategy to double innovation, speed, and direct connections to consumers, will allow it to hold share and pricing. We no longer view cost advantage as a moat source for Nike, as competition from narrow-moat Adidas and others has increased the cost of endorsements.

We believe Nike has a good opportunity for growth in China. Nike has experienced double-digit growth in each of the last four fiscal years in China, and we expect it will continue to do so for at least the next 10 years as sports become a larger part of Chinese culture. Moreover, Nike, with worldwide distribution and more than $3 billion in fiscal 2019 digital sales, will benefit as more people in China, Latin America, and elsewhere move into the middle class and gain broadband access.

As we have raised our fair value estimate, we view Nike as attractive at current levels.

We now assign a Standard stewardship rating to Nike. We had previously assigned an Exemplary rating. While Nike has been an extraordinarily successful firm, we believe its corporate governance is subpar. Mark Parker serves as chairman, CEO, and president. We prefer the CEO and chairman roles to be split to improve oversight of management. Also, under the current structure, outside shareholders have limited say in the composition of Nike’s board. In 2015, founder Phil Knight transferred most of his Class A shares to a new company called Swoosh. The Class A shares are not publicly traded but can be exchanged one for one into the publicly traded Class B shares. Under Nike’s structure, the Class A shareholders appoint 75% of Nike’s board while the Class B shareholders appoint the rest. Swoosh is governed by a board of directors with four members, including Parker and Phil Knight’s son Travis Knight (who has two out of five total votes). Thus, a few insiders can appoint most of Nike’s board.

We think Nike’s compensation policies could be improved. Nike’s performance-based annual cash bonuses are based solely on a pretax income target, and its long-term bonuses are based on pretax income and revenue targets. We think these metrics reward growth over economic value and can be manipulated by managers (by opening new stores, for example). We prefer performance targets based on ROICs and cash flows, as these create long-term value for shareholders by encouraging sound investment decisions.

Nike has reduced its share count by approximately 20% over the past decade, and we expect it will repurchase more than $20 billion in stock in over the next five years (14% of its current market capitalization). However, we believe that Nike reduces shareholder value if it repurchases shares at prices above our fair value estimate. In 2015, Nike repurchased $2.5 billion of stock at prices above our fair value estimates at the time. If the company had halted buybacks instead, it could have conserved cash for greater share buybacks in 2016-17 at prices that were both lower and below our fair value estimates in the period.
Underlying
NIKE Inc. Class B

NIKE is engaged in the design, development and marketing and selling of athletic footwear, apparel, equipment, accessories and services. The company focuses its NIKE Brand product offerings in Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Training and Sportswear categories. The company markets products designed for kids, as well as for other athletic and recreational uses such as American football, baseball, cricket, golf, lacrosse, tennis, walking, and other outdoor activities. The company has license agreements that permit unaffiliated parties to manufacture and sell, using the company-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
David Swartz

Other Reports on these Companies
Other Reports from Morningstar

ResearchPool Subscriptions

Get the most out of your insights

Get in touch