Krause Fund Research
Fall 2015
Consumer Discretionary
Nike, Inc. (NYSE: NKE)
November 17, 2015
Recommendation: Buy
Analysts
Current Price $122.58
Target Price $127.7
Song Gao
[email protected]
Nike Comes Back
Company Overview
Nike, Inc. focuses on the design and sales of athletic
footwear, apparel, sports equipment, accessories and
services. It was founded in 1967 and its world headquarter is
located near Beaverton, Oregon. Nike, Inc. divides its
products into eight important categories: Running,
Basketball, Football (Soccer), Men’s Training, Women’s
Training, Action Sports, Sportswear (our sports-inspired
lifestyle products) and Golf. Nike, Inc. derives 46% of the
revenue from US stores sales. Its net income for fiscal year
2015 ending May. 31 was 21.53% higher than that for
previous fiscal year
• We recommend investors to buy Nike. We also believe that
Nike will rise to our target price and refresh its 52 week high
record.
• Nike’s CEO Mark Parker was honored as Fortune’s Top
BusinessPerson of the Year
• Nike’s first quarter earnings in FY 2016 beat estimation
because the increase in Chinese sales support the high earning
•
Nike’s new partnership with Flex Inc. to bring innovation
to the manufacturing and supply chains.
Stock Performance Highlights
52 week High
52 week Low
Beta Value
Average Daily Volume
$133.52
$90.69
0.79
4.575 m
One Year Stock Performance
Share Highlights
Market Capitalization
Shares Outstanding
Book Value per share
EPS (FY 15)
P/E Ratio
Dividend Yield
Dividend Payout Ratio
$57.70b
8.57m
$15.10
$3.95
31.08
1.12%
34%
Company Performance Highlights
ROA
ROE
Sales
13.85%
29.08%
$31.03 b
Financial Ratios
Current Ratio
Debt to Equity
2.89
9.37%
Important disclosures appear on the last page of this report.
Economic Analysis
Real Gross Domestic Product
Gross Domestic Product (GDP) is a measurement of the
economic health for a nation. Basically, the GDP includes
total consumptions of the products and services. GDP is an
important indicator of the performance of consumer
discretionary sector because about 70% of GDP derives from
the personal consumption expenditures that mainly consists
of services and non-durable goods.
Source: Haver Analytical
Source: Thomson Reuters
The services spending and non-durable goods spending has
strong correlation with the S&P Consumer Discretionary.
When the economy is growing, people will be willing to
consume more personal expenditure. The companies in the
consumer discretionary sector will report more earnings and
sales than before. Thus, investors becomes more confident
about investing these companies. From 1996 to 2008, S&P
Consumer Discretionary reacted more to the expectation of
changes in consumer spending next year. When consumer
spending changes 1%, the S&P 500 will change almost more
than 15% with same direction as consumer spending
changes i.
Consumer Spending&
Consumer Sector Index Performance
Correlation
Category
0.69
Durable Goods
Non-Durable Goods 0.72
0.65
Services
Our team believe that the real GDP growth will rise above the
historical average and reach about 3.0% for long term
reaching the level of 3.3% because the unemployment rate
decreases and disposable income increases. People can
contribute more to production and have more free money to
spend on consumption. The short-term growth rate will come
to 2.5% as a result of downward adjustment of the recovering
economy. Since the personal consumption expenditure
constitute a great proportion of real GDP, we think that S&P
consumer discretionary sector will increase more than 10%.
The companies related to the non-durable goods and services
in this sector may change more 15% positively.
Interest Rate:
Interest rate is another important driver to the consumer
discretionary sector. It indicates cost of consumers’
borrowings. Individuals often borrow money to purchase the
durable goods such as automobiles, electronic appliances for
private expenditures. When the interest rate is high,
consumers will not demand more purchasing. So the
companies’ earnings decrease and so do their stock price. On
the other way, the high interest rate will lead to high debt and
high return. Thus, investors prefer to save money into their
account rather than borrow money to invest. iii
R-Square
0.47
0.52
0.43
The historical data for the last fifty years shows that the
average real GDP growth is 3.09%. Since the financial crisis,
the annual real GDP growth rate is recovering back to the
positive number: The growth rate in 2012 is 2.2% and is 2.4%
in 2014. The GDP growth rate is in upward trend even though
there are some downward adjustments in latest quarter
reports ii.
Important disclosures appear on the last page of this report.
In recent five years, the interest rate is decreasing. It is
0.12% in the current announcement period. Our team
think that the interest rate will be 0.16% for long term as
the GDP grows well and the Federal will make
adjustment of interest rate to match the good economy.
The S&P 500 will experience downward adjustment by
the change of interest rate and increase back soon
because other economic factors will boost the S&P 500
for long term to compensate effect of the increase of
interest rate. In short-term time, the interest rate will
increase about 0.01% or will not change for the short
term because the recent data indicates that unemployment
rate decreases to 5% and non-farm payroll increases to
271 thousand and the Fed can increase the interest rate to
match current economy level. The Consumer
Discretionary sector will react to the S&P 500’s change,
experiencing a slow downward adjustment and regaining
back. The only uncertainty is whether the strengthen
dollar will make the US companies less competitive and
this case will lead the slump of the stock prices similar to
the aftermath of weaken RMB.
Currency rate commonly affects the companies that have
a considerable size of overseas markets. When the dollar
becomes strong, the price of imported goods will
decrease and the cheap price will stimulate the sales. On
the other hand, the strengthened US dollar will lead
increase the price of exported goods. Then the higher
foreign price may decrease the exports. Nike has the
large scale of the future orders using the foreign currency
to trade with the suppliers outside the United States. So,
when the dollars became strong, Nike will get currency
interests from the future orders. Otherwise, it will lose
some of its profits as Nike announced that the future
orders will be affected by currency fluctuations when
calculating the revenue and inventories iv
Disposable Income
Disposable Income calculates the money available for
consumers’ expenditures after subtracting the current tax.
This factor indicates that people would like to consume
more money when the number is higher.
The employment situation can be measured by non-farm
payroll and unemployment rate. When the employment
increases, individuals will have more income to spend.
Thus, the consumer discretionary sector will benefit and
the apparel industry will also have better performance by
the promising expectation of the increasing employment
and extra income.
Currency
Employment
Source: Bureau of Labor Statstics
Source: Federal Reserve Bank of St. Louis
When the disposable income increases, people will have
more money to spend, thus the performance of the
companies will benefit from the increasing spending and
S&P Index will also increase to some extent.
The demand for the consuming goods will also increases
following the trend. Disposable income in recent three
years keeps upward trend. Currently it is 38,165 capita.
Our team expect that disposable income will increase to
42,000 capita for long term. Nike Company will benefit
the increasing demand for its products and its domestic
sales will boost up. Nike will also gain more sales for the
short term.
We think that the recovery of economy make the
unemployment rate drop down to the lowest point of five
years. We expect that the unemployment rate will
decrease to 4.5% because the continuous GDP growth
will make unemployment decrease. As the
unemployment decreases, people will have more income
and be willing to consume. Therefore, the companies in
consumer discretionary sector will have better
performance.
Important disclosures appear on the last page of this report.
Capital Market Outlook
The demand for consumption market is driven by the
economic factors such as GDP, disposable income, and
employment situation. On 11/14/2015, the three Year
return of Consumer Discretionary sector of S&P 500
Index is 71.40%, higher than 46.61% return of S&P 500
overall Index. In recent three years, Textile, Apparel &
luxury goods industry has yielded 51.81% return and the
stock price of Nike has increased by about 164%. v
comparison indicates that the companies are developing
in a stable situation. In this industry, the consolidation
indicates the stable level of development. vi
(ISIBWORLD) Out team thinks that the revenue growth
of industry will probably maintain about 2%-2.5% for
long term and fluctuate in recent two years between 2%-4% because the economy is still in recovery for the short
term time.
Recent Developments and Industry Trends:
Demand
In recent years, the demand for the footwear is based on
design, price and function. After financial crisis, the
change in demand for footwear has experienced a great
fluctuation. From 2010 to 2013, the demand for the
footwear increase about 19.93% then the speed of growth
decreases. The growth of the demand is 3.7% this year,
lower than the growth in previous year (4.8%). vii
Source: Fidelity Research data
According to current economic data of increasing growth
of GDP and lowest unemployment rate in recent five
years, we believe that the consumer discretionary sector
will continue to outperform the S&P total index for long
term. The Apparel Industry will also continue increase its
return by the increasing demand of consumers. For the
short term (within one year), the whole stock market may
slow down its increase because the potential increase of
interest rate will cause the downward adjustment for the
stock market. Then, the stock market will retrieve its
return in the steady growth return.
Industry Analysis
Source:IBIS
Even though the growth in the current year decreases, the
demand is still increasing. Our team think that the
demand for footwear will grow to 4% in recent two years
based on the data that disposable income increases, and
lowest unemployment rate in latest five years. Then the
growth of demand will decrease to 2% at stable level.
Industry Introduction:
Overseas Expansion
Sports Apparel& Footwear Industry consists of the
companies that design, sell athletic footwear, sporting
apparel and accessories. The companies in this industry
purchase the finished shoes and apparels from
manufacturers and resell these products to the retailers or
directly to the shops. They also utilize e-commerce to
build brand image to the customers.
Since the sports apparel and footwear industry is mature
in United States, the industry will seek out other
opportunity to develop.
The large companies in this industry are expanding their
markets across Asia-Pacific area, Europe and emerging
markets in developing countries in South America or
Africa. Nike, Sketcher, Under Armor, Lululemon have
retail stores across world. viii
These large companies also have outsourcing contract
with developing countries to acquire cheap materials.
Nike has outsourcing contracts with suppliers and
manufacturers outside the United States to decrease its
cost of sales margin. ix
Life Cycle
The Sports Apparel& Footwear Industry is in mature
stage. According to the IBIS World, the industry value
added is estimated to grow at 1.6% for long-term, lower
than the estimation of GDP long-term growth. This
Important disclosures appear on the last page of this report.
We believe that the large companies in sports apparel
will continue to utilize the outsourcing and international
expansion to boost sales because the US market is mature
and the revenue in US market grows at a stable level.
Porter Five Forces Analysis
Power of buyers
The customers’ purchase power is moderate. Footwear &
apparels are essential items for customers. There is no
other substituted commodities. Customers who are price
sensitive choose the inexpensive products. As the
customers are gradually knowledgeable about the quality
of shoes and apparels, they are willing to buy high
quality ones and expensive ones. The price range of the
footwear and apparels is from $100--$500, not as high as
the price range of luxury goods. So the power of buyers
is moderate. x
Power of Suppliers
The main suppliers in this industry is the manufacturers.
Companies in this industry are cooperating with the
developing countries’ manufacturers to decrease cost of
materials and labor cost. For instance, Nike has
outsourcing contract with suppliers in developing
countries such as China, Mexico and India. The suppliers
do not have negotiate power with the companies because
there are many suppliers for substitution worldwide. So
the power of suppliers is moderately low.
Threats of New Entrants
The obstacles for new companies to the entry is relatively
low. The only requirements to start a new sports
apparel& footwear retail store are source of the suppliers
and store to operate. But survival for the new stores is
difficult. The first threat is price competition. Large
companies can discount their retail price to attract
customers and increase sales. But small companies cannot
afford the loss of discounted price. The second threat is
brand images. The new companies are difficult to be
recognized by most customers in a short time. When they
can want to try other sales ways such as online sales, they
cannot get positive effect because the customers are not
familiar with the new companies, few of them would risk
trying the new ways. So the threats of new entrants are
very high.
Threats of substitutes
The threats of substitutes are very low. The apparel and
footwear are necessity for customers so the customers
will not replace them with other thing. They will only
change the types of the products. So there is no worry
about the threats of substitutes.
Competition of Industry
The competition of the sports apparel& footwear industry
is high because large companies occupy most market
shares.
Source:Statista
As data are shown on the form, Nike took 69% of
marketshares in this industry. So it is high competitive
among the apparel& footwear retailers. Other new
retailers or small retailers cannot compete with it. In this
industry, the small companies will seek acquisition by the
large companies to expand their sales and avoid the
intense competition. For example, the converse was
merged by Nike and Reebok was acquisted by Adidas.
So the apparel& footwear industry keeps intensive
competition.
Peer Comparison& Leaders in industry
The major companies in this industry can be defined as
leaders. The determinants we define the best companies
include market cap, revenue, profit margin, P/E ratio, and
return on equity (ROE).
Company
Name
Nike
Under
Armour
Skechers,
U.S.A
Lululemon
Athletica
Inc
Columbia
Sportswear
Market
Profit
Cap(B)
Revenue(B) Margin P/E
ROE
103.85B 31.03B
11.25% 30.87 29.08%
18.86B
3.69B
5.82%
89.40 15.39%
3.97B
3.00B
7.47%
17.55 20.43%
6.33B
1.90B
14.05% 24.00 24.01%
3.45B
2.30B
7.23%
20.89 12.52%
Source: Yahoo Finance
Our team think Nike is the leader in this industry based
on several items. First, Nike’s Market Cap is highest
among its competitors. The sum of the other four
companies’ market cap is much less than that of Nike.
Important disclosures appear on the last page of this report.
Second, Nike’s higher P/E ratio compared to its
competitors indicates that it has higher growth and higher
profit. Even though Under Armour’s PE reached to
89.40, this number is too high and suggests that Under
Armour has high volatility. So the Nike is safer to invest
than Under Armor. Third, Nike and Lululemon have over
10% profit margin among these companies, but
lululemon’s revenue is not as much as Nike’s. Nike’s
highest ROE among its peers signifies that the company
utilize its equity value better to generate profit than
others. So we believe that these signals about Nike’s
profitability will bring the investors advantages.
Catalyst for Growth/Change:
•The recovery of U.S economy
•New Designs of the products
•Online services to attract more customers
designs new products with high quality and sell them to the
customers. Nike merged Converse, Hurley, and Jordan to
develop its multiple business.
Product Lines and Markets
Nike’s main products are divided into four categories:
Footwear, Apparel, Equipment, and Other
Footwear: Nike’s footwear products are designed for both
athletic training and leisure. It innovates new designs
annually. The Sportswear, Running, Basketball, and Football
(Soccer) footwear are Nike’s top selling products.
Apparel: Nike’s apparels are designed primarily for athletic
training use. Sportswear, Men's Training, Running and
Football (Soccer) are Nike’s focus on apparel. It also
sponsors the university sports teams and professional leagues.
Equipment & other: Nike sells a series of sports equipment
and accessories under its brand name. It also sells different
plastic products to other manufacturers. xiii
Key Investment Positives
•Increasing demand for footwear
•Innovative design of the products
•International Expansion
•Large companies’ brand recognition
Key Investment Negatives
•Child labor scandals
•Intense Price Competition affecting profit margins
Source: Nike’s Financial Statement in FY 2015
We think that Nike will continue to put focus on the footwear
sales as the revenue from the footwear accounted for more
than half of the total sales.
Company Analysis
Company introduction:
Nike, Inc. became a legal corporate in 1967. Its main business
activity is the design, development and marketing and sale of
athletic footwear, apparel, equipment, accessories and other
services. Nike sell its products through Nike-owned retail
stores, other independent retail store such as Foot Locker, and
online retailers. Nike’s all apparel and footwear are
manufactured by the factories outside the United States and
equipment products are produced both domestically and
abroad. Nike has no significant customers since no customer
occupy 10% or more of the company’s net sales in recent
three fiscal years. xi
Life Cycle
Nike Inc. is in the mature stage of life cycle. From 2012, the
revenue growth rate decreased from 19.78% to 4.88% then
came back to about 10% in recent three years. xiiSo we think
that the revenue growth rate come to a stable level. In order to
keep its current popularity among the customers, Nike
Analysis of recent earnings releases:
On September 24th, Nike announced its first quarter earnings
in Fiscal year 2016. The Earning per Share (EPS) is
$1.34/share, beating the estimation—$1.19/share. Nike’s
earning report wrote that the reason why Nike had a high
earning is the huge increase in Chinese sales. The sales in
China increased about 30% than previous quarter. (WSJ)
Another factor is the slight increase in selling price.
According to Nike’s 10-K report, the company wrote that it
raised the retail price slightly to increase the gross margin and
compensate high input costs caused by labor cost inflation
and shifts in combination of high-cost products. xiv
Product Distribution
Nike distributes its products to over a thousand retail stores
across the world. In US market, Nike has 339 retail stores
including the Converse stores and Hurley stores. Outside of
the US market, it has 592 retail stores. Furthermore, Nike has
Important disclosures appear on the last page of this report.
the hedging orders at a fixed price maturing almost half of a
year.
Nike has 146 footwear factories located in 14 countries and
about 95% of footwear production comes from Vietnam,
China, and Indonesia. Nike is supported by 408 apparel
factories in 39 countries. Top five contract manufacturers are
responsible for 36% of the total apparel production. Nike
corporates with the independent raw materials suppliers
having no risk failing to meet the requirement for the
production. xv
Competition
Nike competes with Lululemon athletica, Skechers, Under
Armour, Columbia, and others in different aspects: earnings,
product characteristics such as quality and design, brand
popularity, and operating ways including sourcing and
distribution. xvi
Nike gains more popularity than other competitors as it
sponsors professional leagues such as NFL and NBA, over
100 university athletic teams, and about 100 national sports
team. On the other hand, Nike operate longer than its direct
competitors. Based on the profitability, popularity, operating
efficiency, we think that Nike is more competitive than its
peers. xviii
Research& Development
When developing the products, Nike hires the experts in the
fields of biomechanics, chemistry, exercise physiology and
other related fields. Nike also consults with the advisory
board consisting of different athletics and sports experts to
ensure the safety and quality of the products. xix
Payout Policy
Nike’s dividend per share increases in recent three years—
from $0.81 per share to $1.08 per share.
The dividend payout ratio increased from 27% to 32% during
2011-2013. Then in recent two years, the payout ratio
decreases slightly. But we believe that Nike will increase its
dividend payout ratio because Nike announced the program
about increasing the repurchase amount and the strong
earnings report have enough resource to pay dividend to the
shareholders. So there are more benefit to the shareholders
than before and investors will be more confident about the
company. xx
Catalyst for Growth
Source:Yahoo Finance
We believe that Nike has the highest profitability among its
competitors because Nike has 3.95 earnings per share, higher
than other four competitors shown above.
Source:Yahoo Finance
According to 10-k of each company, we found that Nike has
large scale size of the production—over 500 factories and
other competitors have just over 100 factories. Even though
Nike have large quantity of inventories, it can still operate
efficiently. We can found Nike’s inventory turnover is the
second highest, but Lululemon’s revenue is much less than
Nike’s. xvii
Nike depends on the sales of footwear so we think that Nike
will innovative design on footwear to attract more customers.
We also expect that Nike’s revenue growth in recent year
continue to increase because Nike expands its business
internationally. In addition, better economy will stimulate the
demand for footwear and consumer’s preference on brand
recognitions will make the Nike competitive. Sponsorship
with professional league, university athletic teams, and
national sports teams make Nike popular among the
consumers.
Key Investment Positives
• Leading in the industry because of the high
profitability, large scale of production, effective
operation, and high popularity.
• Innovative Research & Design on footwear to attract
more customers
• International Expansion
• Various sales channel
• Increasing Demand for footwear
• CEO honored by Fortune Magazine xxi
• Corporation with Flex on manufacturing and
supplies
Important disclosures appear on the last page of this report.
Key Investment Negatives
• Intense competition
• Increase Counterfeits in products xxii
• Dependence on other suppliers and manufacturers
revenue growth rate will increase in recent two years
to 15%. Then the growth rate will decrease to a
steady rate about 9%.
•
Apparel: The apparel is the second largest Nike’s
revenue stream. As Nike did not utilize too many
researches& designs on this part, we assume that the
growth rate will not have great change. In recent two
years, the growth rate will increase because good
economy increase the demand for apparel for short
term.
•
Equipment: The equipment only accounts for a
small proportion of Nike’s total revenue. Equipment
revenue decreases 2% in Fiscal Year 2015. We think
that the equipment has its duration for about 2 or 3
years. So people will purchase to replace the old
ones after 2 or 3 years. The growth rate in recent two
forecast year can be still be negative, but it will come
back to 1% after the steady growth period.
•
Others: Other business include the accessories and
some services. Since it takes only a small part of
total revenue, we assume that the growth rate is 2%,
higher than inflation rate
Valuation Analysis
We valued Nike by using the models including Discounted
Cash Flow (DCF) model, Economic Profit (EP) model,
Discounted Dividend Model (DDM), and Relative Model.
After we calculated the values of four models, we
recommend to buy Nike. From Nike recent earning reports
and economic announcement, we are optimistic about Nike.
The results are different from each other. The DCF&EP
models calculated an intrinsic value of $127.27 per share,
which is 3.8% higher than the price as of November 17, 2015,
The DDM Model we calculated showed a value of $153.51,
about 20% higher than the current price. For the relative
model, we got P/E 2016 estimated relative intrinsic price of
$89.12 and P/E 2017 estimated intrinsic price of
$90.96.These two results have 30% discount and 28.53%
discount respectively when compared to the current price.
Valuation Results
200.00
150.00
127.67
154.04
89.12
100.00
90.96
50.00
0.00
DCF
DDM
Relative P/E Relative P/E
17E
16E
General Assumptions
Continuing Value (CV)
When we determined the continue value growth rate, we used
the long-term real GDP growth as an important factor. The
GDP historical average rate is about 3%. So we assumed that
the CV growth rate is 3.3% the same rate as we predict longterm GDP growth. We believe that the recovery of the
economy will stimulate the demand for footwear and sports
apparel. So we are optimistic about the growth.
Revenue Decomposition
We searched the data from Nike’s 10-K to define the items
we forecast. We divided the products category into four parts:
Footwear, Apparel, Equipment, and others.
• Footwear: The footwear revenue growth rate
increases in recent 3 year because the demand for the
footwear increases and the selling price increases
slightly. The revenue of footwear accounts for 60%
of total revenue. So we think that Nike’s footwear
Cost of Goods Sold
The cost of goods sold include the payment to independent
suppliers and manufacturers since Nike has no brand-owned
factories. Nike decreases its cost of finished good by
cooperating with other independent firms. We assume that
cost of goods sold margin will keep constant in recent five
years because we think that Nike spends time to find another
cost-saving materials or other cost-saving manufacturing
process. From the steady growth period, we expect that the
cost margin will decrease about 1% because Nike can find
cost-saving ways to operate its business.
Capital Expenditures
Nike’s investing cash flow is mainly capital expenditure
almost without any other investment activities. The capital
expenditure focuses on purchasing property for research&
design or leasing capital. From Nike’s 10-K, we believe that
it will continue to increase its expenditure to make innovative
design to be competitive in the market. We used the last five
years’ gross PP&E average increase to forecast the future
value of the gross PP&E. The remaining life time of the gross
PP&E we assume is about 10 years since the 10-k report
estimate 5—15 years. xxiii The depreciation is calculated by a
straight-line basis.
Weighted Average Cost of Capital
Nike’s Weighted Average Cost of Capital is about 7.2%. It
did not conclude any preferred stock in fiscal year 2015.
We calculated the cost of equity by using Capital Asset
Pricing Model (CAPM). Nike’s beta is 0.78 from Bloomberg
terminal, indicating that Nike is relatively stable compared
Important disclosures appear on the last page of this report.
with other companies whose betas are larger than 1 when
market has changes. We choose today’s 30-year U.S.
Treasury Bond (3.05%) as our risk free rate. The risk
premium is selected from 30 years average premium 4.42%.
We found that the cost of equity was 6.54%. We used the
yield to maturity of Nike’s 30-year bond. The value of debt
include short-term debt, current portion of debt, long-term
debt and present valued of operating lease. The value of
Equity is measured by market value of stocks. After
discounting the effect of tax, we calculated the final result of
Weighted Average Cost of Capital: 6.42%.
economic profit and plus the Initial capital expenditure to get
the intrinsic value.
We think that these two models provided us the best
estimation of Nike’s intrinsic value as the models include
more adjustments about the revenue, tax shields, and capital
expenditure.
Sensitivity Analysis
Beta vs. CV growth of NOPLAT
Discounted Dividend Model
The intrinsic value of Discounted Dividend Model is about
$154.04 after adjustments. This model only uses the
discounted dividend in recent forecast years and continue
value from calculation of EPS, CV ROE, and CV growth.
Nike did not announce any news about its increase on
dividend payout so we keep the dividend payout ratio
constant. We assume the CV growth rate for EPS is 3.3%
because we think the profit growth rate will equal to the longterm real GDP rate from the steady growth rate. The DDM
model only considers about the earnings, so we did not focus
too much on this model.
Relative Price to Earning Model
The results of this model are much less than the current stock
price. The reasons why the results is much lower than the
current stock price are the low P/E ratio of selected
companies and small EPS of these companies. We just
choose the Columbia Sportswear and LuLulemon because
their P/E ratios are not in outliers. Under Armour has a P/E
ratio about 90 and Skechers’s P/E is lower than 15.
Moreover, Nike’s P/E is much higher than Columbia and
LuLulemon. If we use the relative P/E model with lower P/E
ratio, we will lower the expectation about the Nike. Nike’s
earning is higher than its peers, so it is not accurate to
estimate Nike’s price by using its peers with lower EPS.
Discounted Cash Flow& Economic Profit
The result of Discounted Cash Flow model is a close
estimation about the intrinsic value of Nike because this
model considers different assumptions. We use the Net
Operating Profit Less Adjusted Taxes (NOPLAT) to subtract
capital expenditure to get the Free Cash Flow (FCF). The
WACC estimation is better than cost of equity because it
contains more information such as the consideration of debt
calculation. We assume the CV growth of NOPLAT will be
4.5% because the good economy bring the stimulus to the
demand for products. The CV growth rate will equal to the
Real GDP rate plus the inflation rate. We are optimistic about
the growth rate of economy and of Nike. Then we discounted
Free Cash Flow and Continue Value to get intrinsic value of
Nike: 127.7 (After Adjustment)
In Economic Profit Model, we got the same final result as
that of Discounted Cash Flow Model. We discounted forecast
Changes in beta will affect the cost of equity and CV growth
of NOPLAT will affect the calculation of the continue value.
When beta decreases about 0.01, the intrinsic price will
increases about $3.3. As the beta increases 0.01, the intrinsic
price would decreases about the $3.3. Keeping other constant,
we changed the CV growth of NOPLAT by 0.05% and found
about $2 change on the intrinsic price. So we think these two
factors are important in the valuation because they are
sensitive to the little changes.
Cost of Debt vs Risk Free Rate
We found that the cost of debt is not sensitive to the change
since 0.03% change in cost of debt will not affect the intrinsic
price too much.
The risk free rate will affect the intrinsic price greatly. When
the risk free rate is changed by 0.05%, the intrinsic price will
change by $2.5. So risk free rate is another sensitive factor in
our valuation model.
Cost of Debt vs Risk Premium
When the cost of debt is changed by 0.03%, the intrinsic price
will not change over $1.So the cost of debt is not a significant
factor.
As the risk premium changes by 0.03%, the intrinsic price
will change $1. We think that risk premium is just moderately
sensitive and is not as sensitive as beta, although these two
factors all affect beta.
CV growth of NOPLAT vs Marginal Tax Rate
CV growth of NOPLAT is a sensitive factor. As the CV
growth of NOPLAT changes by 0.05%, the intrinsic price
will change by$2.
Marginal Tax Rate is not sensitive. When the marginal tax
rate change by 0.2%, the intrinsic price only change by $0.2.
So we do not think that marginal tax rate is a significant
factor to affect result of the valuation greatly.
Risk Premium vs Normal Cash
When the risk premium is changed by 0.03%, the intrinsic
price changes about $1. We think risk premium will not
affect the intrinsic price greatly unless risk premium increases
or decreases a lot.
Important disclosures appear on the last page of this report.
As the normal cash percentage decreases by 0.4%, the
intrinsic price only increases by $0.5. On the contrary, the
normal cash percentage increases by 0.4%, the intrinsic price
decreases by $0.5. So we think that the normal cash
percentage is not a sensitive factor to the valuation.
Important disclosures appear on the last page of this report.
Important Disclaimer
This report was created by students enrolled in the Security
Analysis (6F:112) class at the University of Iowa. The report
was originally created to offer an internal investment
recommendation for the University of Iowa Krause Fund and
its advisory board. The report also provides potential
employers and other interested parties an example of the
students’ skills, knowledge and abilities. Members of the
Krause Fund are not registered investment advisors, brokers
or officially licensed financial professionals. The investment
advice contained in this report does not represent an offer or
solicitation to buy or sell any of the securities mentioned.
Unless otherwise noted, facts and figures included in this
report are from publicly available sources. This report is not
a complete compilation of data, and its accuracy is not
guaranteed. From time to time, the University of Iowa, its
faculty, staff, students, or the Krause Fund may hold a
financial interest in the companies mentioned in this report.
Important disclosures appear on the last page of this report.
i
Fisher Investments on Consumer Discretionary Page 51
xix
Nike 2015 10-K Report Page 5
“Product Research, Design &Development”
ii
U.S. Bureau of Economic Analysis GDP Statistics
http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#re
qid=9&step=3&isuri=1&903=5
xx
Factset Terminal Nike Ratio Analysis
xxi
iii
iv
Fisher Investments on Consumer Discretionary Page 53-55
Fortune, “Nike’s Master Craftsman”
http://fortune.com/2015/11/12/nike-ceo-mark-parker/
xxii
Nike 2015 10-K Report Page 10
“Risk Factors, Future orders”
Nike 2015 10-K Report Page 7
“Risk Factors”
v
Fidelity Sector Research
https://eresearch.fidelity.com/eresearch/markets_sectors/sect
ors/sectors_in_market.jhtml?tab=learn&sector=25
xxiii
Nike 2015 10-K Report Page 57,
Notes, ‘Property, Plant and Equipment’
vi
IBISWORLD “Industry Performance”
http://clients1.ibisworld.com/reports/us/industry/currentperfo
rmance.aspx?entid=1073
vii
IBISWORLD “Industry at a Glance”
http://clients1.ibisworld.com/reports/us/industry/ataglance.as
px?entid=1073
viii
S&P Capital “Textiles, Apparel & Luxury Goods”
Industry Survey, Page 47
ix
Nike 2015 10-K Report Page 22, “Manufacturing”
x
MarketLine United States Footwear Industry Analysis
http://advantage.marketline.com/Product?pid=MLIP16330025&view=d0e333
xi
Nike 2015 10-K Report Page 3
“General Introduction”
xii
Nike 2015 10-K Report Page 28
“Operating Segments”
xiii
Nike 2015 10-K Report Page 76,
“Revenue by Major Product line”
xiv
Nike 2015 10-K Report Page 20,
‘Selected Financial Data’
xv
Nike 2015 10-K Report Page 4
‘Sales and Marketing’
xvi
Nike 2015 10-K Report Page 6
“Competition”
xvii
Nike 2015 10-K Report Page 5
Under Armour 2014 10-K Report Page 2
Lululemon 2015 10-K Report Page 5
xviii
Nike’s Sponsorship List
https://www.sport195.com/brands/nike-939
Important disclosures appear on the last page of this report.
Nike Inc.
Key Assumptions of Valuation Model
Ticker Symbol
Current Share Price
Current Model Date
Fiscal Year End
Pre‐Tax Cost of Debt
Beta
Risk‐Free Rate(30 Year Treasury Yield)
10 Year Treasury Yield
Equity Risk Premium
CV Growth of NOPLAT
CV Growth of EPS
Current Dividend Yield
Marginal Tax Rate
Effective Tax Rate
Inflation Rate(CPI Y/Y change)
CV ROIC
WACC
Normal Cash
NKE
$122.58
11/17/2015
May. 31
3.96%
0.79
3.05% 11/17/2015
2.09%
4.42%
3.30%
3.30%
1.20%
20.20%
22.2%
0.00%
31.57%
6.42%
2%
Beta
127.665
3.10%
3.15%
3.20%
3.25%
3.30%
3.35%
3.40%
3.45%
3.50%
3.55%
3.60%
0.75
128.28
129.92
131.61
133.35
135.16
137.02
138.95
140.95
143.03
145.18
147.41
0.76
126.54
128.13
129.76
131.46
133.20
135.01
136.88
138.81
140.82
142.89
145.05
0.77
124.85
126.39
127.97
129.61
131.30
133.05
134.86
136.74
138.67
140.68
142.76
0.78
123.20
124.69
126.23
127.82
129.46
131.15
132.91
134.72
136.59
138.53
140.55
127.665
2.65%
2.70%
2.75%
2.80%
2.85%
2.90%
Risk Free R
2.95%
3.00%
3.05%
3.10%
3.15%
3.20%
3.25%
0.0384
145.95
143.38
140.91
138.51
136.19
133.95
131.78
129.68
127.65
125.67
123.76
121.90
120.10
0.0387
145.95
143.38
140.91
138.51
136.20
133.96
131.79
129.69
127.65
125.68
123.76
121.91
120.11
0.039
145.95
143.39
140.91
138.51
136.20
133.96
131.79
129.69
127.66
125.68
123.77
121.91
120.11
0.0393
145.95
143.39
140.91
138.52
136.20
133.96
131.79
129.69
127.66
125.69
123.78
121.92
120.12
127.665
4.30%
4.32%
4.34%
4.36%
4.38%
4.40%
4.42%
4.44%
4.46%
4.48%
4.50%
4.52%
0.0384
131.56
130.89
130.23
129.58
128.93
128.28
127.65
127.02
126.39
125.77
125.16
124.56
0.0387
131.57
130.90
130.23
129.58
128.93
128.29
127.65
127.02
126.40
125.78
125.17
124.56
0.039
131.57
130.90
130.24
129.58
128.93
128.29
127.66
127.03
126.40
125.78
125.17
124.57
127.665
19.00%
19.20%
19.40%
19.60%
19.80%
20.00%
Marginal Ta 20.20%
20.40%
20.60%
20.80%
21.00%
21.20%
3.10%
122.74
122.55
122.36
122.16
121.97
121.78
121.59
121.40
121.20
121.01
120.82
120.63
3.15%
124.21
124.01
123.82
123.62
123.43
123.23
123.04
122.84
122.65
122.45
122.26
122.06
127.665
4.32%
4.34%
4.36%
4.38%
4.40%
4.42%
4.44%
4.46%
4.48%
4.50%
4.52%
4.54%
0.4%
132.53
131.87
131.21
130.56
129.91
129.27
128.64
128.01
127.39
126.77
126.16
125.56
0.8%
132.13
131.46
130.80
130.15
129.51
128.87
128.24
127.61
126.99
126.37
125.77
125.16
CV growth
Risk Premi
Risk Premi
0.79
121.59
123.04
124.53
126.07
127.67
129.31
131.01
132.76
134.57
136.45
138.40
0.8
120.02
121.43
122.88
124.38
125.92
127.51
129.16
130.86
132.61
134.43
136.31
0.81
118.49
119.86
121.27
122.72
124.22
125.76
127.36
129.01
130.71
132.47
134.29
0.82
117.00
118.33
119.70
121.11
122.56
124.06
125.61
127.21
128.86
130.56
132.32
0.83
115.55
116.84
118.17
119.54
120.95
122.41
123.91
125.46
127.06
128.71
130.41
Cost of Debt
0.0396
145.95
143.39
140.91
138.52
136.20
133.96
131.80
129.70
127.67
125.69
123.78
121.93
120.12
3.99
150.95
150.43
149.91
149.40
148.89
148.38
147.88
147.38
146.88
146.39
145.90
145.42
144.94
0.0402
145.95
143.39
140.91
138.52
136.21
133.97
131.80
129.71
127.67
125.70
123.79
121.94
120.14
0.0405
145.95
143.39
140.91
138.52
136.21
133.97
131.81
129.71
127.68
125.71
123.80
121.94
120.14
0.0408
145.95
143.39
140.91
138.52
136.21
133.98
131.81
129.71
127.68
125.71
123.80
121.95
120.15
0.0393
131.57
130.90
130.24
129.59
128.94
128.30
127.66
127.03
126.41
125.79
125.18
124.57
Cost of Debt
0.0396
131.58
130.91
130.25
129.59
128.94
128.30
127.67
127.04
126.41
125.79
125.18
124.58
3.99
147.83
147.67
147.51
147.35
147.20
147.04
146.88
146.73
146.57
146.42
146.26
146.11
0.0402
131.58
130.92
130.25
129.60
128.95
128.31
127.67
127.04
126.42
125.80
125.19
124.59
0.0405
131.59
130.92
130.26
129.60
128.96
128.31
127.68
127.05
126.43
125.81
125.20
124.59
0.0408
131.59
130.92
130.26
129.61
128.96
128.32
127.68
127.05
126.43
125.81
125.20
124.60
3.20%
125.72
125.52
125.32
125.12
124.93
124.73
124.53
124.33
124.14
123.94
123.74
123.55
3.25%
127.27
127.07
126.87
126.67
126.47
126.27
126.07
125.87
125.67
125.47
125.27
125.07
CV growth of NOPLAT
3.30%
3.35%
128.88
130.54
128.68
130.34
128.48
130.13
128.27
129.93
128.07
129.72
127.87
129.51
127.67
129.31
127.46
129.10
127.26
128.90
127.06
128.69
126.85
128.48
126.65
128.28
3.40%
132.26
132.05
131.84
131.63
131.42
131.21
131.01
130.80
130.59
130.38
130.17
129.96
3.45%
134.03
133.82
133.61
133.40
133.18
132.97
132.76
132.55
132.34
132.12
131.91
131.70
3.50%
135.87
135.65
135.44
135.22
135.00
134.79
134.57
134.36
134.14
133.93
133.71
133.50
1.2%
131.72
131.06
130.40
129.75
129.11
128.47
127.84
127.21
126.59
125.98
125.37
124.77
1.6%
131.31
130.65
130.00
129.35
128.70
128.07
127.44
126.81
126.19
125.58
124.97
124.37
Normal Cash
2.0%
130.91
130.25
129.59
128.94
128.30
127.67
127.04
126.41
125.79
125.18
124.58
123.98
2.8%
130.10
129.44
128.78
128.14
127.50
126.86
126.23
125.61
125.00
124.39
123.78
123.19
3.2%
129.69
129.03
128.38
127.73
127.09
126.46
125.83
125.21
124.60
123.99
123.39
122.79
3.6%
129.28
128.62
127.97
127.33
126.69
126.06
125.43
124.81
124.20
123.59
122.99
122.40
2.4%
130.50
129.84
129.19
128.54
127.90
127.26
126.64
126.01
125.40
124.79
124.18
123.58
Nike Inc.
Revenue Decomposition
Fiscal Years Ending May. 31
Revenue by Category
Footwear
Growth(%)
Apparel
Growth(%)
Equipment
Growth(%)
Other Business
Global Brand Divisions
Other Corporate Business
Total
Growth(%)
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
14,635.0
16,208.0
18,318.0
20,882.5
24,014.9
27,256.9
30,255.2
33,280.7
36,275.9
9%
11%
13%
14%
15%
14%
11%
10%
9%
7,491.0
8,109.0
8,636.0
9,120.5
9,667.7
10,392.8
11,016.4
11,567.2
12,145.5
18%
8%
6%
6%
6%
8%
6%
5%
5%
1,640.0
1,670.0
1,632.0
1,596.1
1,572.2
1,556.4
1,572.0
1,587.7
1,611.5
36%
2%
-2%
-2%
-2%
-1%
1%
1%
2%
2,500.0
1,684.0
1,982.0
2,021.6
2,062.1
2,103.3
2,145.4
2,188.3
2,232.1
117.0
125.0
115.0
120.0
120.0
120.0
120.0
120.0
120.0
-68.0
3.0
-82.0
50.0
50.0
50.0
50.0
50.0
50.0
25,313.0
27,799.0
30,601.0
33,790.7
37,486.8
41,479.4
45,158.9
48,793.9
52,435.1
4.9%
9.8%
10.1%
10.4%
10.9%
10.7%
8.9%
8.0%
7.5%
10,387.0
12,299.0
13,740.0
15,388.8
17,235.5
18,959.0
20,854.9
22,523.3
24,325.2
17.5%
18.4%
11.7%
12.0%
12.0%
10.0%
10.0%
8.0%
8.0%
5,415.0
6,366.0
7,126.0
7,838.6
8,622.5
9,312.3
10,057.2
10,660.7
11,300.3
Revenue by geography segments
North America
growth(%)
Europe
growth(%)
China
growth(%)
Japan
growth(%)
Emerging Markets
Global Brand Divisions
Corporate
Other Business
Total
growth(%)
1.3%
17.6%
11.9%
10.0%
10.0%
8.0%
8.0%
6.0%
6.0%
2,453.0
2,602.0
3,067.0
3,527.1
4,161.9
4,911.1
5,647.7
6,494.9
7,404.2
-3%
6%
18%
15%
18%
18%
15%
15%
14%
791.0
771.0
755.0
747.5
754.9
762.5
770.1
785.5
801.2
-5.3%
-2.5%
-2.1%
-1.0%
1.0%
1.0%
1.0%
2.0%
2.0%
3,718.0
3,949.0
3,898.0
4,092.9
4,297.5
4,512.4
4,738.0
5,117.1
5,526.5
117.0
125.0
115.0
120.0
120.0
120.0
120.0
120.0
120.0
-68.0
3.0
-82.0
50.0
50.0
50.0
50.0
50.0
50.0
2,500.0
1,684.0
1,982.0
2,021.6
2,062.1
2,103.3
2,145.4
2,188.3
2,232.1
25,313.0
27,799.0
30,601.0
33,790.7
37,486.8
41,479.4
45,158.9
48,793.9
52,435.1
4.9%
9.8%
10.1%
10.4%
10.9%
10.7%
8.9%
8.0%
7.5%
Nike Inc.
Income Statement
Fiscal Years Ending May. 31
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
25,313.0
14,279.0
27,799.0
15,353.0
30,601.0
16,534.0
33,790.7
37,486.8
41,479.4
45,158.9
48,793.9
52,435.1
18,257.4
20,254.5
22,411.7
24,399.8
26,363.8
28,331.1
11,034.0
12,446.0
14,067.0
15,533.3
17,232.4
19,067.7
20,759.1
22,430.1
24,103.9
Income Statement
Sales
COGS
Gross Income
Depreciation&Amortization of Intangibles
438.0
586.0
649.0
348.3
403.5
435.9
401.7
396.9
397.5
SG&A Expense
7,796.0
8,766.0
9,892.0
10,923.1
12,117.9
13,408.5
14,597.9
15,773.0
16,950.0
EBIT (Operating Income)
6,756.4
2,800.0
3,094.0
3,526.0
4,261.9
4,710.9
5,223.3
5,759.5
6,260.3
Interest Income
26.0
26.0
5.0
5.2
5.3
5.5
5.6
5.8
6.0
Interest Expense
-23.0
-43.0
-39.0
-45.0
-43.0
-41.8
-41.6
-41.3
-41.0
Other non-operating Income(expense)
469.0
467.0
713.0
734.4
756.4
779.1
794.7
810.6
826.8
Pretax Income
3,272.0
3,544.0
4,205.0
4,956.5
5,429.7
5,966.0
6,518.2
7,035.4
7,548.1
Income Taxes(benefit)-current
901.0
862.0
1,045.0
1,239.1
1,357.4
1,491.5
1,629.6
1,758.8
1,887.0
Income Taxes(benefit)-deferred
-93.0
-11.0
-113.0
-148.7
-162.9
-179.0
-195.5
-211.1
-226.4
2,464.0
2,693.0
3,273.0
3,866.1
4,235.2
4,653.5
5,084.2
5,487.6
5,887.5
894.0
870.0
857.0
846.0
836.3
827.8
820.4
814.0
808.6
0.81
0.93
1.08
1.1
1.17
1.2
1.2
1.3
1.3
2.7
3.1
3.8
4.5
5.0
5.6
6.2
6.7
7.3
Net Income
Total Shares Outstanding
Dividends per Share
EPS
Nike Inc.
Balance Sheet
in millions of U.S. Dollar, except per share items
Fiscal Years Ending May. 31
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
3,337.00
2,628.00
3,117.00
3,434.00
802.00
308.00
0.00
13,626.00
1,993.00
3,149.00
3,434.00
3,947.00
818.00
355.00
0.00
13,696.00
2,481.00
3,443.00
3,358.00
4,337.00
1,028.00
389.00
940.00
15,976.00
2303.65
3514.96
3708.03
4789.07
976.60
430.23
940.00
16,662.53
2406.59
3588.42
4113.62
5312.91
927.77
475.83
940.00
17,765.14
2811.96
3663.42
4551.75
5878.77
881.38
526.26
940.00
19,253.54
3692.97
3739.98
4955.51
6400.25
837.31
582.03
940.00
21,148.07
4849.81
3818.15
5354.39
6915.43
795.45
643.72
940.00
23,316.95
6329.12
3897.95
5753.96
7431.49
755.67
711.95
940.00
25,820.14
Property, Plant & Equipment - Gross
Accumulated Depreciation
Net Property, Plant & Equipment
Goodwill
Net Other Intangibles
Deferred Tax Assets
Total Assets
5,500.0
3,048.0
2,452.0
131.0
382.0
993.0
17,584.0
6,220.0
3,386.0
2,834.0
131.0
282.0
1,651.0
18,594.0
6,352.0
3,341.0
3,011.0
131.0
281.0
2,201.0
21,600.0
7,014.1
3,689.3
3,324.9
131.0
281.0
2,311.1
22,710.4
7,781.3
4,092.8
3,688.5
131.0
261.0
2,426.6
24,272.3
8,610.1
4,528.7
4,081.4
131.0
261.0
2,547.9
26,274.9
9,373.9
4,930.4
4,443.4
131.0
240.0
2,675.3
28,637.8
10,128.4
5,327.3
4,801.1
131.0
240.0
2,809.1
31,298.1
10,884.2
5,724.8
5,159.4
131.0
220.0
2,949.6
34,280.1
Liabilities & Shareholders' Equity
ST Debt & Curr. Portion LT Debt
Accounts Payable
Income Tax Payable
Dividends Payable
Accrued Payroll
Other Current Liabilities
Total Current Liabilities
178.0
1,646.0
98.0
188.0
977.0
839.0
3,926.0
174.0
1,930.0
432.0
209.0
1,110.0
1,172.0
5,027.0
181.0
2,131.0
71.0
240.0
1,385.0
2,326.0
6,334.0
163.2
2,345.8
83.1
245.8
1,529.4
2,568.5
6,935.7
155.8
2,590.3
91.0
251.6
1,696.7
2,849.4
7,634.8
151.8
2,873.6
100.0
257.4
1,877.4
3,152.9
8,413.1
150.8
3,179.7
109.2
263.3
2,043.9
3,432.6
9,179.5
149.8
3,461.8
117.9
269.1
2,208.4
3,708.9
9,915.8
148.8
3,740.4
126.5
274.9
2,373.2
3,985.6
10,649.4
Long-Term Debt
Deferred Tax Liabilities
Other Liabilities(Derivatives)
Total Liabilities
1,210.0
1,545.0
104.0
6,785.0
1,199.0
1,554.0
323.0
8,103.0
1,079.0
1,480.0
0.0
8,893.0
973.0
1,554.2
0.0
9,462.9
929.0
1,632.0
0.0
10,195.9
905.0
1,713.8
0.0
11,032.0
899.0
1,799.7
0.0
11,878.2
893.0
1,889.9
0.0
12,698.7
887.0
1,984.6
0.0
13,521.0
0.0
5,187.0
-1,674.0
-727.0
-4.0
5,695.0
274.0
11,156.0
17,584.0
0.0
5,868.0
-2,628.0
-821.0
-4.0
4,871.0
85.0
10,824.0
18,594.0
0.0
6,776.0
-2,534.0
-931.0
-3.0
4,685.0
1,246.0
12,707.0
21,600.0
0.0
6,940.1
-2,595.4
-953.6
-3.0
4,999.1
1,308.3
13,247.6
22,710.4
0.0
7,104.3
-2,656.8
-976.1
-3.0
5,598.4
1,373.7
14,076.4
24,272.3
0.0
7,268.4
-2,718.1
-998.7
-3.0
6,532.1
1,442.4
15,242.9
26,274.9
0.0
7,432.5
-2,779.5
-1,021.2
-3.0
7,812.6
1,514.5
16,759.7
28,637.8
0.0
7,596.7
-2,840.9
-1,043.8
-3.0
9,412.5
1,590.2
18,599.4
31,298.1
0.0
7,760.8
-2,902.3
-1,066.3
-3.0
11,328.5
1,669.8
20,759.0
34,280.1
Assets
Cash Only
Total Short Term Investments
Accounts Receivables, Net
Inventories
Prepaid Expenses
Deferred Income Taxes
Other Current Assets
Total Current Assets
Preferred Stock (Carrying Value)
Common Stock&APIC
Repurchase Stock(included only in RE calculation)
Dividend Declared(included only in RE Calculation)
Forfeiture share from employees(only in RE Calculation)
Retained Earnings
Other Equity
Total Equity
Total Liabilities & Shareholders' Equity
Nike Inc.
Cash Flow Statement
Fiscal Years Ending May. 31
2013
2014
2015
2016E
2017E
2018E
2019E
2020E
2021E
2485.0
438.0
125.0
2693.0
586.0
291.0
3273.0
649.0
658.0
3866.1
348.3
4235.2
403.5
4653.5
435.9
5084.2
401.7
5487.6
396.9
5887.5
397.5
-77.1
-83.3
-90.0
-97.3
-105.3
-114.0
142.0
-197.0
58.0
31.0
-28.0
23.0
55.0
-38.0
3027.0
-298.0
-505.0
284.0
334.0
133.0
21.0
-16.0
-502.0
3003.0
-216.0
-621.0
201.0
-361.0
275.0
31.0
-210.0
51.0
4680.0
-350.0
-452.1
214.8
12.1
144.4
5.8
51.4
242.5
4006.0
-405.6
-523.8
244.5
7.9
167.3
5.8
48.8
280.9
4381.3
-438.1
-565.9
283.3
9.0
180.7
5.8
46.4
303.5
4824.1
-403.8
-521.5
306.1
9.3
166.5
5.8
44.1
279.7
5274.8
-398.9
-515.2
282.1
8.7
164.5
5.8
41.9
276.3
5644.3
-399.6
-516.1
278.6
8.6
164.8
5.8
39.8
276.8
6029.9
164.0
-1203.0
-877.0
-328.0
-960.0
935.0
-662.1
-72.0
-767.2
-73.5
-828.8
-75.0
-763.8
-76.6
-754.5
-78.2
-755.8
-79.8
-28.0
-1067.0
-2.0
-1207.0
-150.0
-175.0
0.0
-734.1
20.0
-820.7
0.0
-903.8
21.0
-819.3
0.0
-832.7
20.0
-815.6
-799.0
-2245.0
75.0
-60.0
115.0
-2914.0
-899.0
-2020.0
-63.0
-7.0
199.0
-2790.0
-953.6
-2431.2
-17.8
-106.0
59.3
-976.1
-2492.6
-7.4
-44.0
62.4
-998.7
-2554.0
-4.0
-24.0
65.7
-1021.2
-2615.4
-1.0
-6.0
69.1
-1043.8
-2676.8
-1.0
-6.0
72.7
-1066.3
-2738.1
-1.0
-6.0
76.5
Net Financing Cash Flow
-703.0
-1361.0
15.0
937.0
72.0
-1040.0
-3449.3
-3457.7
-3515.0
-3574.5
-3654.8
-3734.9
Net Change of Cashflow
1083.0
-1117.0
1632.0
-177.4
102.9
405.4
881.0
1156.8
1479.3
Operating Activities
Net Income
Depreciation, Depletion & Amortization
Other Non-cash Items
Changes in Working Capital
Receivables
Inventories
Accounts Payable
Income Taxes Payable
Accured Payroll
Dividend Payable
Prepaid Expenses
Other working capital (Assets/Liabilities)
Net Operating Cash Flow
Investing Activities
Proceeds(Payments) on Fixed Assets
Sale(Purchase) of Investments
Proceeds(Payments) in Other Investment Activities
Net Investing Cash Flow
Financing Activities
Cash Dividends Paid
Issuance(Repurchase) in Capital Stock
Change in Current Debt
Borrowing(change) in Long-Term Debt
Borrowing(change) in other financing activities
Nike Inc.
Common Size Income Statement
Fiscal Years Ending May. 31
Sales
COGS
Gross Income
Depreciation&Amortization of Intangibles
SG&A Expense
EBIT (Operating Income)
Interest Income
Interest Expense
Other non-operating Income(expense)
Pretax Income
Income Taxes(benefit)-current
Income Taxes(benefit)-deferred
Net Income
2013
100.00%
56.41%
43.59%
1.73%
30.80%
11.06%
0.10%
‐0.09%
1.85%
12.93%
3.56%
‐0.37%
9.73%
2014
100.00%
55.23%
44.77%
2.11%
31.53%
11.13%
0.09%
‐0.15%
1.68%
12.75%
3.10%
‐0.04%
9.69%
2015
100.00%
54.03%
45.97%
2.12%
32.33%
11.52%
0.02%
‐0.13%
2.33%
13.74%
3.41%
‐0.37%
10.70%
2016E
100.00%
54.03%
45.97%
1.03%
32.33%
12.61%
0.02%
‐0.13%
2.17%
14.67%
3.67%
‐0.44%
11.44%
2017E
100.00%
54.03%
45.97%
1.08%
32.33%
12.57%
0.01%
‐0.11%
2.02%
14.48%
3.62%
‐0.43%
11.30%
2018E
100.00%
54.03%
45.97%
1.05%
32.33%
12.59%
0.01%
‐0.10%
1.88%
14.38%
3.60%
‐0.43%
11.22%
2019E
100.00%
54.03%
45.97%
0.89%
32.33%
12.75%
0.01%
‐0.09%
1.76%
14.43%
3.61%
‐0.43%
11.26%
2020E
100.00%
54.03%
45.97%
0.81%
32.33%
12.83%
0.01%
‐0.08%
1.66%
14.42%
3.60%
‐0.43%
11.25%
2021E
100.00%
54.03%
45.97%
0.76%
32.33%
12.89%
0.01%
‐0.08%
1.58%
14.40%
3.60%
‐0.43%
11.23%
Nike Inc.
Common Size Balance Sheet
Cash Only
Total Short Term Investments
Accounts Receivables, Net
Inventories
Prepaid Expenses
Deferred Income Taxes
Other Current Assets
Total Current Assets
Fiscal Years Ending May. 31
2013
13.18%
10.38%
12.31%
13.57%
3.17%
1.22%
0.00%
53.83%
2014
7.17%
11.33%
12.35%
14.20%
2.94%
1.28%
0.00%
49.27%
2015
8.11%
11.25%
10.97%
14.17%
3.36%
1.27%
3.07%
52.21%
2016E
6.82%
10.40%
10.97%
14.17%
2.89%
1.27%
2.78%
49.31%
2017E
6.42%
9.57%
10.97%
14.17%
2.47%
1.27%
2.51%
47.39%
2018E
6.78%
8.83%
10.97%
14.17%
2.12%
1.27%
2.27%
46.42%
2019E
8.18%
8.28%
10.97%
14.17%
1.85%
1.29%
2.08%
46.83%
2020E
9.94%
7.83%
10.97%
14.17%
1.63%
1.32%
1.93%
47.79%
2021E
12.07%
7.43%
10.97%
14.17%
1.44%
1.36%
1.79%
49.24%
Property, Plant & Equipment - Gross
Accumulated Depreciation
Net Property, Plant & Equipment
Goodwill
Net Other Intangibles
Deferred Tax Assets
Total Assets
21.73%
12.04%
9.69%
0.52%
1.51%
3.92%
69.47%
22.37%
12.18%
10.19%
0.47%
1.01%
5.94%
66.89%
20.76%
10.92%
9.84%
0.43%
0.92%
7.19%
70.59%
20.76%
10.92%
9.84%
0.39%
0.83%
6.84%
67.21%
20.76%
10.92%
9.84%
0.35%
0.70%
6.47%
64.75%
20.76%
10.92%
9.84%
0.32%
0.63%
6.14%
63.34%
20.76%
10.92%
9.84%
0.29%
0.53%
5.92%
63.42%
20.76%
10.92%
9.84%
0.27%
0.49%
5.76%
64.14%
20.76%
10.92%
9.84%
0.25%
0.42%
5.63%
65.38%
Liabilities & Shareholders' Equity
ST Debt & Curr. Portion LT Debt
Accounts Payable
Income Tax Payable
Dividends Payable
Accrued Payroll
Other Current Liabilities
Total Current Liabilities
0.70%
6.50%
0.39%
0.74%
3.86%
3.31%
15.51%
0.63%
6.94%
1.55%
0.75%
3.99%
4.22%
18.08%
0.59%
6.96%
0.23%
0.78%
4.53%
7.60%
20.70%
0.48%
6.94%
0.25%
0.73%
4.53%
7.60%
20.53%
0.42%
6.91%
0.24%
0.67%
4.53%
7.60%
20.37%
0.37%
6.93%
0.24%
0.62%
4.53%
7.60%
20.28%
0.33%
7.04%
0.24%
0.58%
4.53%
7.60%
20.33%
0.31%
7.09%
0.24%
0.55%
4.53%
7.60%
20.32%
0.28%
7.13%
0.24%
0.52%
4.53%
7.60%
20.31%
Long-Term Debt
Deferred Tax Liabilities
Other Liabilities(Derivatives)
Total Liabilities
4.78%
6.10%
0.41%
26.80%
4.31%
5.59%
1.16%
29.15%
3.53%
4.84%
0.00%
29.06%
2.88%
4.60%
0.00%
28.00%
2.48%
4.35%
0.00%
27.20%
2.18%
4.13%
0.00%
26.60%
1.99%
3.99%
0.00%
26.30%
1.83%
3.87%
0.00%
26.03%
1.69%
3.78%
0.00%
25.79%
Preferred Stock (Carrying Value)
Common Stock&APIC
Repurchase Stock(included only in RE calculation)
Dividend Declared(included only in RE Calculation)
Forfeiture share from employees(only in RE Calculation)
Retained Earnings
Other Equity
Total Equity
Total Liabilities & Shareholders' Equity
0.00%
20.49%
‐6.61%
‐2.87%
‐0.02%
22.50%
1.08%
44.07%
69.47%
0.00%
21.11%
‐9.45%
‐2.95%
‐0.01%
17.52%
0.31%
38.94%
66.89%
0.00%
22.14%
‐8.28%
‐3.04%
‐0.01%
15.31%
4.07%
41.52%
70.59%
0.00%
20.54%
‐7.68%
‐2.82%
‐0.01%
14.79%
3.87%
39.20%
67.21%
0.00%
18.95%
‐7.09%
‐2.60%
‐0.01%
14.93%
3.66%
37.55%
64.75%
0.00%
17.52%
‐6.55%
‐2.41%
‐0.01%
15.75%
3.48%
36.75%
63.34%
0.00%
16.46%
‐6.15%
‐2.26%
‐0.01%
17.30%
3.35%
37.11%
63.42%
0.00%
15.57%
‐5.82%
‐2.14%
‐0.01%
19.29%
3.26%
38.12%
64.14%
0.00%
14.80%
‐5.53%
‐2.03%
‐0.01%
21.60%
3.18%
39.59%
65.38%
Nike Inc.
Weighted Average Cost of Capital (WACC) Estimation
For Fiscal Year 2015 Ending May.31
Risk Free Rate (30 Year Treasury Yield)
Beta
3.05%
0.79
Market Risk Premium
4.42%
Cost of Equity 6.54%
Cost of Debt
Bond Mature on 05/01/2043 3.96%
Short Term Debt
Long‐term Debt
Debt(in Millions)
PV of Opreating Lease(in millions)
Equity(in millions)
$ 181
$ 1,079
$ 1,260
$ 2,496.75
$ 105,051.06
Weights
Weights of Debt(including PV of Operating Lease) Weights of Equity
3.45%
96.55%
Tax Rate
22.16%
WACC
6.42%
Nike Inc.
Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth
CV ROIC
WACC
Cost of Equity
Fiscal Years Ending May. 31
DCF Model
FCF
CV of FCF in stead growth period(CV2021) Number of Period For Discounting PV of FCF
PV of CV2021
Value of Operating Assets
Add: Excessive Cash
Add: Short‐term Investment
Add: Other Long Term Asset
Less: PV of Operating Lease
Less: ST Debt & Curr. Portion LT Debt
Less: Long Term Debt
Less: Other Liabilities(Derivatives)
Value of Equity
Number of Shares outstanding
Intrinsic Value of Stock
Adjusted Price
EP Model
Begin IC
EP CV2021 EP
Number of Periods For Discounting:
PV of EP
PV of CV2021 EP
Value of Operating Assets
Add: Excessive Cash
Add: Short‐term Investment
Add: Other Long Term Asset
Less: PV of Operating Lease
Less: ST Debt & Curr. Portion LT Debt
Less: Long Term Debt
Less: Other Liabilities(Derivatives)
Value of Equity
Number of Shares outstanding
Intrinsic Value of Stock
Adjusted Price
3.30%
31.57%
6.42%
6.54%
2015
0
2016E
2017E
2018E
2019E
2020E
2021E
2060
2237
2500
3003
3304
1
1936
2
1975
3
2074
4
2341
5
2420
94441
3646
128921
6
2193
2445
2731
3026
3306
1
2060
2
2159
3
2266
4
2359
5
2422
84011
105187
1869
3358
0
2497
181
1079
0
106658
857
124
127.7
9911
0
105187
1869
3358
0
2497
181
1079
0
106658
857
124
127.7
3581
114683
6
Present Value of Operating Lease Obligations (2015)
Present Value of Operating Lease Obligations (2014)
Operating
Leases
2016
2017
2018
2019
2020
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
447
423
371
311
268
1,154
2974
477
2497
Capitalization of Operating Leases
Pre‐Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
447
423
371
311
268
268
2015
2016
2017
2018
2019
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
427
399
366
311
251
1050
2804
443
2361
Capitalization of Operating Leases
3.96%
4.3
PV Lease
Payment
430.0
391.4
330.2
266.3
220.7
858.2
2496.8
Present Value of Operating Lease Obligations (2011)
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
427
399
366
311
251
251
1844
252
1592
Capitalization of Operating Leases
Pre‐Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
374
310
253
198
174
174
3.96%
4.2
PV Lease
Payment
410.7
369.2
325.7
266.3
206.7
782.7
2361.3
Present Value of Operating Lease Obligations (2010)
374
310
253
198
174
535
PV Lease
Payment
359.8
286.8
225.2
169.5
143.3
407.3
1591.8
403
340
304
272
225
816
2360
354
2006
Pre‐Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
403
340
304
272
225
225
334
264
220
177
148
466
1609
220
1389
Pre‐Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
334
264
220
177
148
148
3.96%
3.6
PV Lease
Payment
387.6
314.6
270.6
232.9
185.3
614.7
2005.7
Lease
Year
Commitment
1
408
2
387
3
271
4
224
5
186
6 & beyond
186
PV of Minimum Payments
PV Lease
Payment
392.5
358.1
241.2
191.8
153.2
499.3
1836.0
330.2
281.3
233.6
195.6
168.6
588.5
1797.8
261
1537
PV Lease
Payment
321.3
244.3
195.8
151.5
121.9
354.3
1389.0
Pre‐Tax Cost of Debt
Number Years Implied by Year 6 Payment
Year
1
2
3
4
5
6 & beyond
PV of Minimum Payments
Lease
Commitment
330.2
281.3
233.6
195.6
168.6
168.6
2138
302
1836
Pre‐Tax Cost of Debt
Number Years Implied by Year 6 P
Present Value of Operating Lease Obligations (2008)
Operating
Leases
2010
2011
2012
2013
2014
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
408
387
271
224
186
662
Capitalization of Operating Leases
Capitalization of Operating Leases
3.96%
3.15
Operating
Leases
2013
2014
2015
2016
2017
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
3.96%
3.6
Present Value of Operating Lease Obligations (2009)
Capitalization of Operating Leases
3.96%
3.07
2014
2015
2016
2017
2018
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Operating
Leases
2011
2012
2013
2014
2015
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Present Value of Operating Lease Obligations (2012)
Operating
Leases
Capitalization of Operating Leases
Pre‐Tax Cost of Debt
Number Years Implied by Year 6 Payment
Operating
Leases
2012
2013
2014
2015
2016
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
Present Value of Operating Lease Obligations (2013)
Operating
Leases
Operating
Leases
2009
2010
2011
2012
2013
Thereafter
Total Minimum Payments
Less: Interest
PV of Minimum Payments
312.4
264.4
228.9
192.1
163.9
692.3
1854
290
1564
Capitalization of Operating Leases
3.96%
3.49
Pre‐Tax Cost of Debt
Number Years Implied by Year 6 P
3.96%
4.22
PV Lease
Payment
317.6
260.3
207.9
167.5
138.8
444.5
1536.6
Lease
Year
Commitment
1
312.4
2
264.4
3
228.9
4
192.1
5
163.9
6 & beyond
163.9
PV of Minimum Payments
PV Lease
Payment
300.5
244.6
203.7
164.5
135.0
515.7
1564.0
Nike Inc.
Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending May. 31
EPS
Key Assumptions
CV growth
CV ROE
Cost of Equity
2016E
$ 4.54
2017E
2018E
2019E
2020E
2021E
$ 5.03 $ 5.59 $ 6.17 $ 6.72 $ 7.26
3.30%
29.92%
6.54%
Future Cash Flows
P/E Multiple (CV Year)
EPS (CV Year)
Future Stock Price(2020)
Dividends Per Share
Future Cash Flows
Discounted Period
Discounted Cash Flows
$ 1.13 $ 1.17 $ 1.21 $ 1.24 $ 1.28
$ 199.16
1
2
3
4
5
$ 1.058 $ 1.028 $ 0.998 $ 0.966 $ 146.013
Intrinsic Value
Adjust Price
$ 150.06
$ 154.04
27.44
$ 7.26
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): Average Time to Maturity (years):
Expected Annual Number of Options Exercised:
58,100,000
6.00
9,683,333
Current Average Strike Price:
Cost of Equity:
Current Stock Price:
$ 16.95
6.54%
$122.58
Increase in Shares Outstanding:
Average Strike Price:
Increase in Common Stock Account:
9,683,333
9,683,333
9,683,333
9,683,333
9,683,333
9,683,333
9,683,333
9,683,333
9,683,333
9,683,333
$ 16.95 $ 16.95 $ 16.95 $ 16.95 $ 16.95 $ 16.95 $ 16.95 $ 16.95 $ 16.95 $ 16.95
164,132,500 164,132,500 164,132,500 164,132,500 164,132,500 164,132,500 164,132,500 164,132,500 164,132,500 164,132,500
Change in Treasury Stock
Expected Price of Repurchased Shares:
Number of Shares Repurchased:
2,534,000,000 2,534,000,000 2,534,000,000 2,534,000,000 2,534,000,000 2,534,000,000 2,534,000,000 2,534,000,000 2,534,000,000 2,534,000,000
$ 122.58 $ 130.60 $ 139.14 $ 148.24 $ 157.94 $ 168.28 $ 179.28 $ 191.01 $ 203.51 $ 216.82
20,672,214 19,402,914 18,211,551 17,093,339 16,043,787 15,058,678 14,134,056 13,266,207 12,451,646 11,687,099
Shares Outstanding (beginning of the year)
Plus: Shares Issued Through ESOP
Less: Shares Repurchased in Treasury
Shares Outstanding (end of the year)
857,000,000
846,011,119
836,291,538
827,763,321 820,353,315
813,992,862
808,617,517 804,166,794
800,583,920
797,815,608
9,683,333
9,683,333
9,683,333
9,683,333
9,683,333
9,683,333
9,683,333
9,683,333
9,683,333
9,683,333
20,672,214 19,402,914 18,211,551 17,093,339 16,043,787 15,058,678 14,134,056 13,266,207 12,451,646 11,687,099
846,011,119
836,291,538
827,763,321
820,353,315 813,992,862
808,617,517
804,166,794 800,583,920
797,815,608
795,811,842
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol
Current Stock Price
Risk Free Rate
Current Dividend Yield
Annualized St. Dev. of Stock Returns
Range of
Outstanding Options
Range 1
Total
Number
of Shares
58,100,000
58,100,000
NKE
$122.58
3.05%
1.20%
23.60%
Average
Exercise
Price
16.95
$ 16.95
Average
B‐S
Value
Remaining
Option
of Options
Life (yrs)
Price
Granted
6.00 $ 99.95 $ 5,807,088,061
6.00 $ 108.46 $ 5,807,088,061