Investors were disappointed in Nike’s (NKE) fiscal 2022 Q1 results. It is not surprising since the company’s management lowered its earnings forecast for both Q2 and the entire fiscal year. According to Nike, the forecast was worsened because of supply chain issues. Moreover, the closure of several factories shifted the timing of production and delivery. Should investors be worried about their investment in this company? Let’s look into it.
The apparel industry is highly competitive, and brand strength is everything here. Fortunately for the shareholders of the sportswear manufacturer, Nike will give a head start to any of its competitors.
In 1964, middle-distance athlete Phil Knight and his track coach Bill Bowerman founded Nike. The dynamics of the company’s shares since its appearance on the stock exchange confirms that it is one of the most successful concerns in the world. In November 2021, Nike celebrated 40 years since it began selling securities on the stock exchange. During this time, the shoe corporation has shown outstanding results.
Major investment companies such as Deutsche Bank, Goldman Sachs, Morgan Stanley, and others always recommend holding Nike securities in the portfolio.
Today, the Nike brand is an integral part of American daily life as Coca-Cola and McDonald’s. It explains the company’s value, estimated at $270 billion. Nike’s market price is six times higher than the rest of the American shoe companies combined.
The issuer has a strong brand. In its advertising portfolio, you can see the most successful athletes: Cristiano Ronaldo, Michael Jordan, Serena Williams, LeBron James. Expenditures on advertising and marketing involving celebrities are fully justified. According to the fiscal year 2021, Nike spent $3.1 billion on marketing, with revenues from Jordan Brands alone reaching $4.71 billion.
Approximately 2,500 sports teams, sports associations, and clubs use the company’s services. Almost 70% of the value of the company’s products is not directly related to production. The cost of producing a pair of sneakers does not exceed $30, while their price is $100. Name series, created for famous athletes, artists, and singers, cost $250, and the share of production costs for such a pair drops to 12%. So a company’s main financial asset is its brand, not its supply chain or the number of stores.
It’s all about digital
In 2020, the company launched a new development strategy called Consumer Direct Acceleration, according to which Nike will further rely on its sales. In 2020, the issuer terminated business relationships with nine wholesale distribution channels, including Belk and Zappos, and focused on its sales, especially online sales.
For this purpose, the company created two apps for smartphones and tablets: the main shopping app, Nike, and the SNKRS app, where you can buy the company’s sneakers. The SNKRS app allows customers to stay up-to-date on the latest news and events, strengthening the connection between the issuer and customers. Demand for the app grew by more than 120% in the last quarter. SNKRS is available in 50 countries and is already as popular as the Nike app.
In his Q1 2022 report, Matt Friend, the company’s CFO, said the apps were performing well, especially during a pandemic when not everyone could shop in regular stores.
The company has added specific options to the apps, providing shoppers with a safe shopping experience. For example, a QR code function has been added so that it is possible to place an order online and pick it up in the store from a special locker.
As part of the new strategy, Nike plans to open 200 small, interactive Nike Life outlets in the coming years.
The new strategy has proven itself well and helps the issuer thrive in the face of stiff competition.
A couple of months ago, Facebook announced the creation of a metaworld. Many companies immediately adopted the trend of actively integrating the virtual world into their businesses. Nike also said it would open its virtual world called Nikeland. The Nike metaworld will help increase brand awareness, and Nikeland will also become a testing ground for new shoe design ideas. The Nike metaworld will be opened on the Roblox site.
In addition to the virtual universe, Nike is also entering the NFT market, where unique items are sold as digital tokens, using blockchain technology to confirm ownership. This trend is just emerging, but it is already in high demand. Thus, in the first half of 2021, global NFT sales set a new record, soaring to $2.5 billion.
According to Morgan Stanley, the NFT market will expand the addressable luxury market by 10%-15%. Why is it interesting for Nike? The company’s limited edition shoes can cost a lot of money. Back in 2019, the issuer filed a patent for a new kind of NFT called CryptoKicks, which is a digital representation of a crypto token shoe.
CryptoKicks will not only make the company’s products more unique but also help Nike improve analytics. So, the company will monitor both the volume of resale of its sneakers and the appearance of fakes.
According to forecasts, NFT sales will dramatically increase the leading brands’ operating margins by 20-25%. The company itself predicts that by 2025, the penetration rate of digital sales, the metaverse, and NFT products will reach 40%.
For many investors, Nike is going to be Santa Claus this year, as the company is going to raise its quarterly payout by 11%. The new level is just over $0.30 per share.
But this is not the only news that will make shareholders happy. The most important thing, in our opinion, is that the company’s strategy is working, which is visible in the latest reports.
In Q1 FY2022, the issuer raised revenue 16% year-over-year. That figure topped $12 billion, which we believe is a significant result given the supply disruptions caused by the COVID-19 pandemic.
Some of that money, $4.7 billion, came from Nike Direct, up nearly 30% from a year earlier. Total net income for the king of athletic footwear was up 23%, or nearly $1.9 billion.
Despite supply chain issues, analysts expect continued double-digit growth over the next two years for both revenue and earnings per share.
Buy or sell?
Nike is a recognized winner in its field. Despite its venerable age, the company feels young and follows the latest trends. Digital sales, together with the metaverse, are proof of that.
It is worth remembering that the company also creates innovative shoes associated with musicians, famous players, and sports stars. For example, Nike collaborates with Riot Games. The fruit of this collaboration is the latest Dunk Lows sneakers associated with the League of Legends video game. The rapper G-Dragon also collaborated with Nike. Together they released a pair of sneakers called Nike Kwondo1. These moves are sure to create a whole army of new fans of Nike products.
If we talk about the technical picture, the company’s shares are declining now. The decline is corrective, and investors should not worry. Currently, the price is near $160 and can pass this mark in the nearest sessions. After that, you can consider buying from a yearly high of $180, and then the $200 area.
Last week’s corporate reports
In early December 2021, GameStop reported its profits and losses for Q3 2021. The report once again disappointed investors. As a result, the paper fell by 7.88%. According to the report, the issuer’s net loss increased to $105.4 million, or $1.39 per share, compared to a loss of $18.8 million, or $0.29 per share, for the same period in 2020. Revenue for the period was $1.297 billion, up 29.05% year-over-year.
Now the price is around $144. There is some stabilization in the market, but it is too early to speak about growth.
Last week we also discussed Adobe. It’s a promising company, but it’s going down at the moment. Characteristically, it is happening against a backdrop of strong data. The issuer’s revenue was better than expected by $20 million, EPS was within the forecast.
So why is there a drop? Investors were disappointed in the 2022 forecast. According to Adobe’s forecast, the company will earn $17.9 billion in 2022, while analysts talk about $18.2 billion.
Should you buy the shares? For now, we suggest that you watch the behavior of the paper at the level of $560-$550. We expect the testing of this support area, followed by a rebound. Before that, it’s better to watch the market.