Image Source: Valuentum
By Valuentum Analysts
Very few other companies, if any other, have built such deep, personal connections with the consumer as Nike, Inc. (NKE) has, let alone the tremendous brand strength, and its endorsement deal with LeBron James gives it yet another top-notch globally marketable superstar. Nike’s annual free cash flows averaged ~$4.0 billion from fiscal 2019-2021, versus its ~$1.6 billion in dividend obligations in fiscal 2021, and it had a solid net cash position on the books at the end of fiscal 2022. The sustained strength seen at its digital and direct-to-consumer operations supports Nike’s outlook. Nike’s Dividend Cushion ratio is impressive; however, its ~1.1% dividend yield is relatively modest.
From its namesake to Jordan Brand to Hurley to Converse, Nike is the #1 sports brand period, and we doubt any other company will come close to challenging that anytime soon. Many such as Under Armour (UA) (UAA) or Adidas (ADDYY) (ADDDF) will try, however. Consumer preferences are still fickle, and the global economy, particularly U.S.-China tensions, and inflationary pressures may challenge its results, but Nike’s focus on exceeding the athlete’s expectations is second to none. Though it’s hard to find much fault with Nike’s business model and its dividend payout, we caution that its share repurchases compete for capital against its dividend program, and its share buyback program is huge. Nike is also contending with inflationary and supply chain hurdles, and its leaning on its digital sales channels and ample pricing power to offset those headwinds.
On June 27, Nike’s fourth-quarter fiscal 2022 results for the period ended May 31, 2022 were about as expected as its direct-to-consumer business offset weakness elsewhere. On a consolidated basis, the company experienced a modest revenue decline due largely to weakened sales in Greater China (FXI, MCHI), but Nike was still able to beat consensus estimates, with diluted earnings per share coming in at a healthy $0.90. Still, fourth-quarter fiscal 2022 revenues dropped 1% due in part to currency pressures, while net income fell 5% and diluted earnings per share dropped 3%.
Nike’s gross margins were hurt 80 basis points in the quarter in part due to obsolescence reserves from weakened demand in Greater China and higher freight and logistics expenses. The company noted that inventories leaped 23% from the prior-year period, to $8.4 billion, due to supply chain issues, and we’re not too happy about the inventory build, but the increase is understandable given lockdowns in Greater China. Revenue in Greater China fell 19% in the quarter, too, which while striking, may have been better than many were expecting, again given the lockdowns.
Image: Nike’s revenue faced pressure in Greater China to the tune of -19% as apparel sales fell 39%. Though the results were disappointing, we believe that many market participants were expecting worse. Image Source: Nike’s 8-K, June 27, 2022.
All things considered, the quarterly performance could have been better, but it fits the major consumer-business related themes we’ve been witnessing of late with respect to gross margin pressure and inventory build. In the company’s fourth-quarter 2022 press release, the company announced a brand new four-year $18 billion share repurchase program, and while we’d prefer Nike to stock up more cash on its balance sheet, it’s hard to argue with an executive suite that knows its shares are underpriced. After all, we value Nike’s equity at $139 per share, meaningfully higher than its last closing price of ~$111. The board is clearly looking to add economic value by buying back Nike stock on the cheap.
Looking at Nike’s balance sheet, there’s not much to worry about. Cash and equivalents and short-term investments totaled ~$13 billion at the end of May, while total debt and notes payable were ~$9.43 billion, good enough for a solid net cash position. The company hasn’t published a cash flow statement yet, and while the inventory build will represent a stiff use of cash in the period, management did note that “free cash flow was offset by share repurchases and dividends,” implying, at least to us, that the measure was still strong, albeit not as strong as it could have been. We continue to be huge fans of Nike’s free cash flow generating capacity as well as its net cash rich balance sheet as it buys back its own underpriced stock.
Concluding Thoughts
Nike CEO John Donahoe may have said it best in its fourth-quarter fiscal 2022 press release: “Nike’s results this fiscal year are a testament to the unmatched strength of our brands and our deep connection with consumers. Our competitive advantages, including our pipeline of innovative product and expanding digital leadership, prove that our strategy is working as we create value through our relentless drive to serve the future of sport.”
What more can we say about this great company. We like its financials quite a bit, fourth-quarter fiscal 2022 earnings came in better than expected, the company is navigating supply chain issues, inflationary pressures, and weakness in Greater China quite well, and it just launched a new massive buyback program to take advantage of its underpriced stock. Nike boasts an impressive Dividend Cushion ratio of 3.8, and we’re reiterating our $139 per share fair value estimate on shares. Shares yield ~1.1% at the time of this writing.
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Tickerized for NKE, UA, UAA, ADDYY, ADDDF, FXI, MCHI, KWEB, YETI, DKS, FL, XRT, KSS, LULU, HIBB, DECK, BIRD, CROX, SKX, VRA, WWW, SPWH, PTON, NLS, POOL, BODY, FXLV, LTH, XPOF, PLNT
Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE. Callum Turcan owns shares in DIS, META, GOOG, VRTX, and XLE and is long call options on DIS and META. Some of the other securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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