Our Nike (NYSE:NKE) position got a nice boost this week up to almost $57 a share after the investor meeting which took place on the 25th of October. Investors certainly liked what they heard where the “Triple Double” strategy (how fast it gets products to the market) remains firmly at the forefront. Furthermore many manufacturers have decided in recent years to try and circumvent US wholesale weakness by going directly to the customer. Nike is calling this the consumer direct offense or CDO for short. In theory the above strategies make perfect sense. Nike customers will avail of better service by cutting out the middleman. Also customers will have more choice when purchasing because of product being updated at faster clips. This has to be a win win situation which should boost Nike shares over time.
The main themes of the investor day were growth in international markets, digital penetration and innovation. The company won’t get near its previously reported goal of sales of $50 billion by 2020. Management though clearly looks like it is on the right track with respect to where it wants to take the company. Tthe company’s earnings multiple is bang on the industry’s average of 24. I still see the stock undervalued by 15 to 20%. Let’s through the detail management went through with respect to the company’s growth themes as all look encouraging at this point
Ecommerce & Athletics Trends Are Tailwinds
With respect to international growth, Nike definitely has some growth triggers. Firstly is the sustained growth of athletics worldwide which will act as a tailwind for product sales going forward. Participation rates in soccer especially are increasing worldwide so demand for product here should remain buoyant. Adding to this is the growth of eCommerce which Nike intends to invest in heavily. In fact, the company is now stating that “Undifferentiated, mediocre retail won’t survive.”. This basically means that the buying process going forward needs to be far more service orientated where the brand will take center stage. Nike will hook up with selected retail partners where a unique differentiated experience and Nike-trained employees will be mandatory.
So basically whether the customer buys in Nike’s own stores, Nike.com or in one of its retail partners stores, Nike is doubling down on its brand as it believes over time, it will be able to stand alone as the undisputed market leader in its main categories. It’s all about providing perceived value to the customer. Personally I believe management is on the right track.
Nike’s Digital Channels Will Grow
With respect to Nike’s digital objectives, the company will partner up with online portals as well as aggressively sell its wares on Nike.com. The company’s partnership with Amazon (NASDAQ:AMZN) didn’t get much coverage at the investor day. In an ideal world, Nike would not sell their product on Amazon. If management is stating that undifferentiated retail will not survive, then Amazon should clearly be off the list. In order for Nike to be able to control its pricing, it must sell the lions share of product on its own portal. Then Amazon can be an extra.
Furthermore I don’t buy the argument that digital sales of footwear will never really take off due to customers almost invariably wanting to try the product first before purchase. Customer habits are changing but speed of delivery and return policies will only improve in eCommerce going forward. Therefore I don’t see this being a headwind over the long term for Nike shares.
Nike Is Doubling Down On Innovation
However the company’s laser type focus on innovation is where management believes it will see big earnings gains going forward. The jury is still out of this though. Sometimes when a company innovates too much in a certain segment, the flagship product in that segment can sometimes lose some market share. This happens often if pricing is not pitched correctly. Nike hopes it can circumvent this risk by bringing brand new products to the market in womenswear for example such as the Flyknit sportsbra and Pants Studio (an array of workout tights and pants).
Some of these innovative products wont make the grade even with changes in the supply chain expected. However management will be able to react much quicker going forward to customer’s tastes. This is the key issue. To be able to double down on your winners and cull your losers, you need to be able launch innovative products at scale. Therefore expect extensive new product launches to continue.
Nike shares which are trading at around $57 still seems a tad undervalued. We will hold until it reaches the late sixties. The stock clearly now has momentum on its side as shares have once more broken through the 200 day moving average.