The shares of this athletic apparel manufacturer were recently upgraded by Susquehanna, to Positive and PiperJaffray, to Overweight, and were initiated at Morgan Stanley, to Overweight.
Nike, Inc. (NKE)
From Canaccord Genuity Research
We are upgrading Nike, Inc. (NKE) to BUY from Hold and raising our PT to $95. After two years of compression, and market share declines, NKE has regained its footing and is solidly marching back to top form.
Since last year’s announcement of its new “Triple Double” strategy, NKE has most notably accelerated its product engine as evidenced by a flurry of new innovations and marquee collaborations. It also has increased its focus on the consumer experience via its SNKRS app, NikePlus membership, and other in store/online consumer-centric initiatives. Speed initiatives via programs like Express Lane have also ramped up, and while they will require time to become meaningful contributors to sales/margins, the steps taken thus far point to longer-term positive gross margin gains, particularly in light of what has been a decade of margin pressure from persistently rising production/labor costs, until last year when production costs were flat to margins.
In addition, we believe the gross margin headwinds the company has faced over the past 2.5 years are set to reverse, thus yielding an opportunity to recapture at least ~100bps of promotionally driven margin degradation and DTC mix, and over +100bps of production cost gains via its “man rev” data/manufacturing initiatives over the next 2-3 years. In aggregate, we see newly introduced platforms coupled with forthcoming innovations sparking the next multi-year run for NKE. These elements, underpinned by NKE’s transformation to an experientially driven company, combine to form catalysts to sustaining mid-teens EPS growth for the next three years, an outlook that is increasingly visible and reflective of F2021 earnings power approaching $4.00.
Leveraging collaborations and its vast archive of past innovations to optimize on the current trend: We have been discussing NKE’s improving product assortment for the past six months; however, we now feel it has reached a tipping point. Not only is NKE delivering an impressive amount of newness to market seemingly weekly, it is also leveraging the 90’s trend by bringing back its classic Air Max 1/90/95/97 franchises to strong consumer reception. In addition, high profile collaborations with Virgil Abloh, Anna Wintour, Kendrick Lamar, and Supreme, to name a few, speak to the elevated product that NKE has released this year that embraces the culture and lifestyle of its consumer, not just the sport. Lastly, Jordan has stabilized as the company has successfully reduced quantities and improved full price sell thrus. With stronger product tailwinds in Brand Jordan, we expect the total dollar volume declines to abate in early C2019 with the brand likely returning to growth in FQ3.
The virtuous cycle of innovation cannot be overstated: Last year’s introduction of the Vapor Max gave rise to a new technology platform while also serving as the catalyst to reignite the Air Max platform. This year, we have seen the launch of the new technical running shoe, the Epic React ($150), to great acclaim. Extending from the React platform was the launch of the React Element 87 two months ago which has been hailed as the shoe of the year. More iterations (e.g. Element 55) are slated to launch next month. With this pace of innovation, we see NKE embarking on a path of accelerated sales growth of HSD-LDD through 2020.
Our $95 PT is a blend of 30x 2019E EPS, 21x EBITDA, and DCF. Given our belief in NKE’s ability to drive mid-teens EPS growth (or better) for the next three years, we believe a 2x P/E/G ratio (or 30x P/E) is justifiable. Historically, over the past ten years, the stock has traded at an average PEG ratio of 1.7x and currently trades at 2.4x. Arguably, with greater evidence of sustained HSD top and mid-teens bottom line growth we feel our valuation parameters could prove conservative.
Camilo Lyon and Pallav Saini, Canaccord Genuity Research, www.canaccordgenuity.com, September 11, 2018