Breaking Down NIKE, Inc. (NKE) Financial Health: Key Insights for Investors

Understanding NIKE, Inc. (NKE) Revenue Streams

Understanding NIKE, Inc.’s Revenue Streams

The primary revenue streams for NIKE, Inc. are categorized into various segments including footwear, apparel, and equipment, with distribution channels through wholesale customers and direct-to-consumer sales.

Revenue Breakdown by Product Line

Year-over-Year Revenue Growth Rate

In the first quarter of fiscal 2025, NIKE, Inc. reported total revenues of $11.6 billion, a decrease from $12.9 billion in the first quarter of fiscal 2024, reflecting a year-over-year decline of 10%. On a currency-neutral basis, revenues decreased by 9%.

Contribution of Different Business Segments to Overall Revenue

The NIKE Brand accounted for over 90% of total revenues, with direct sales contributing approximately 42% of total brand revenues:

• Wholesale: $6.4 billion
• Direct to Consumer: $4.7 billion

Revenue Changes by Region

Analysis of Significant Changes in Revenue Streams

The decline in revenue can be attributed to several factors:

• Decreased sales in footwear by 14% and apparel by 11%.
• Reduced digital sales through NIKE Direct, which fell 20%.
• Increased average selling prices (ASP) were noted, but were overshadowed by lower unit sales.

Overall, the revenue landscape for NIKE, Inc. reflects a challenging market environment, with significant declines across key product categories and regions.

A Deep Dive into NIKE, Inc. (NKE) Profitability

A Deep Dive into NIKE, Inc.'s Profitability

Gross Profit Margin: For the first quarter of fiscal 2025, the gross profit was $5,257 million, down from $5,720 million in the same period of fiscal 2024, representing an 8% decline. The gross margin increased to 45.4% from 44.2%, an improvement of 120 basis points.

Operating Profit Margin: Earnings Before Interest and Taxes (EBIT) for the first quarter of fiscal 2025 was $1,264 million, compared to $1,614 million in the previous year, a decrease of 22%. The EBIT margin dropped to 10.9% from 12.5%.

Net Profit Margin: The net income for the first quarter was $1,051 million, a decrease from $1,450 million year-over-year, leading to a net profit margin of 9.1% compared to 11.2% previously.

Trends in Profitability Over Time

The profitability metrics have shown a downward trend in fiscal 2025 compared to fiscal 2024. Below is a summary of the key profitability metrics over the last two quarters:

Comparison of Profitability Ratios with Industry Averages

As of fiscal 2024, the average gross margin in the apparel industry is approximately 42%. NIKE's gross margin of 45.4% positions it above the industry average. The operating margin for the industry averages around 10%, which is comparable to NIKE's 10.9%. However, the net profit margin for the industry is about 8%, indicating that NIKE's 9.1% net profit margin remains competitive.

Analysis of Operational Efficiency

Operational efficiency is reflected in the company’s ability to manage costs effectively. The total selling and administrative expenses for Q1 2025 were $4,048 million, down 2% from $4,116 million in Q1 2024. Selling and administrative expenses accounted for 34.9% of revenues in Q1 2025, up from 31.8% in Q1 2024, indicating a need for improved cost management.

Demand creation expenses increased by 15% to $1,226 million, reflecting increased investment in marketing, while operating overhead expenses decreased by 7% to $2,822 million.

Debt vs. Equity: How NIKE, Inc. (NKE) Finances Its Growth

Debt vs. Equity: How NIKE, Inc. Finances Its Growth

As of August 31, 2024, NIKE, Inc. reported total long-term debt of $7.998 billion and current liabilities including the current portion of long-term debt of $1.000 billion. The total current liabilities amounted to $10.628 billion.

Debt-to-Equity Ratio

The debt-to-equity ratio is a crucial metric for assessing financial leverage. As of August 31, 2024, NIKE's debt-to-equity ratio stood at approximately 0.57, calculated using a total equity of $13.944 billion. This ratio is below the industry average of around 0.85, indicating a conservative approach to leverage compared to its peers.

Recent Debt Issuances and Credit Ratings

In July 2022, NIKE filed a shelf registration statement allowing for the issuance of an unlimited amount of debt securities, which is valid until July 2025. As of August 31, 2024, the company holds long-term debt ratings of AA- from Standard & Poor's and A1 from Moody's Investor Services.

Refinancing Activity

In the first quarter of fiscal 2025, NIKE did not report any new borrowings under its $3 billion commercial paper program. The company remains in compliance with covenants under its credit facilities.

Balancing Debt Financing and Equity Funding

NIKE's financing strategy involves a balanced approach between debt and equity. In fiscal 2025, the company repurchased 14.8 million shares of Class B common stock for approximately $1.193 billion, under its $18 billion share repurchase program. Furthermore, for the first quarter of fiscal 2025, dividends paid amounted to $558 million, reflecting a commitment to return capital to shareholders.

Assessing NIKE, Inc. (NKE) Liquidity

Assessing NIKE, Inc.'s Liquidity

Current Ratio: As of August 31, 2024, the current ratio was calculated at 2.36, indicating strong liquidity. This is derived from current assets of $25,040 million and current liabilities of $10,628 million.

Quick Ratio: The quick ratio, which excludes inventories from current assets, stood at 1.73. This reflects cash and equivalents of $8,485 million, accounts receivable of $4,764 million, and current liabilities of $10,628 million.

Analysis of Working Capital Trends

Working capital as of August 31, 2024, was $14,412 million, calculated as current assets minus current liabilities. This represents an increase from $14,789 million as of May 31, 2024, largely driven by a rise in inventories, which increased to $8,253 million from $7,519 million.

Cash Flow Statements Overview

Operating Cash Flow: For the first quarter of fiscal 2025, cash provided by operations was $394 million, a significant improvement from an outflow of $66 million in the same quarter of fiscal 2024. This was influenced by net income adjustments of $1,358 million for non-cash items.

Investing Cash Flow: Cash used in investing activities was an outflow of $166 million, compared to an inflow of $418 million in the prior year, primarily due to net changes in short-term investments.

Financing Cash Flow: Cash used in financing activities amounted to $1,622 million, slightly increased from $1,599 million in the previous year, driven by higher share repurchases of $1,184 million and dividend payments of $558 million.

Potential Liquidity Concerns or Strengths

Despite a strong current and quick ratio, potential liquidity concerns include the reliance on cash flows for share repurchase programs, which could impact liquidity if cash flows decline. The company maintains a $3 billion commercial paper program, with no borrowings outstanding as of August 31, 2024, indicating good liquidity management.

Is NIKE, Inc. (NKE) Overvalued or Undervalued?

Valuation Analysis

Is NIKE, Inc. Overvalued or Undervalued?

The valuation of NIKE, Inc. can be assessed through key financial ratios such as the price-to-earnings (P/E), price-to-book (P/B), and enterprise value-to-EBITDA (EV/EBITDA) ratios.

• P/E Ratio: As of August 31, 2024, NIKE's P/E ratio stood at 28.6, reflecting a 12% decrease from the previous year.
• P/B Ratio: The price-to-book ratio was reported at 10.2, indicating a 5% increase year-over-year.
• EV/EBITDA Ratio: The enterprise value-to-EBITDA ratio was calculated at 17.5, which represents a 15% decline compared to the previous fiscal year.

Stock Price Trends

Over the past 12 months, NIKE's stock price has experienced notable fluctuations. The stock price started at $112.50 and reached a peak of $135.00 in November 2023, before declining to $90.50 by August 2024, representing a 19.5% decrease over the year.

Dividend Yield and Payout Ratios

NIKE's current dividend yield is 1.5%, with a payout ratio of 26%. This indicates a sustainable dividend policy, allowing for reinvestment in growth opportunities while rewarding shareholders.

Analyst Consensus on Stock Valuation

The consensus among analysts is as follows:

• Buy: 10 analysts
• Hold: 12 analysts
• Sell: 4 analysts

Analysts have expressed mixed feelings about the stock's valuation, with a majority leaning towards a "Hold" rating, reflecting concerns over recent revenue declines and market conditions.

Key Risks Facing NIKE, Inc. (NKE)

Key Risks Facing NIKE, Inc.

NIKE, Inc. faces a variety of internal and external risks that could impact its financial health. These risks include industry competition, regulatory changes, and fluctuating market conditions.

Industry Competition

The competitive landscape in the athletic apparel and footwear industry remains intense. As of the first quarter of fiscal 2025, total revenues decreased to $11.6 billion, down from $12.9 billion in the same period last year, marking a 10% decline . This decline reflects heightened competition from both established brands and emerging players, which can affect market share and pricing strategies.

Regulatory Changes

NIKE is subject to various regulations globally, including labor laws, environmental regulations, and trade policies. The ongoing investigation by the European Commission regarding potential breaches of State Aid rules could lead to increased tax liabilities, which are currently estimated at $999 million in gross unrecognized tax benefits . Adverse outcomes from such investigations could significantly impact financial performance.

Market Conditions

Current economic conditions, including inflationary pressures and changing consumer spending behaviors, have caused a cautious approach among consumers. As reported, demand creation expenses increased by 15% to $1.226 billion due to heightened marketing efforts . However, this increase in spending comes at a time when revenues are decreasing, indicating potential misalignment in market strategies.

Operational Risks

Operational risks associated with supply chain disruptions, particularly in sourcing materials and production, are significant. As of August 31, 2024, inventories rose to $8.3 billion, reflecting a 10% increase from the previous quarter . This increase may indicate challenges in inventory management or forecast inaccuracies, further straining financial resources.

Financial Risks

Financial risks include currency exchange rate fluctuations, which can impact international revenue. The company reported an unfavorable impact of approximately $12 million on income before taxes due to currency-related gains and losses . Additionally, the effective tax rate rose to 19.6% compared to 12.0% in the previous year, increasing overall tax liabilities .

Strategic Risks

Strategic risks related to product portfolio management have emerged as the company shifts focus towards innovative products. This shift has resulted in a decline in revenues in certain product categories, adversely affecting overall performance. As noted, the footwear segment saw a 10% decrease in revenues on a currency-neutral basis .

Mitigation Strategies

To address these risks, NIKE has implemented several strategic initiatives. The company aims to enhance its digital sales channels, which accounted for 42% of total revenues in the first quarter of fiscal 2025 . Additionally, ongoing investments in brand marketing and strategic pricing actions are designed to bolster competitiveness in the marketplace.

Future Growth Prospects for NIKE, Inc. (NKE)

Growth Opportunities

Future growth prospects for NIKE, Inc. are driven by several key initiatives and market dynamics.

Key Growth Drivers

• Product Innovations: The company continues to invest in R&D, focusing on sustainable materials and advanced technology in footwear and apparel.
• Market Expansions: NIKE is targeting growth in emerging markets, particularly in Asia Pacific and Latin America, where revenues decreased only 7% year-over-year, indicating resilience.
• Acquisitions: Strategic acquisitions, such as the purchase of data analytics firms, enhance customer engagement and supply chain efficiency.

Future Revenue Growth Projections

Analysts project a revenue growth rate of approximately 5% to 7% annually over the next five years, driven by increased demand for performance footwear and apparel.

Earnings Estimates

The expected earnings per share (EPS) for fiscal year 2025 is estimated at $4.00, reflecting a recovery from the previous year.

Strategic Initiatives

• Digital Transformation: Expanding e-commerce platforms with a focus on enhancing user experience and personalization.
• Sustainability Goals: Committing to reducing carbon emissions and increasing the use of recycled materials, which aligns with consumer trends towards sustainability.
• Partnerships: Collaborations with technology companies to integrate augmented reality (AR) into retail experiences.

Competitive Advantages

NIKE's strong brand equity, extensive distribution network, and innovative product offerings position it favorably for future growth. The company maintains a 45.4% gross margin, a testament to its pricing power and operational efficiency.

Financial Overview

As of August 31, 2024, inventories increased by 10% to $8.3 billion. This indicates preparedness for future demand as the company anticipates a rebound in sales.

Furthermore, share repurchases totaled $1.184 billion in Q1 FY2025, demonstrating confidence in the company's long-term growth trajectory.