Not only are Nike (NKE +1.48%) shoes and apparel a great addition to your closet, the stock has proven to be a wealth builder for investment portfolios over the years. The company has outperformed the S&P 500 over the past five years. You might not expect that from a business whose sales and net income only increased 27.8% and 23.1%, respectively, from fiscal 2015 through fiscal 2019. But the market will often pay more for a high-quality industry leader.
As the global leader in athletic footwear and apparel, Nike continues to have a big influence on the world of sport and fashion. Like many other companies, it's enduring a challenging environment in hopes of coming out stronger on the other side. In order to assess the company's prospects over the next five years, investors should consider some important factors.
Image Source: Nike.
Coronavirus impact
Nike's latest quarter was especially difficult, as the company battled the fallout from the coronavirus pandemic (it was the fourth quarter of Nike's fiscal year, which ends May 31). Some 90% of company-owned stores outside of Greater China were closed for eight weeks during the quarter, resulting in a $790 million loss. However, digital sales shot up 75% from the prior-year quarter and now represent 30% of total revenue. This is a huge positive, and it demonstrates Nike's ability to handle an acceleration of the shift to e-commerce.
On the quarterly earnings calls, CEO John Donahoe emphasized the strength of the company's app ecosystem. Workouts on the Nike Training Club app more than tripled from last year, and Nike Commerce app downloads also tripled last year's level. In total, 25 million new members registered for Nike's digital applications, up over 100% from last year. This leads to stronger consumer connections and relationships, with the hope of greater sales in the future. "We now expect our overall business to reach 50% digital penetration," Donahoe said.
Despite these positive developments, Donahoe recently warned his employees of potential layoffs. The goal is to build a "flatter, nimbler company" in order to bolster its direct-to-consumer offerings. Layoffs are never welcome, but investors should appreciate Nike's ability to aggressively pursue a shift in strategy when circumstances change.
Dubbed the Consumer Direct Acceleration, management's strategy is now focused on an even faster timeline to take advantage of shifts in consumer behavior. In addition to achieving its goal of digital leadership, Nike is seeing impressive growth in its women's business. With the company having less than 10% of the U.S. women's apparel market currently, growth this quarter in the women's market was twice as fast as men's. It's obvious this will be a key business driver in years to come.
Other favorable trends
Nike is riding the wave of other favorable trends that will benefit the company many years from now. Becoming increasingly popular is athletic apparel for nonworkout occasions, also called athleisure. The appeal of wearing Nike gear primarily with a casual focus will only grow as the company continues collaborating with celebrities like Drake, Travis Scott, and Kevin Hart.
The Jordan Brand was a lone bright spot for fiscal 2020, as wholesale equivalent revenues rose 15% from last year to reach $3.6 billion. Donahoe says, "Jordan Brand resonated deeply in Q4 with the airing of ESPN's The Last Dance documentary." With no live sports in the U.S. over the past few months, it's quite impressive to see a documentary series drive sales. The limited and highly anticipated releases, coupled with the aura of scarcity, will support Jordan Brand's success.
Another favorable trend is the aspect of sport in general. People all over the world love watching sports, whether it's their favorite professional basketball team or just the local high school football team on a Friday night. When sports eventually return, fans will want an even greater connection to those on the court or field. The heightened love of the game will be a long-term boon for Nike.
Let's go to year 2025
While fiscal 2020 was a difficult year for Nike, I believe management is making all the right moves to position the business for greater success going forward. I am certain that sales and profits will be higher five years from now, something shareholders can be excited about. The stock's P/E ratio may seem high -- over 60 at Wednesday's close -- but don't forget that it's based on depressed recent earnings.
I'm a big believer that long-term trends will continue for longer than we assume. Nike is well positioned to capitalize on an accelerated shift to e-commerce, a greater emphasis on nonworkout apparel and footwear, and a growing love of sport and competition. The company also has $11 billion remaining on its share repurchase program launched in 2018, which will further boost intrinsic value per share in the future. If you're an investor with a five-year time horizon, simply apply Nike's slogan to this investment decision -- just do it!
