During Nike's (NKE -0.74%) investor day, management provided a long term revenue forecast of achieving $36 billion in revenue by 2017. This objective translates to a roughly 9% compounded annual growth rate based on Nike's $25.3 billion revenue in 2013. The company is about to embark on an ambitious, yet realistic plan that presents investors a great opportunity to invest in a well-established company that is still experiencing growth.
Direct to consumer to drive growth and sales
Nike is placing a strong emphasis on its direct to consumer, or DTC, growth channel. The segment includes items sold at Nike stores and online sales through www.nike.com. The company plans to improve its margin through increased DTC penetration and achieve $8 billion in sales by 2017, compared to $4.3 billion in 2013.
DTC growth will drive higher-margin retail sales and enhance merchandising strategies and relationships with wholesale partners. Nike brick and mortar stores will serve as testing grounds for new products and merchandising initiatives.Results from these experiments will be shared with Nike's wholesale customers to further improve sales. This may sound confusing and irrational, but Nike selling its own products in its own stores actually helps sales at its major retail partners. Nike's President of Brand Trevor Edwards had the following to say during a recent conference call:
I think part of it is our strategy around our DTC, we clearly use DTC as an opportunity for us to really improve our assortments to make sure that we have the best lines. And so what we're able to do is really use it as a spearhead and so what you're seeing in our DTC doors is really great performance, because we have the right assortments coming through those doors. The more we learn, the more we then take those to our retail partners. And so what we've been seeing is our ability to drive a really integrated marketplace is really helping to drive these kinds of results. But obviously, we use our DTC as a lab, as it were and also is a way to ensure that we can get our premium products to the marketplace.
Retailers such as Foot Locker (FT -0.37%) will benefit from Nike's long term forecast. Foot Locker will see increased sales from its store within a store, House of Hoops. House of Hoops predominantly features Nike products backed by NBA superstars such as Lebron James and Kevin Durant, and legendary superstar Michael Jordan's line of basketball shoes. While DTC is a higher growth and higher margin business for Nike, retailers like Foot Locker won't be left in the dark. Nike's core strength is not in retail operations, as it leaves that aspect up to its partners.
Foot Locker is in the final stages of implementing a new allocation system that will boost inventory turns and lower markdowns, thus raising margins for 2014. Investors can also look forward to the company's exposure and expansion within an improving European environment, as well as continued store remodeling, as factors to continue driving growth.
House of Hoops inside a Foot Locker location in Beverly Hills, California. Source: sollecollector
Flyknit
Flyknit is a tremendous long term growth opportunity that will naturally expand to other categories over time. The efficient production technology makes Flyknit a perfect platform for customization. Flyknit technology uses single fibers knitted together instead of traditional fabrics, thereby reducing waste by 80% when compared to a traditional Nike shoe. In the near term, the Flyknit Air Max will be introduced in January 2014 and likely be embraced even at a $200+ price tag. In 2015, an accessibly-priced Flyknit style will likely be introduced as the Flyknit technology becomes a material part of Nike's business.
International growth
Nike will focus on international sales, specifically from BRIC countries. Management believes that Russia is on the path to becoming a $1 billion market, while Brazil will reach the $1 billion mark by the end of fiscal 2015 according to plans laid out during its previous investor conference . By the 2016 Olympics, Brazil is expected to become Nike's third largest global market after China and the U.S.
China is an area of concern. Nike expects to fall short of the $4 billion revenue goal by 2015 which was announced at the previous analyst day. China was the only market that has seen sales decline in the previous quarter. Management remains confident in its ability to conquer the Chinese market and plans to "reset" its strategy, work through excess inventory, and rethink its publicity tours which include NBA superstars.
It will take more than just Kobe to turn things around in China. Source: qz.com
Excels in the face of competition
Nike is keenly aware of competitors, such as Lululemon Athletica (LULU -1.26%), that are entering its market. Historically, strong competitors have brought out the best in Nike, and there is no reason to believe that will not be the case in the coming years. Lululemon has plans to expand its men's clothing selection, which currently accounts for less than 10% of revenue, and plans to have men's stand-alone stores by 2016.
Lululumen is unlikely to succeed on a grand scale attracting men because the company will likely never be able to secure endorsements like those that enforce Nike's brand image. Nike has a roster of global athletes to promote its image, such as Cristiano Ronaldo, Wayne Rooney, Roger Federer, and Kobe Bryant. Meanwhile, Lululemon is still shaking off the negative publicity it has received from its see-through pants blunder. Additionally, studies have shown that fashion brands that appeal mainly to women have historically failed to transition their businesses to men. Proof of this can be seen in the disaster that revolved around Uggs' transition to a men's line, despite an endorsement from NFL superstar Tom Brady.
Taking a second to compare some financials, Nike holds $6 billion in cash and investments, which is roughly 55% of Lululemon's total market cap of around $11 billion. With ample financial flexibility, Nike can continue to fend off competition for years to come.
Conclusion
Nike has a strategic, cohesive plan that's driven by long term annual revenue and earnings-per-share growth. In the past 10 years, Nike has generated $16 billion in cumulative free cash flow and $15 billion of this was returned to shareholders through dividends and share repurchases. Investors can look forward to a continuation of these rewards, as well as a long term accumulation in share price as Nike embarks on its ambitious journey into the future.
