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THIS REPORT WAS PREPARED BY “STUDENT’S NAME”, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND

ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE

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MASTERS IN FINANCE

EQUITY RESEARCH

Sportswear market is expanding: the growing trend to

dress with sportswear (athleisure) in the daily life and increasing health consciousness results in an expanding market

Nike has a strong brand image and much more budget

than its competitors

Growing competition and entrance of mass producers:

the number of competitors in the market will increase in the coming years. Gaining market shares will become complicated. Nike will invest in the strengthening of its brand image in order to avoid growing price sensitivity of the customer and keep its customers loyal to its brand.

China is a growing market: a growing sport culture in

China combined with a growing Chinese middle class and a small sportswear market share (7.12% in 2014) results in growth potential

Growth through increase in DTC: Nike will open several

stores and continuously improve its online shop to grow the % of revenues from DTC and increase its profit margins.

A target price of $57.24 for the end of FY2016 is obtained through a DCF valuation. This price represents 2.80% return from

the current price ($58.76), therefore a HOLD recommendation is issued.

Company description

The American company Nike, Inc was founded in 1964. The company designs, develops, advertises and sells athletic footwear apparel and equipment. Nike Inc. owns: Hurley International LLC and Converse Inc. The company is the largest seller of athletic footwear and apparel in the world. Nike is traded on the New York stock exchange under the symbol NKE and is part of the S&P 500.

Table of Contents

NIKE COMPANY REPORT

APPAREL, FOOTWEAR AND ACCESSORIES JUNE 2016

STUDENT: PAULINE VELDEKENS [email protected]

Strong brand in an expanding market

But increasing competition will prevent market share expansion

Recommendation: HOLD

Price Target FY17: 57.24 $

Price (as of 9-Jan-16) 58.76$

Bloomberg: NKE US Equity

52-week range (USD) 45.35-68.20

Market Cap ($m) 91,410

Outstanding Shares (m) 1,703

Other (…)

Source: Bloomberg

Source:

(Values in $ millions) 2015 2016F 2017F

Revenues 30,601 33,990 37,540

Rev. growth 11% 10% 4%

EBIT 4,175 4,333 4,948

EBIT margin 14% 13% 13%

Net Profit 3,273 3,419 3,900

EPS ($) 1.92 2.01 2.29

P/E .3.06 2.87 2.71

EV/EBIT 22.27 22.27 20.37

EV/sales 3.04 2.84 2.69

Net debt to EBIT

Source: Company data

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NIKE INC. COMPANY REPORT

PAGE 2/31

Company overview ............................................................................... 3

Shareholder structure ........................................................................................ 4

The Sector ............................................................................................ 5

Nike’s business model and competitive environment ......................... 7

Segment analysis ............................................................................... 11

Valuation ............................................................................................ 23

Key drivers ........................................................................................................ 23

WACC assumptions ............................................................................................ 28

Sensitivity analysis ........................................................................................... 29

Appendix ............................................................................................ 30

Summary Tables ....................................................................................

Disclosures and Disclaimer ...................................................................


PAGE 3/31

Company overview

In 1964 Bill Bowerman and Phil Knight founded Blue Ribbon Sports, which

would be renamed Nike, Inc.in 1972. This American footwear and apparel

producer is traded on the NYSE since 1980 and is part of the S&P500. Its

fiscal year starts in June and ends in May. The share price has risen steadily

from 2003 until now. Only for fiscal year 2009 did the share close at a lower

(26.45$) value than at the beginning of the fiscal year (33.27$). This decline

in share price is due to a decrease in revenues from the previous year (FY

2008). At the time the world and American economy was in the middle of an

economic crisis, which affected revenues of several businesses around the

world. The stock has a return of 52.09% for the last five years and 30.97%

for the last six months. When comparing the returns of Nike to the S&P500,

Dow Jones US footwear index and the S&P 500 apparel index we observe

that Nike has outperformed the market from 2013 onwards (see exhibit 1).

Since its foundation Nike has achieved high growth in sales and expanded

its activities to the entire world. In 2008, Nike acquired Umbro, a british

soccer brand, for $528 million, in order to increase its market share in the

soccer market and to compete with Adidas on Adidas’ main market.

However, Nike failed to revamp the ailing brand. At the same time Nike

continued its already existing Nike branded soccer equipment and footwear

lines. In order to focus on their core brands and to avoid heavy investment

to restore Umbro’s brand identity and because Nike had become a well-

established name in the soccer market, Umbro was sold in 2012 for $225

million. In 2012, Nike also divested its stake in Cole Haan (sold to Apax for

$570M), a casual apparel and footwear manufacturer, acquired in 1988.

Nike did not manage to create the same hype around Cole Haan, as the

Nike brand enjoyed. Therefore, they decided to focus on their core brands

and to keep a portfolio that is complementary to the Nike brand. At present,

Nike Inc, still possesses two wholly-owned subsidiaries: Converse Inc.

(bought in 2003) and Hurley International LLC (bought in 2002). Thanks to

their four brands: Nike Brand, Jordan Brand, Converse and Hurley, Nike has

seen its revenues increase for the 5th year in a row to reach 30.6 billion USD

in fiscal year 2015. The Nike Brand offers products classified in eight

categories: Running, Basketball (which includes the Jordan products),

Football (Soccer), Men’s Training, Women’s Training, Action Sports,

Sportswear and Golf. Furthermore, the company is the largest producer of

athletic footwear and apparel in the world. Its biggest market is North

America, which accounts for 45% of total Nike Inc revenues in FY 2015.

Western Europe comes in at second place with 19% of total revenues,

Exhibit 1: cumulative total

return of 100$ investment

Exhibit 2-Nike’s revenues and net income

Exhibit 3-Revenues per Region (USD B)


PAGE 4/31

followed by Emerging Markets (13%), Greater China (10%), Eastern Europe

(5%) and Japan (2%). Revenues from Converse are reported separately

and account for 6% of global Nike Inc revenues. In these five regions Nike is

either the leader in the market or number 2 (see appendix 1). At first the

company focused on athletic footwear, but later Nike also developed

sportswear apparel and equipment. However, footwear remains the biggest

source of income for Nike. In fiscal year 2015, 60% of total revenues came

from the sale of footwear (excluding Converse), 28% came from the sale of

apparel and equipment accounted for 5%. The remaining 7% came from

sales of Converse (6%) and less than 1% from license agreements.

Nike also splits its revenues in sales to wholesale customers and DTC. Their

Direct To Consumer (DTC) business groups sales in nike-owned stores and

from their online shop. In recent years Nike has put emphasis on its DTC

business, as this allows them to get higher profit margins and to control

better their branding and display of products. Since fiscal year 2012, Nike

has improved its profit margin from 43% to 46% through increase in DTC

revenues and increase in average net selling price. In 2015 Nike owned 931

stores, of which 247 are located in North America and 99 are Converse

stores.

Even though, the company has made some acquisitions in the past, the disposal

of Umbro and Cole haan in recent years shows Nike’s strategy to concentrate on

its core business and its strong brands. The company will most likely increase its

revenue through organic growth rather than acquisitions.

Shareholder structure

Nike Inc reports Class A and Class B Common Stock in its financial statements.

Both have one voting right. However, the voting rights of Class B Common stock

are in certain circumstances limited with respect to the election of directors.

Moreover, each Class A Common Stock is convertible into one share of Class B

Common Stock. The authorized number of shares for Class A is 200 million and

1,200 million for Class B. As of July 17, 2015 the total number of shares

outstanding was 855,351,589, of which 177,457,876 were Class A Common

Stock and the remaining 677,893,713 are of Class B. Nike’s share are held for

90.87% (12/10/2015) by Institutional and Mutual Fund owners. The top three

institutional holders are Vanguard Group, FMR and State Street Corporation

owning respectively 6.28%, 6.02% and 4.56% of the shares outstanding (see

exhibit 5). Of the remaining shares some are owned by Nike directors and key

employees. Nike wants to create a culture where people are committed to the

Exhibit 4-Revenues per product category

Exhibit 5-Nike’s Institutional and Mutual Fund owners


PAGE 5/31

company and the brand, therefore stock-based compensation is a common thing

for the company. Furthermore, the company has a politic of giving back to the

shareholder. The company distributes yearly dividends and buys back shares.

Nike has just announced its third 4 year shares buyback plan in a row for a value

of 12 billion USD that will run from FY 2017 until FY 2020. The two previous buy

back plans were for a value of 5 and 8billion USD. If the company is doing good

in the next 4 years and meets its targets it is likely a new 4 year share buyback

plan will be launched in 2021. Nike has several incentives for its share buyback

plans. First, share buyback reduce dilution caused by employee stock options

and other share-based compensation plans, which Nike uses to motivate/reward

key employees. Moreover, buying back shares is reduces the number of shares

outstanding and improves financial ratios (EPS…) which in turn can boost share

prices and lead to higher capital gains. Nike prefers to combine dividends and

share-buyback programs instead of only using dividends. In addition to the share

buy-back the company has paid its investors dividends every year since 1987.

Lastly, the company has done several stock splits over the years (in December

2012, 2007, 1996, 1995, 1990 and 1983) and announced a new 2 for 1 stock split

that took place in December 2015. Nike’s stock split’s sole purpose is to broaden

the investor’s base and improve the trading liquidity of the stock. Other than that

it has no effect on the return of current shareholders as share price is reduced by

half but there are also two times more shares outstanding.

The Sector

The apparel industry depends highly on the consumer confidence and the

economic environment. For the years 2008 and 2009 the growth in apparel sales

declined as a result of the crisis. In 2010 consumer confidence rose which led to

a growth of sales of 6% year over year1. In 2011 apparel retail value rose 8% and

dropped back to 2% growth for 2012, 2013 and 2014. The footwear industry

experienced higher or similar growth rate than the apparel. However, the

footwear industry represented only 21% of the apparel and footwear market. The

sportswear sector is part of the footwear and apparel industry and therefore is

influenced by the macroeconomic environment, but also and mostly by fashion

trends and consumer behaviours. With a CAGR of 5.15% for the period 2009-

2015, the sportswear industry has shown higher growth than the footwear and

apparel industry (CAGR of 3.82% and 6.08%). The popularity of the sportswear

is due to multiple factors.

1 Data from euromonitor for apparel at retail value current prices year-on-year exchange rates.

Dividend payments:

May 2013

May 2014

May 2015

$ per share

0.81 0.93 1.08

% of net income

29% 30% 28%

Source: company data

Exhibit 9: % sportswear to total apparel & footwear of the region

2015 2019

World 15.49% 15.56%

North America

27.27% 28.48%

Western Europe

13.66% 14.68%

Eastern Europe

13.85% 14.32%

China 7.11% 7.26%

Emerging Markets

19.32% 20.27%

Japan 15.76% 16.73%


PAGE 6/31

First, in recent years health consciousness has increased. Worldwide the number

of health and fitness clubs has grown from 133,760 in 2011 to 183,920 in 2014.

Especially North America, has a strong sport culture, the sportswear industry

accounted for 27% of the footwear and apparel industry in 2015 (see exhibit 9).

In addition we can see that well established economies like North America and

Western Europe are the biggest markets of sportswear, 36% and 20%

respectively for 2015 (see exhibit 10). In Emerging economies like China and

Emerging Markets (Brazil and Mexico) we notice that this industry is becoming

more important as the % of sportswear to world sportswear increases (see

exhibit 10). This is especially true for China that experiences an increase from

8.77% in 2015 to 9.51% for 2019.

In the sportswear industry a majority of revenues come from men’s apparel and

men’s footwear. However, with the growing fitness trend more women engage in

sports than before. In addition, the number of working women rises, which results

in increasing disposable income of women. According to an Euromonitor study

the average income of women increased 26% from 2005 to 2010. Sports

manufacturer have to adapt their products to the targeted consumer in order to

be successful. Women put greater emphasis on design and appearance of the

product than men.

Furthermore, lately a new trend has emerged: athleisure. People are dressing

more casual, therefore sports clothes and footwear are worn for the daily life, not

only to practice sports. Until recently, denim was the consumer’s first choice for

casualwear but recently the growth of the denim market is decreasing at the

expense of the sportswear market. However, denim companies, like Wrangler,

Lee, try to tackle this issue by investing in innovation to bring jeans that feel like

yoga and jogging pants to the market and compete more effectively with

sportswear. Since the growth of the sportswear industry is more a consequence

of a change in lifestyle, analysts think that sportswear will remain an important

industry in the future and not fade away as fast as other fashion trends. This

means sport companies need to pay attention to make their products

fashionable. Not solely the performance and quality matter anymore, the style

has become important. The activewear trend increased the attractiveness of the

sportswear sector and led to an increasing competition in this industry. More and

more clothing companies launch a sportswear collection (e.g. Mango, TopShop)

or broadens their sportswear offer (e.g. H&M, Inditex, Forever21…). A growing

market saturation as a consequence of mass players (H&M, Forever21…) and

premium brands (e.g. Cynthia Rowley) entering the market might pose a threat to

the domination of performance-led sportswear companies. Thus, the importance

of branding to keep the incoming competitors at bay. Moreover, the rising

Exhibit 10: % sportswear of region to world sportswear

2015 2019

North America

35.34% 33.34%

Western Europe

20.39% 18.53%

Eastern Europe

5.41% 5.66%

China 8.77% 9.51%

Emerging Markets*

6.08% 6.53%

Japan 4.65% 4.10%

*Emerging market = Brazil

and Mexico


PAGE 7/31

importance of fashion in the sportswear requires companies to have a flexible

supply chain and to be able to create new products and bring them to the market

fast.

Rise in athleisure, increased purchasing power of women and higher health

consciousness are all trends that affect the size and growth of the sportswear

industry all around the world. However, when it comes to fashion, consumer

preferences can vary from one geography to another. Consequently, a segment

analysis is needed to assess the size of the sportswear industry, demographics

and spending habits in order to forecast the size of the sportswear industry.

Nike’s business model and competitive

environment

Nike and Adidas are two very similar companies: they both sell their products all

over the world, provide footwear and apparel for the most popular sports, have

endorsement contracts with famous athletes and celebrities… In spite of all these

similarities the financials of both companies do not look alike. Adidas has been

struggling financially, it reported a negative year over year growth rate of -4.6%

2013 and a growth of 2.33% for 2014. In the same period Nike recorded a growth

of 8% and 10% for 2013 and 2014 respectively. Adidas had an operating margin

of 6.60% versus 14% for Nike. In this sections the main elements that drive

success in the sportswear market will be discussed. The performance of Nike

and its competitors regarding these elements will also be analysed, in order to to

gain insights on the market and Nike’s competitive advantage (see appendix 2 for

a comparison of Nike and competitors).

The main driver of sales in the sportswear industry is brand image and

recognition. This is attained mostly through marketing and athlete/celebrity

endorsement contracts. Nike endorses the most athletes, followed by Adidas.

Almost all the sportswear manufacturers that bring performance products2 to the

market uses athletes to represent their product and their brand. Nowadays, sport

companies are also endorsing celebrities ranging from singers to top models3.

With the rise of social media4 people are closer and can interact with their

favourite athletes and celebrities, which strengthens the importance of brand

2 As opposed to sportswear products from H&M, Forever21... these are more fashion-oriented than performance 3 Nike endorsed: Ellie Goulding and Karlie Kloss, Under Armour model Gisel Bundchen, Adidas: Selena Gomez, Puma:

Rihanna...

4 In 2014, 26% of the American adults (18+) used Instagram, in 2012 only 13% of the American population had an

Instagram account


PAGE 8/31

endorsements. Social media has also given rise to fitness celebrities (i.e. Jen

Selter 8.2 million followers on Instagram, Paige Hathaway 3.3M followers…).

These people promote the sports lifestyle as well as the fashionable aspect of

sportswear clothing, which has a positive impact on the size of the sportswear

market. In addition to endorsements, sponsoring of major sport events and

marketing clips filled with athletes also contribute to building a strong brand

image and consumer base. The last aspect of marketing is promoting the brand

through social media. This type of marketing is dominated by Nike, which has 4.8

million followers on Twitter and a little over 33 billion followers on Instagram.

Nike’s Instagram account is ranked 20th on the ranking of Instagram accounts

with the most followers5. Adidas on the other hand, has only 1.99 million

followers on Twitter and 6.7M on Instagram. On average Nike tweets 371 times

per months, while Adidas only 126. 95% of Nike’s tweets are replies to followers.

By replying to its customers/followers, the brand strengthen the emotional band

with its consumers. Nike mostly posts motivational tweets, this helps establish its

philosophy among its followers. Even though Adidas has less followers, in 2015 it

was the sneaker brand that collected the most likes on Instagram with 78.8

million likes.

Each (performance) sport brand has its own identity, philosophy and athletes that

represent them. Consumer connect with the brand on an emotional level, which

makes it an industry where most consumers are loyal to a specific brand.

Creating and promoting this brand identity requires expensive marketing

campaigns. Nike records net incomes 5 times higher ($3.62B) than its closest

competitor Adidas ($702Mn). During the same twelve months period, Nike

spends $3.2B, Adidas $1.68B, Under Armour approximately $625M and Puma

$653M on marketing expenses. While Adidas and Under Armour (UA) have

bigger operating margins (47.6% and 49% respectively) than Nike (45%), Nike

still records a higher operating margin (14%) than them (Adidas 6.60%, UA

10.40%).

Considering the huge gap in net income between Nike and its competitors

combined with its low level of debt7. We anticipate Nike will remain a strong

market player in the coming years.

Next, most buyers of sportswear are willing to pay a higher price for the

acquisition of footwear than apparel because low-quality shoes can lead to an

injury, while the risk of injury due to low quality apparel is much lower. Moreover,

5 Ranking: http://socialblade.com/instagram/ 6 http://blog.crowdfireapp.com/nike-vs-adidas-twitter-analytics-faceoff-part-2/ 7 Nike’s debt to equity ratio is lower than its competitors ratio (0.12 vs 0.34 for Adidas and 0.59 for UA)


PAGE 9/31

all around the world wearing sneakers during the day is seen as fashionable

whereas wearing sport apparel as daywear is not as much accepted worldwide.

Manufacturing popular sport shoes is a real asset at the moment. Since,

Nike derives most of its revenues (app. 60%) it is less threatened by new

entrants on the market like H&M, Forever21… than some of its competitor that

sell mainly apparel (i.e Lululemon Athl.).

Furthermore, Nike started off as a running shoe manufacturer. Even though the

company now produces footwear and apparel for almost every sport, consumers

still see the company as one of the best manufacturer of running shoes, due to its

history. The site runrepeat.com8 allows to compare running shoes based on

users review and prices. Two key elements can be concluded from this analysis.

First, even though Nike is a premium brand in terms of pricing, they also offer

lower priced shoes. Second, Nike shoes get in general high users reviews

(higher than Adidas). Some shoe models of other brands (i.e. Puma, Asics) are

considered better by the users but they are not seen as fashionable. The strength

of Nike is to bring products to the market that consumers value in terms of quality

and looks. When filtering according to experts reviews, the same conclusion can

be drawn. In recent years, more and more people are running, due to increasing

health consciousness and because running is cheap9. According to a survey

conducted by Statista the most popular outdoor activity in the US for the period

2010-2013 was running. An article from the Financial Times reports that running

is growing in popularity among the Chinese middle class10. The number of

participants increased from 44.7 million in 2009 to 57.6 million in 2013. The

growing number of runners has helped boosting Nike’s revenues in recent years.

Another element that explains the success Nike is experiencing is the

geographic location where it has strong market presence. Nike is mainly

present on the North American market which has shown extraordinary growth in

sportswear. Moreover, America is acknowledged as the place where trends are

started, therefore having a strong position on this market can have positive

effects on sales in different regions. For its expansion Nike has focused its effort

on Western Europe, Greater China and to a smaller extent the Emerging

Markets. Adidas derived its sales mainly from China, Western and Eastern

Europe. Adidas’ market share in Eastern Europe is 20% (see appendix 1).

However, the biggest economy of Eastern Europe, Russia is going through

difficult economic times, consequently the sales of Adidas have disappointed.

Right now Adidas is trying to enter and grow on the North American market.

8 http://runrepeat.com/compare-running-shoes 9 You don’t need a lot of equipment and it can be done anywhere at any time 10 http://www.ft.com/intl/cms/s/0/82d5a3aa-b2ce-11e5-8358-9a82b43f6b2f.html#axzz3wKjiWctZ


PAGE 10/31

However, due to the huge success of sportswear in the region, a lot of young

companies (i.e. Under Armour, Lululemon Athl) have entered the market and are

growing. The fast-growing Chinese economy and middle class, make it an

important market for sportswear at the moment.

Finally, the distribution channel also influences sales. Based on data collected

on Euromonitor we can see that 90.60% of worldwide sportswear in 2014 was

bought in store. Even though online sales remain small compared to total market

sales they are growing at a fast pace (from 4.20% in 2009 to 7.90% in 2014

worldwide). Sport manufacturers all have e-shops to sell their clothes directly to

the consumer. Furthermore, companies are opening company-owned stores in

order to gain higher margins and have better control over the shop experience of

customers. Company-owned stores and online store increases the company’s

revenues and the profit margin if the extra cost of managing stores does not

offset the extra revenues (which is mostly the case). At the end of FY2014 Nike

had 858 stores an increase of 14% from the 753 stores Nike owned in FY2013.

However this is still far less than the number of stores of its main competitor

Adidas, which owned 2913 stores in FY2014 as shown in the graph below. A big

part of Adidas’ stores are located in Russia, Europe and China.

In conclusion, Nike’s strong brand and marketing approach combined with its

strong financials, its expertise in running shoes and strong positions in key

markets results in a global market leader that recorded high growth in recent

years.

Nike’s strategy for the coming years is the following. The company wants to

expand its sales to women11, as disposable income from women is increasing.

They the #Betterforit women campaign mostly in China, North America and

Western Europe (to a lesser extent). In North America the company will face

direct competition from Lululemon Athl. which sells essentially to women. Selling

to women requires that the company pays extra attention to the design of the

product. Adidas will also aim at increasing its revenues from sales to women by

promoting collections in collaboration with designers (i.e. Stella Mc Cartney).

11 Sportswear market is the only market from the footwear and apparel industry where sales to men are higher than sales

to women.


PAGE 11/31

Secondly, Nike will increase its revenues from DTC, this will happen through the

opening of new stores and investing on its online selling platform. There is room

for Nike to grow its DTC business as it draws less sales from DTC than its

competitors. In 2014 Nike derived 20% of its revenues from DTC, compared to

25% for Adidas and Under Armour. Nike’s competitors (Adidas,Under Armour,

Lululemon, Puma…) are also planning to boost their revenues from direct-to-

consumer sales. Lastly, Nike will focus on its market in Greater China as it is the

fastest-growing. Adidas, also enjoys a strong position in this markets and plans to

increase its presence on this market.

Segment analysis

Since Nike divides its revenues in five geographic segments, the same segments

will be used for the macroeconomic and demographic analysis. Overall the

economy is recovering and the growth is positive. However, a lack of strong

broad-based global growth is forecasted. In such an economic environment

innovation is crucial. Reaching the right people, in the right places at the right

time is key. Businesses need to understand the features valued by customers

and for which they are willing to pay more. Globally, an increase in the number of

middle class households boosts revenues of consumer-focused businesses.

Generally-speaking, middle class consumers focus on family, planning for the

future, their image and are health-aware. These aspects play important roles in

defining their purchasing decisions. Health-awareness for middle class

consumers refers to their diet and exercising habits, which has a positive

influence on the growth of the sportswear industry. Image is perceived differently

by the middle class of the emerging and the developed markets. In the emerging

market middle class consumer spend money on branded products, which reflects

their status of success. In developed countries the image of success is linked to

experiences, i.e. ski trips, holidays… The sportswear industry is able to take

advantage of these two notions of success as most sportswear manufacturer are

trendy brands and more and more experiences are related to sports and require

sports apparel and footwear.

Finally, it is worth noticing that sportswear are non-discretionary goods.

Therefore, consumer spending on sportswear and the choice of brand will

depend on the macroeconomic factors. Fashion trends, economic environment

and brand image are the main determinants of sales in the sports industry.

Exhibit 12: North America

disposable income and

consumer expenditures


real GDP growth (%)


PAGE 12/31

North America

Macroeconomic environment

Since 2010 the US economy is recovering from the recession that ended in 2009.

However, the recovery is not as fast as expected. Canada suffered less from the

crisis than the US. In North America real GDP is expected to rise by 2.40% in

2015 and 2.50% for 2016, a growth that is below potential according to analysts.

Annual disposable income per capita as well as expenditure on clothing and

footwear are forecasted to grow in 2015 1.47% and 1.15%12 respectively. The

region also experiences a high consumer confidence level due to higher

employment levels and lower energy prices. In 2015 USA is expected to be the

11th and Canada the 15th country with the highest consumer annual expenditure

per capita on clothing and footwear with $1,20713 and $1,109 respectively. The

inflation for 2015 is expected to be 0.30% and increase to 1.70% for 2016

Overall a slight improvement of the economy is expected in coming years for

North America. However, the Central Bank is expected to raise interest rates in

the near future, which could affect negatively consumption. For the period 2015-

2024 a CAGR of 3.43% for disposable income per capita is forecasted. The

savings ratio in the coming years will fluctuate around 10% and the growth of the

index consumer price is expected to grow around 2% every year until 202414.

The footwear and apparel industry has grown at a CAGR 2010-2015 of 2.23%

using data at retail value current 2014 prices and is forecasted to grow a CAGR

3.12% for the period 2015-2024. This growth is in line with the growth of

disposable income per capita less savings (CAGR 2010-2015: 2.59%, CAGR

2015-2024: 3.53%). When adjusting retail values for change in prices using the

ICP with base year 2014, CAGR 2010-2015 3.97% and CAGR 2015-2024 5.11%

are recorded.

The sportswear industry (see appendix 3) in North America represented 26.5% of

the North American apparel and footwear industry in 2014. The market share of

sportswear has increased at a CAGR of 3% for the period 2008-2014. In the last

years the sportswear market has grown at a higher pace (CAGR 5% for 2011-

2014). Sportswear sector is expanding in North America thanks to sports-inspired

and performance sportswear. Health consciousness is associated to sports in

North America, a study from Statista15 revealed that in 2014 50% of Americans

thought making sure to get enough physical activity was the most effective way to

12 Data from Euromonitor and OECD 13 Data from Euromonitor at constant 2014 prices and 2014 fixed exchange rates 14 Data from Euromonitor 15 http://www.foodinsight.org/sites/default/files/2015-Food-and-Health-Survey-Full-Report.pdf


PAGE 13/31

manage their weight. According to the same study four out of five Americans are

trying to lose or maintain their weight. Sports nutrition industry has been used as

a proxy to assess the popularity of sports in the different regions. Looking at the

growth in market share16 of sports nutrition, since 2012 an increasing growth rate

can be observed, reaching a high in 2013 (12.79%). In the coming years a slowly

decreasing growth rate is expected (CAGR 2013-2024: 6%). Moreover, in 2005

41.3 million US citizens had a gym membership, this increased to 50.2 million in

2012.17

The sportswear sector is growing at the expenses of the denim sector. The jeans

industry has recorded decreasing growth rates since 2011 (year over year growth

of denim in 2011 for North America was 3.48% and -2.84% in 201418). Denim is

forecasted to further lose some market share until 2018, reaching a market share

of 5.38%. From 2019 onwards the denim market share is expected to grow

slowly to reach a market share of 5.73% by 2024 (see appendix 3).

Finally, the number of middle class households is expected to grow at a low rate

(<1%) every year from 2015 onwards. A growing middle class has a positive

impact on expenditure and sport participation.

In conclusion, since growth rate of the market share of sport nutrition is

decreasing, the market share of denim will be positive again in 2019 and middle

class is growing at a decreasing rate, the market share of sportswear is expected

to grow at a decreasing rate until 2019. In 2020 the sportswear market will have

reached maturity and represent a market share of 29.10% (see appendix 3), from

then on the sportswear industry will grow at the same pace as the apparel and

footwear industry.

Performance of Nike and competitors

Nike performed recently really well in North America with a CAGR of 14% for the

period 2010 to 2015 compared to a CAGR of 7% for the sportswear industry. It

also increased its market share and controlled 21% of the North American

sportswear industry in FY2015. This increase results from the opening of 58 new

stores in North America over the period 2010-2015. The comparable sales

growth (currency neutral) was 16% for FY2015 versus 12% total currency neutral

growth in revenues. The percentage change in sales from DTC (17%19) is higher

than increase in sales to wholesale customers (10%). An increase of EBIT

margin is seen in North America. In conclusion, in the last year Nike has

16 Data from euromonitor: retail value of sport nutrition in North America/disposable income in North America 17 Data from the International Health, Racquet and Sportsclub Association (IHRSA) 18 Data from euromonitor, retail value at current 2014 prices. 19 Currency neutral change


past performance of Nike

Exhibit 14: Revenues North America Nike and closest

competitors

Exhibit 15: real GDP growth


PAGE 14/31

performed very well in North America by increasing it sales and decreasing its

costs.

Western Europe


The last decade has been economically difficult for Western Europe. After being

hit by the subprime crisis of 2008, Western Europe had to face a sovereign debt

crisis around the end of 2009. In summer 2015 the European Union closed a

bailout deal with Greece, which was on the verge of bankruptcy. In 2015 the

European Central Bank launched its quantitative easing program in order to

stimulate the economy. In spite of this, Western Europe’s recovery has been

more sluggish than expected. Real GDP growth was 1.40% in 2014 and is

expected to be 1.80% for 2015 and 1.90% for 2016. On the long term the real

GDP growth will fluctuate around 1.80%. The inflation is expected to decrease a

little from 2014 to 2015 (1.80% to 1.20%) but is expected to reach 2.60% in 2024.

Looking at the consumer expenditure on clothing & footwear per capita in certain

countries of Western Europe, we see that it varies a lot depending on the

economic health of the country. Furthermore the expenditure is not expected to

vary a lot in the coming years (see exhibit 16). Western Europe has a higher

expenditure per capita on clothing and footwear than the world average. Same

goes for the annual disposable income per capita. In 2014 Greece had the lowest

annual disposable income per capita ($14,791) and Switzerland the highest

($53,517).

In conclusion the economy is recovering but at a very low pace. For the period

2015-2024 a CAGR of 3.82% for disposable income per capita is forecasted. The

savings ratio is expected to decrease from 9.70% in 2015 to 9.30% in 2024. The

growth of the index consumer price is expected to grow to 2.64% for 2017. From

2018 onwards it will fluctuate around 2.60% until 202420. The footwear and

apparel industry has grown at a CAGR 2010-2015 of 1.62% using data at retail

value current 2014 prices and is forecasted to grow a CAGR 2.33% for the period

2015-2024. This growth is less extreme than the growth of disposable income per

capita less savings (CAGR 2010-2015: 0.832%, CAGR 2015-2024: 3.82%).

When adjusting retail values of apparel and footwear sector for change in prices

using the ICP with base year 2014 following growth are recorded: CAGR 2010-

2015 4.54% and CAGR 2015-2024 4.92%

20 Data from Euromonitor

Exhibit 16: Western Europe consumer expenditure in

clothing & footwear


PAGE 15/31

The market share of the sportswear sector was 13.37% in 2014 for Western

Europe. This is a lot smaller than North America’s market share (aprox. 27% in

2014). An increase at CAGR 2.18% for the period 2008-2014 has been recorded

for the sportswear market share in Western Europe. In the last four years (2011-

2014) the growth rate was slightly higher (2.33%). The sportswear market has

shown a slow expansion from 11.14% in 2007 to 13.37%in 2014. Looking at the

growth of the ratio of sport nutrition to disposable income, we see sports has

become more important in recent years (growth of 10.16% y-o-y in 2014). This

growth rate is expected to remain positive in coming years, but will decrease (y-

o-y growth of 4.92%) by 2024. According to a study of Eurobarometer in 2009

40% of EU citizens practice sport weekly and 41% in 201421. Furthermore, the

market value of health in Western Europe is growing from €27,706Mn in 2011 to

an expected €31,436Mn in 201622. The market share of denim is fluctuating, but

has not grown at a rate higher than 1.4% in the last seven years. A declining

growth is expected until 2019. From 2020 onwards the market will expand its

market share at a slow pace (growth rate <1.40%).

Overall; the Western European market has not adopted the sports trend

completely yet. It is expected that the sports market will grow, but it will not attain

the same market share as in North America by 2024. The Western European

population wears more and more sport shoes in daily life, however sport apparel

is still considered by most as only for practicing sports or staying at home.

However, health consciousness is rising and an increase in sport participation in

coming years is forecasted. By 2024 sportswear industry is expected to have a

market share of 16.11%. The sportswear industry in Western Europe showed a

growth at CAGR 3.49%23 for the period 2010-2015. In the future a growth of

4.18% (CAGR 2015-2024) is anticipated. Sportswear’s success is growing in

Western Europe, but it is unlikely Western Europe’s market share in sportswear

will become as big as in America (see appendix 4).


From 2006 until 2013, Nike struggled on the Western European market. The

CAGR for this period is 3%. From 2013 onwards Nike started to adopt a more

aggressive marketing, which resulted in an increase in Market share and in

revenues. For the period FY 2013 – FY 2015 Nike’s revenues have increased in

Western Europe with a CAGR of 17%. Nike has invested in marketing expenses

in Western Europe in order to close to increase its market share in the region.

The gap between Nike and Adidas narrows in the Western European market.

21 http://europa.eu/rapid/press-release_MEMO-14-207_en.htm 22 Based on forecast of Statista databas 23 Fro values at current 2014 prices, using data from Euromonitor

Exhibit 17: Western Europe revenue, EBIT and

EBIT margin

Exhibit 18: Western Europe revenue, Nike vs.

Adidas revenues


PAGE 16/31

Nike is a real threat for Adidas as Western Europe is Adidas main market, losing

the leadership in this market would send a very bad signal to Adidas’

shareholders. Not only the revenues of Nike increased, also the EBIT margin

grew from 15% in FY2013 to 22% in FY 2015.

Eastern Europe


The economy of Eastern Europe has been negatively affected by the Russian

Economy. Russia is the largest country in Eastern Europe with its population

representing 44% (in 2015) of the total population of Eastern Europe. In recent

years the Russian economy has suffered, due to the drop in oil prices, the

military actions undertaken by the country and the embargo on Russia imposed

by the European Union. In addition, Russia has tense relations with USA, the rest

of Europe and just imposed sanctions on Turkey. Even though the growth rate of

real GDP of Czech Republic and Poland is expected to be positive for 2015, it will

not offset the contraction of Real GDP in Russia. Russia’s real GDP growth is

forecasted as negative for 2015 and 2016. Thereafter it will become positive

again and reach 2% in 2021. The Eastern European economy is expected to

suffer from the bad economic situation in Russia, its real GDP growth is

forecasted to be negative in 2015 (-1.40%) and less than 1% in 2016. The annual

disposable income per capita is higher in 2014 for Russia than Eastern Europe

but by 2024 it is expected to be the opposite (see exhibit 21). The disposable

income per capita of eastern Europe is expected to have a growth of CAGR

7.22% for the period 2015-2024, while the CAGR was -3.10% for 2010-2015. The

Eastern European economy has suffered in recent years but a slow recovery of

the economy is expected. However, the real GDP growth rate will remain below

its pre-crisis level (4.70% for 2008) and reach 2.40% by 2024. When looking at

the consumer expenditure on clothing and footwear in Russia, we observe a

decrease of forecasted expenditure until 2018. From 2019 until 2024 the

expenditure increases to reach a value of $565 in 2024 (vs $610 in 2014). In

Eastern Europe this variable fluctuates between $387 and $429. We can

conclude that even though the Russian economy is doing worse than other

Eastern European countries, their expenditures on clothing and footwear remain

higher than most other Eastern European countries even when Russia’s

disposable income per capita drops below the Eastern European average. The

inflation in Russia is forecasted to grow at a fast pace in 2015 and 2016 (15.40%

and 7.50%). Afterwards, it is going to decrease slightly to reach 5% in the long

term. Eastern Europe’s inflation is quite high as it fluctuates around 3.30% and

6.90%, essentially due to the effect of Russia’s high inflation.

Exhibit 19: Western Europe sportswear & footwear and

apparel growth

Exhibit 20: Eastern Europe and Russia growth in real

GDP (%)

Exhibit 21: Eastern Europe and

Russia disposable income

Exhibit 22: Eastern Europe

Nike and Adidas revenues


PAGE 17/31

The footwear and apparel industry in Eastern Europe is likely to shrink in 2015

due to the tough economic situation of Russia. Afterwards it is expected to show

positive growth. While the growth from 2010-2015 was barely positive (CAGR

0.35%), it is expected to increase in the future (CAGR 2015-2024 5.42%) thanks

to the anticipated recovery of Russia. The sportswear industry in Eastern Europe

is growing: the market value of consumer health increased by €2,608Mn from

2011 to 2015. The market share of sportswear will grow in the future but at a

declining rate. In 2014 sportswear represented 13.70% of footwear & apparel in

Eastern Europe and is expected to grow to 6.28% by 2024 (for a retail value of

$26,008Mn)24 (see appendix 5). As can be seen in the graph below in Eastern

Europe and Russia the growth of sportswear is forecasted to be higher than the

growth of footwear and apparel.

Growth sportswear market and footwear and apparel market for Russia and

Eastern Europe


Adidas has a higher foothold in Eastern Europe, more specifically in Russia than

Nike. Due to the inflation and the devaluation of the Russian Rubble, Adidas did

not reach the revenue levels expected. Adidas decided to slow down its

investments in Russia and cancelled the opening of several stores. Total

revenues of Nike do not depend significantly on the revenues of Eastern Europe.

Greater China


In the last years the Chinese economy has doing well, with real GDP rates

around approximately 8%-9%. In 2014 real GDP was 7.30% and is expected to

decrease to 5% in 2021 and stay constant afterwards until 2024. However, during

24 At 2014 current prices

Exhibit 24: Real GDP Greater China

Exhibit 25: sportswear and footwear and apparel growth Greater China

Exhibit 23: revenues and EBIT

in Eastern Europe


PAGE 18/31

the summer 2015 China has experienced some turmoil on its stock market with

shares plunging. In spite of this market crash Nike reported a growth of 30% of

revenues for its first quarter 2016 (from June 2015 to August 2015) compared to

Q1 of FY2014. However, consumption does not weight a lot in the Chinese GDP,

therefore, the Chinese authorities try to increase consumption in order to boost

GDP. Inflation was at 2.10% in 2014 and is expected to drop to 1.70% for 2015.

From 2016 onwards inflation will increase until it reaches 2.50% in 2020 and will

remain constant afterwards until 2024. The annual disposable income per capita

in China is expected to increase at a CAGR of 7.43% for the period 2014-2024

(from $4,733 in 2014 to $9,693 in 2024). Consumer expenditure on clothing and

footwear is expected to increase at an even faster pace: CAGR of 9.12% over

the period 2014-2024. Spending on footwear and clothing nearly doubles over a

10 year period, it will increase from $239 per capita to $427 in 2024. This

increase is due to a growing middle class and incentives from the government to

boost consumption. According to data from Euromonitor China was ranked 93

out of 180 in the ease of doing business ranking. China is expected to improve its

ranking position in the coming years as its economy is dependent on foreign

companies that manufacture in China.

The apparel and footwear market has grown at CAGR 9.85%25 during 2010-

2015. The growth rate is expected to decrease but remain positive for the period

2015-2024 (CAGR 6.18%). In 2017 the Chinese footwear & apparel market is

forecasted to reach a value of $403,424Mn and become the biggest footwear &

apparel market in the world. The popularity of sports in China, the growth in

middle class households (>1% every year) and the rising purchasing power of

Chinese women result in an increasing sportswear market share. In 2015 the

market is expected to increase moderately at 1%, afterwards the growth rate will

rise to 3% in 2020 and remain at 3% until 2024. The market share of sportswear

is rather small (7.12%) compared to other geographies, therefore growing market

share until 2024 (9.27%) is a reasonable expectation. In coming years the growth

of the sportswear will match or exceed the growth of footwear and apparel in

China. Looking at the graph, which shows the growth of the sportswear market

and the apparel and footwear market we see that the sportswear trend is more

recent than in more mature markets like the USA.


In 2013 Nike saw its revenues in Greater China decrease, it then decided to

restructure the organization of its Greater China segment. Nike invested a lot of

25 Based on data in CNY from Euromonitor

Exhibit 27: Greater China Revenue, EBIT and EBIT margin of Nike


PAGE 19/31

resources to create a connection between the Chinese customer and the brand.

In 2014 revenues of Nike went up again and rised in fiscal year 2015 as well.

However, Adidas is gaining shares in the Chinese market and is close to catch

up with Nike. Adidas’ competitive advantage in China is its larger retail division

and its multi-branded portfolio (NEO, Reebok…) which allows the company to

have a more market specific approach. Nike is planning to open a considerable

amount of stores in China in order to boost its revenues. In China brands like

Nike and Adidas are seen as upscale brands, they are a symbol of social status.

This partly explains the higher success of brands like Adidas and Nike than

Chinese brands like Li Ning and Anta. Moreover, this Chinese companies have

suffered from the Chinese stock market meltdown that happened during summer

2015. In addition, Chinese’s interest for sports is increasing, which also boosted

sales from Nike and Adidas.

Japan


Japan’s economy has been struggling with deflation for years in spite of an

aggressive programme of quantitative easing. In 2014 Japan recorded an

inflation rate of 2.70% but it is expected to drop to 0.80% in 2015. In the next

decade inflation will rise by a rate fluctuating between 1% and 1.60%, which is

well below the target rate of 2%. In the past couple of years nearly one million

women have joined the workforce. As companies have difficulties to fill

vacancies, it is likely that more and more women will join the workforce. From

2011 to 2015 real GDP growth has fluctuated between, -1% and 1%, well below

the 2% targeted by the government. Real GDP is expected to rise by 1.4% in

2016, in the following years the growth rate will decelerate and drop to 1% by the

end of the decade. Annual disposable income is forecasted to decrease until

2015. From 2016 onwards it will rise to reach $25,400 per capita in 2024 (vs

$22,947 in 2014).

Regarding the apparel and footwear industry in Japan, its growth rate follows the

trend of the growth rate of annual disposable income per capita. The growth of

the retail value in Yen will be close to zero over the period 2015-2024. In 2015

the growth of the sector is expected to be 4.7%, however when converted in $US

the growth is negative due to the appreciation of the US dollar (from

106YEN/USD to 121YEN/USD). The Yen is forecasted to appreciate slightly and

reach an exchange rate of 108 YEN/USD in 2024. In 2014 the Japanese

sportswear market share was 15.39%, it is expected to grow slightly to 17.05%

by 2024. The increasing popularity of sports and athletic footwear is contained by

Exhibit 28. Japan growth in footwear & apparel market

and sportswear


PAGE 20/31

the tough economic environment and the decreasing number in middle class

households. As shown in other economies the growth of sportswear is bigger

than the growth of footwear and apparel. For Japan this growth was negative in

2014 and is expected to be negative in 2015 as well due to the changes in

exchange rate. From 2016 the onwards the growth rate becomes slightly positive

(see exhibit 28)


In recent years Adidas has outperformed Nike in Japan. The larger retail division

and the multi-brand strategy allows Adidas to perform better than Nike.

Revenues of Nike hava fluctuated a lot in the last decade. In FY 2009 Nike

recorded for the first time $1 billion revenues in Japan, but since then revenues

have dropped to $755M in FY 2015. This are the lowest revenues Nike has

recorded for Japan in the last decade. EBIT margin is rather low compared to

Nike’s other geographic markets. In order to increase its revenues in Japan, Nike

should invest heavily in marketing and open several stores. However, since the

Japanese economy does not offer a lot of growth potential Nike prefers to focus

on other markets (e.g. Greater China and Emerging Markets).

Emerging Markets


Revenues coming from several countries in Asia (except Greater China and

Japan), Latin America, Middle East Africa and Australia, New-Zealand are

classified by Nike as revenues from Emerging Markets. Latin America is

expected to be the worst-performing economy due to Brazil’s ailing economy,

which accounted for 38.9% of the GDP of Latin America in 2014. In this

geography the most Nike sales come from Brazil and Mexico. The

macroeconomic factors of these countries will be analysed more in details.

Brasil: in 2010 the country recorded its fastest level of annual growth in 25

years. Since then growth rates have decelerated and fell below historical trends.

In 2014 the Brazilian economy stagnated and in 2015 it officially entered a

recession. Brazil’s economy relies on export which dropped due to weak

Exhibit 30. Japan revenues,

EBIT & EBIT margin

Exhibit 32: Brazil footwear & apparel and sportswear growth

Exhibit 31 Brazil real GDP

growth


PAGE 21/31

commodity prices and slowing Asian economies. Moreover, an austerity

programme was launched in Brazil. These two factors resulted in slowing growth

and eventually a recession. A slow recovery is expected for 2016 driven by

growing exports as a consequence of the depreciation of the Brazilian real. The

depreciation of the real is due to an increase in interest (to an all-time high) and

inflation (approx. 10%). An expected increase in the unemployment rate will

result in a decrease of the annual disposable income. However, it is forecasted

disposable income will rise again in 2017. Expenditures on clothing and footwear

will also decrease at first before growing again from 2017 onwards. It is worth

noticing that expenditures on clothing and footwear decrease at a slower rate

than disposable income. This suggests that Brazilian care about their

appearance and try to cut into other expenses before having to cut on clothing

and footwear. Lastly, the sportswear market will grow at a faster rate than

apparel & footwear in Brazil as well.

Mexico: the country’s economy has grown at a slower pace than most other

large Latin American countries. The trade disputes with the USA and violence

and drugs problems contributed to slowing down the growth of Mexico. In 2014

real GDP growth rose to 2.1%, which led to an acceleration of economic

momentum. Low wages that make employment more competitive and the

agreement of the Trans Pacific Partnership will further boost the Mexican

economy. Inflation will fluctuate around 4% and 3.20% in the next 8 years.

Looking at the forecast of consumer expenditures on clothing and footwear, we

observe that they grow faster than the annual disposable income per capita. This

hints that in the future a bigger part of disposable income will be allocated to

clothing and footwear.

India: Nike’s presence in India is limited, but it has a lot of potential. Real GDP

growth is expected to increase to 7% in the future and the sportswear industry is

expected to grow at a high double digit growth rate. Sportswear will grow almost

twice as fast as the apparel and footwear industry. India ranked 140 out of 189

on the “Ease of doing business ranking”. This explains why international

companies like Adidas and Nike do not have a strong presence on the Indian

market yet.

The footwear and apparel in Latin America is expected to record a negative

growth in retail values expressed in $US. This is due to the difficult economic

situation of Brazil. The growth is expected to be slightly positive in 2016 and

increase until it reaches 4.90% in 2020. The sportswear sector is starting to gain

momentum in Latin America. The Brazilian market represents a huge opportunity

for the sport industry. In 2014 the health club industry in Brazil was worth

$2,442Mn, while Mexico came in second place with a value of $1,479Mn and

Exhibit 34: Mexico footwear & apparel and sportswear growth


PAGE 22/31

Argentina came in third (1,200). In spite of the difficult economic times the

sportswear market share is anticipated to grow from 16.32% in 2014 to 18.08%

by 2024, due to an expected recovery and the growing markets in Argentina and

Mexico. Concerning the sportswear market of Asia-Pacific, a positive growth rate

is expected as the economy is growing in most countries and the purchasing

power is increasing as well.


On a currency neutral basis Nike grew its revenues from Emerging Markets at

8%. When the effect of currency change is incorporated we obtain a growth rate

of -1%. The difficulty of Emerging markets is the high inflation and currencies that

are often devaluated. The high volatily of the exchange rates resulted in a

fluctuating revenues from Emerging Markets in the last year. In reality revenues

have increased in these economies but not enough to offset the negative effect of

currency changes. With the Olympic Games coming up in Brazil, it is clear

Emerging Markets have potential and should not be neglected. Adidas has a high

presence in Brazil and hopes that its multi-brand portfolio will give it a competitive

advantage. Lastly, Emerging Market covers a very large territory and some

countries have high growth potential (e.g. India) and Nike will try to enter these

market or build its market share.

Valuation

To determine a target price for Nike shares, the discounted cash flow model has

been used. Since, Nike has a fiscal years that runs from June until May, we

forecasted the value for fiscal year 2017. Due to the lack of data for the balance

sheet and income statement of the different geographic segments, the sum of the

Exhibit 36 Emerging Markets revenue, EBIT and EBIT margin

Exhibit 35 Emerging Markets

Nike and Adidas revenues


PAGE 23/31

parts approach was not an option. With the help of a base case scenario a target

price has been calculated. To assess the robustness of this target price a

sensitivity analysis to the cost of capital and terminal value growth rate has been

run.

Key drivers

To reach a value for future free cash flows some inputs needed to be forecasted.

-Growth in revenues: the growth in revenues obtained by forecasting the

evolution of Nike’s market share in the different geographies. To obtain the

market share of Nike in the past, its revenues from wholesale customer have

been converted into retail values. Since, Nike discloses the wholesale equivalent

revenues only on a global basis, we assumed the margin taken by wholesalers is

the same in every region. This margin has decreased from 43% in FY2013 to

41% in FY2015. The margin is kept constant for the future.

To forecast the evolution of sales and market share, the competitive environment

will be taken into account, the evolution of disposable income for female and the

growth of the female population. Finally real GDP will also be taken into account

as an indication if customers are willing to spend more or are price sensitive due

to the economic situation.

Afterwards the evolution of the percentage of total Nike revenues coming from

DTC will be forecasted in order to remove the wholesaler’s margin from the sales

to wholesalers. The percentage of revenues from DTC will be forecasted based

on the evolution of internet retailing and the number of stores of Nike.

North America

In this region competition is high. There are a lot of growing companies that are

competing to gain market share. Nike is forecasted to gain slightly in market

share due to its large campaign for women. From 2017 onwards its market share

will remain constant. The company is strong enough financially to keep its market

share, but they are too many rising competitors to grow at a faster pace than the

market. The revenues are forecasted to grow at a CAGR of 4.48% 2015-2024,

mostly due to the expanding DTC business (see appendix 9).

Western Europe


PAGE 24/31

In this market Nike’s market share is expected to grow in 2016 and 2017 due to

the soccer euro cup. Afterwards, competition, like Under Armour, Lululemon…

are expected to enter the market which, will make it difficult for Nike to grow its

market share (see appendix 10). Thanks to the increase in DTC business, Nike

revenues in Western Europe will record a CAGR of 7.40% over the period 2015-

2024.

Eastern Europe

This is a difficult market for Nike, since Adidas is hugely popular in this region.

Moreover, the economic situation will at first result in a decrease of Nike’s market

share. As the economic situation recovers in 2017 Nike’s market share grow

back a little and remains constant after that. Over the period 2015-2024 Nike’s

revenues will have a CAGR of 11.45%, mainly due to the growth in the market

and the DTC (see appendix 11).

Greater China

In China the market share will increase in the two coming years (2016 and 2017),

mainly thanks to the growing popularity of sports and Nike’s marketing

campaigns. However, in 2019 it will slightly drop to 23% market share and remain

constant. The decreasing market share will be the result of the high number of

competitors on the market. Growing companies in the US like Under Armour plan

to enter the market. Moreover fast retailer are seen as premium brands in the US

and might more easily steal market shares from Nike than in North America or

Western Europe. Next, Adidas also targets the Chinese market. DTC revenues

are growing at fast pace, consequently a growth of CAGR 13.50 is recorded.

Japan

Japan is expected to grow at a very slow rate (real GDP below 1%). At the

moment Adidas is the market leader in Japan. Furthermore, Japan has two

popular sports manufacturers (Asics and Mikuzo). The slow growth and the

decrease in woman population lead to a constant market share of Nike in Japan.

However, similarly to internet retailing, DTC will grow in Japan. A CAGR of

11.24% is recorded (see appendix 13).

Emerging Markets

The Market share of Nike will grow in 2017 as a consequence the Olympic

Games (Nike is the sponsor of the Olympic games at Rio). Nike has the

resources to launch a big marketing campaign for the Olympics, which will have a

positive effect on its sales. Afterwards, Nike’s market share will drop to 19% as

new entrants will appear, with cheaper priced goods. Furthermore, fast retailers


PAGE 25/31

like H&M, Inditex… are expanding in Latin America26, so the market share of

Nike will be affected by this (see appendix 14).

Worldwide Nike will not grow its market share much, since the company has

already big market shares in most regions and new entrants on the market are

increasing. The company is however, expected to maintain its market share. Nike

will still record large increases in its revenues, but these will mainly come from

the incN

FY 2016 Est FY 2017 Est FY 2018 Est FY 2019Est FY 2020Est FY 2021Est FY 2022Est FY 2023Est FY 2024Est

Revenues

of Nike 33,990 37,540 39,106 42,246 45,483 49,490 52,958 57,059 61,149

-EBIT margin: the margin will be affected by several important factors. First, the

increase in DTC revenues will have a positive impact on the Profit margin as the

company is able to collect more revenues for almost the same costs. DTC

business requires investments in stores and online site maintenance, design…

but the increase in sales more than offset the increase in costs. Second, if

marketing expenses grow at a higher rate than revenues, EBIT margin will be

squeezed. Third, the company relies on R&D to innovate. The R&D expenses will

likely grow in coming years, but the increasing sales due to innovating products

and the more efficient manufacturing processes will probably offset the negative

effect of the increasing R&D costs. Since Nike has higher EBIT margins than its

competitors (see appendix 2). It is expected the company will increase its

expenses in marketing and R&D in order to compete more heavily, which would

result in a decrease in EBIT margin.

Moreover, negotiations of the Trans-Pacific Partnership (TPP) reached in

October 2015. This will reduce tariffs between members of the TPP. Nike

sources a large amount of its footwear from Vietnam, which is a member of the

Partnership. This aspect will have a positive effect on the profit margin. The profit

margin is 46% for FY2015 and is expected to grow to 47.6% by 2019 in order to

reach the same profit margin as Adidas. Since Adidas has more stores than Nike

it is reasonable that in a few years Nike will attain this profit margin.

-Net working capital elements: most elements of the working capital have

been forecasted using ratios. The inventory turnover ratio has been decreasing,

due to an increase in inventory. As the number of Nike owned stores increases

the inventory increases as well. However, this ratio has been kept constant for

the coming years since the pressure to reduce the manufacturing time in order to

26 Latin America is the main region of Emerging Markets for Nike, therefore the analysis has been made based on data

from Latin America.


PAGE 26/31

follow fashion trends and compete with mass producers (e.g. H&M) entering the

market will help keep the inventory under control. The net receivables depend

has been forecasted using the average days to collect receivables based only on

wholesale revenues (net receivable sales). The number of days to collect

receivables has declined in the last years, which indicates a loss of negotiation

power of wholesalers. Their sales dependent for a large part on Nike products.

We adopted a conservative approach and kept the same average days to collect

receivables as in FY 2015 (i.e. 46.70). Looking accounts payables we see an

increase in days to pay accounts payables. Nike is a very strong brand with huge

operations around the world. The manufacturing factories cannot afford to lose

Nike as a customer, which increases Nike’s negotiating power, which is reflected

in the number of days to pay payables. Here a conservative approach has also

been adopted and the value of FY2015 (47.04) has been kept constant for the

future.

-Capex: the new stores are not included in capex since we assumed Nike rented

them. Since the company is expected to grow organically no acquisition will be

made. Capex results from investment in property plant and equipment. This

account is divided in land, building, Machinery, equipment & internal use

software, leasehold improvements and construction in process. Building refers to

the offices, since they are building a new office building at the headquarter in the

USA we expect a higher growth of this account than in previous year. For the

next three years building will have a year over year growth of 3%, afterwards this

will fall to 2%. Machinery, equipment and internal use software will be the fastest

growing accounts. Nike’s strategy is to constantly innovate its products and

processes and wants to increase its tech offer, therefore new machines and

equipment will be needed and developed. Machinery and equipment will increase

at a constant growth rate of 10%. Lastly, leasehold improvements are computed

as ratio of stores.

Our analysis and forecasts result in a CAGR 2017-2024 of 6% for Nike’s free

cash flow. They increase every except for FY 2019 and FY2020 where a slight

decrease of -2% and -6% is recorded.

For the growth rate of terminal value we used the long term world nominal GDP

growth rate of 4.20%27. The world growth rate has been chosen since Nike

operates all over the world and we cannot know for sure the weight of the

different geographies in the long term. This rate is lower than the growth rates of

revenues but it is unlikely that Nike will sustain such high growth rate in the long

27 Data from OECD


PAGE 27/31

term and outperform the market because the sportswear market will grow at a

slower rate. Moreover, with the increasing competition it is likely the market will

become more and more saturated.


PAGE 28/31

WACC assumptions

To get a value per share the future free cash flows have to be discounted at the

weighted cost of capital (WACC).To get the debt to enterprise ratio at market we

used net debt. In the case of Nike net debt is negative since they have very few

debt and a lot of cash and short term investments on their balance. The ratio for

FY 2015 is -2.54% but the target ratio is set at -1% to reflect Nike’s 1 billion USD bond

issue of October 2015 (Q2 2016). Following the bond issue, the financial debt of Nike is

forecasted to be $2,385Mn for FY 2016. The company will use the proceeds from the

bond issue for general corporate purposes. However, in spite of the new bond issue net

debt will remain negative due to the high levels of cash and short-term investments

($2,039Mn and 1,310 non-operating cash in FY 2015). The ratio is expected to remain

at -1% in the future as Nike does not plan to make an acquisition.

The pre-tax cost of debt was determined by adding a default spread to the risk-free

rate. The spot 10 year US government bond has been used (2.18%) for the risk-free

rate. The spot rate is assumed to reflect better the current and expected economic

situation than an average of past yields. The default spread is obtained through a

table28 that links the interest coverage ratio of a firm to a rating and a default spread fort

that rating. Nike has an interest coverage ratio of 96, which corresponds to an AAA

rating29 that is linked to a spread of O.75%. Nike’s pre-tax cost of debt is consequently

risk free rate (2.27%) + spread, which gives 3.02. The cost of equity has been

calculated using the capital asset pricing model (CAPM). To obtain the unlevered beta

of Nike (0.77), an average of the unlevered betas of peers30 has been made. The

levered 6 month beta against the MSC world of Nike and its peers were obtained from

Bloomberg and unlevered. The average of the unlevered beta has been relevered

using the company’s target debt to equity ratio. The equity risk premium is obtained

through the method of Aswath Damodoran. This method consists in determining a

mature market risk premium (MRP), which is the implied equity risk premium of the

S&P500, and adapt it with the appropriate country risk premium (CRP). The CDS

spreads of the different countries are used to determine the value of the CRP. The CRP is added to the

MRP to obtain the total equity risk premium for a specific country. A Country risk premium allows to reflect

28 http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ratings.htm 29 This is a synthetic rating 30 Peers used: Adidas; Under Armour, Lululemon Athl., VF Corp., Li Ning

WACC 7.98%

target equity/ entreprise value @

market 101.00%

D : debt value/entrerpise value @ market -1.00%

t : marginal corporate tax rate 20.20%

Kd : cost of debt 2.93%

Ke : cost of equity = Rf + β [E(Rm) − Rf] 7.93% Rf : risk-free rate (US10Yr Gvt Bond) 2.18%

Β 0.77

E(Rm) − Rf : market risk premium 7.45%


PAGE 29/31

the risk of a specific country or geography. The weighted average31 of the equity risk premiums of the

different geographies where Nike operates, gives us the total equity risk premium of Nike (see appendix 15).

By combining all the inputs needed for the CAPM formula, we obtain a cost of

equity of 7.93%. Consequently, Nike’s WACC is 7.93%

Using this WACC to discount the free cash flows we obtain an enterprise value of

$92,922Mn and an equity value at market of $193,585M. When divided by the

number of outstanding share (1,703M) we get a value per share of $57.24 (at the

end of FY2016).

The expected capital gain for a share quoting at 58.76 is -3%. The dividends and

share buybacks will result in an additional 5.36% return. Since, the total

shareholders return is 2.80% we issue a HOLD recommendation.

Sensitivity analysis

Since the valuation depends a lot on the values of the perpetual growth rate and

the WACC, it is important to build a sensitivity analysis. The WACC depends

highly on the risk-free rate. In the original calculation a spot rate of the 10 year

US government bond has been used. Some argue that monetary policies

undertaken by the FED in recent years to boost the economy (i.e. quantitative

easing) result in an artificially low spot rate of the US government bond. To solve

this, an average of daily yields over a long period (i.e. 10 years) can be used as

risk-free rate (3.10%). A risk-free rate of 3.10% results in a WACC of 8.90%.

Next, when the target net debt to enterprise value is negative, some analysts

choose to set the ratio to zero for the calculation of the WACC. If the ratio is set

equal to zero, a WACC of 8.01% is obtained.

Furthermore, to calculate the beta of Nike an industry average has been

computed. However, Nike and Adidas are the only two companies that are truly

global sportswear manufacturers. Another value for beta could be obtained by

trailing 10 year monthly prices for Adidas to the S&P 500. With this method a

beta of 0.81 is obtained (vs 0.77 with the peer analysis). The higher beta leads to

a higher WACC of 8.24%.

Finally, because Nike’s shares are solely quoted on the NYSE, the company

invests essentially in American assets (short-term investments and cash

equivalents), issues bonds on the American market and pays its suppliers

essentially in $US, it could be argued that the appropriate market risk premium

31 Weights depends on the sales of Nike in the region to total Nike sales


PAGE 30/31

considered should only be the one implied from the S&P 500 (this is 6%). If a risk

premium of 6% is used, the WACC would drop to 6.86%.

Instead of taking the world nominal GDP growth rate, the long term nominal

growth rate of the US (4.30%32) could have been chosen, since Nike derives the

majority of its revenues from sales in the United States. Another possibility would

be to compute the weighted average nominal GDP growth rate, combining the

weights of Nike’s sales in the different geographic segments and the appropriate

region-specific long term nominal GDP growth rate. This option would yield a rate

of 4.86%. To be really cautious not to overestimate long term revenues the world

inflation for 2024 (3.80%33) could be used. This assumes that Nike will not gain

any extra revenues (in real terms) after 2024. The company will keep earning the

same revenues as in 2024 adjusted by inflation to reflect the increase in price. An

even more conservative approach would be to fix the long term inflation of the US

(2%) as perpetual growth rate.

The result of the sensitivity analysis can be seen in the table below. The red color

indicates sell recommendations, blue is hold and green is buy. As can be seen

the analysis relies a lot on the hypothesis made.

sensitivity analysis

WACC %

6.86% 7.98% 8.0% 8.24% 8.90%

2.00% 50.44 40.60 40.44 38.88 34.98

3.80% 72.79 52.91 52.61 49.84 43.23

g (%) 4.20% 81.87 57.24 56.88 53.60 45.92

4.30% 84.59 58.47 58.01 54.60 46.67

4.86% 104.82 66.80 66.30 61.76 51.53

32 Data from OECD 33 Data from Euromonitor database

Exhibit 40: sensitivity analysis


PAGE 31/31

Disclosures and Disclaimer

Research Recommendations

Buy Expected total return (including dividends) of more than 15% over a 12-month period.

Hold Expected total return (including dividends) between 0% and 15% over a 12-month period.

Sell Expected negative total return (including dividends) over a 12-month period.

This report was prepared by “Pauline Veldekens”, a student of the NOVA School of Business and Economics, following the Masters in Finance Equity Research – Field Lab Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his/her own personal judgement. This report was supervised by professor Rosário André (registered with Comissão do Mercado de Valores Mobiliários as financial analyst) who revised the valuation methodology and the financial model. All opinions and estimates are subject to change

without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use. The information contained herein has been compiled by students from public sources believed to be reliable, but NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or its content. The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion about the subject company and its securities. He/she has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report. The author of this report may have a position, or otherwise be interested, in transactions in securities which are directly or indirectly the subject of this report. NOVA SBE may have received compensation from the subject company during the last 12 months related to its fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to or dependent on the opinions expressed in this report. The Nova School of Business and Economics, though registered with Comissão do Mercado de Valores Mobiliários, does not deal for or otherwise offers any investment or intermediation services to market counterparties, private or intermediate customers. This report may not be reproduced, distributed or published without the explicit previous consent of its author, unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to suspend this report reproduction or distribution without further notice.


1 | P a g e

Appendix

Appendix 1: Market share of the market leaders in sportswear apparel

sportswear

world

North

America

Western

Europe

Eastern

Europe

Greater

China Japan

Latin

America Asia

company

market

share company

market

share company

market

share company

market

share company

market

share company

market

share company

market

share company

market

share

market leader Nike 15.9 Nike 20.6 adidas 12.8 adidas 19.2 Nike 14.4 adidas 16.1 Nike 12.3 Nike 15.9

runner up adidas 10.5 VF

Corp 5.7 Nike 12.8 Nike 14 adidas 13.8 Nike 12.6 adidas 11.4 adidas 15.7

Third

VF Corp 3.5 adidas 4.7 Kering 3.1

Bosco

Di Cil iegi 2.6 Anta ( 9.6 Mizuno 8.6 Kering 2.8 Anta 4

Source: Euromonitor (market share is in percentage)

Appendix 2: Comparative analysis of Nike and its main competitors

Nike Adidas Under Armour Lululemon Athl VF corp Bosco Di Ciliegi

Group

main sport category running, mostly

footwear, bastketball soccer footbal l yoga, womenswear outdoor apparel

original geographic market

North America Western Europe North America North America North America Eastern Europe

strong position on the market

North America (has a s trong presence

worldwide)

Europe (Western & Eastern), but s trong

worldwide presence North America North America North America Eastern Europe


2 | P a g e

distribution channels

onl ine, own shops , wholesa lers



onl ine, own shops , wholesa lers (partnering

with gym and sport s tudios onl ine, own shops ,

wholesa lers

price range premium premium premium Premium premium premium

marketing 3.2B 1.68B

333M (& product

innovation 291.6) /

revenues 31.34B 17.8Bn 3.69B 1.96B 12.54B

net income 3.62B 702Mn 215M 259.5M 1.04B

gross margin 46% 47.60% 49% /

operating margin 14.05% 6.60% 10.40% 18.05% 14.68%

main sportswear brands Converse, Nike

brand, Jordan Neo, Reebok, Adidas Under Armour Lululemon Athl

The North Face, Vans,

Timberland, Napapijri Bosco Sport

product mix

46% footwear, 43% apparel , 11%

hardware

65.5% apparel , 19.7% footwear, 10.7%

accessories

where do revenues come from

global : Western Europe (16%), North

America 41%, China 10%, Emerging Markets 15%,

Eastern Europe 5%

global : Western Europe (27%), North

America 23%, China 10%, Other As ia 16%, Latin America 10%, Eastern Europe 13%

94% USA, 6% europe and Japan North America

Mostly (North) America and Europe Eastern Europe

endorsements of internationally known

athletes and celbrities?

YES YES YES NO NO NO


3 | P a g e

Appendix 2: Comparative analysis of Nike and its main competitors (continued)

Kering SA Mizuno Anta Li Ning Asics Oxylane Group

main sport category Shoes gol f, basebal l gymnastics footwear apparel (and footwear)

original geographic market Western Europe Japan China China Japan

Western Europe (France)

strong position on the market

Western Europe, Latin America Japan China China Japan, As ia

Western Europe, Eastern Europe

distribution channels onl ine, own shops ,

wholesa lers onl ine, own shops ,


wholesa lers onl ine, own s hops ,


wholesa lers own stores

price range premium premium premium premium premium cheap

marketing app 653M

revenues 3.55B 13.9M 196M 143M

net income 40.3M 0.22M 36.84M -4.5M

gross margin 46.60%

operating margin 2.91% 1.96% 23.24% 0.84%

main sportswear brands Puma Mizuno Anta, Fi la Li Ning As ics Decathlon

product mix 41.7% footwear, 38.1% apparel, 20.1%

accessories

66% footwear, 24%, sportswear, 10% sport equipment

sell mostly their own brand but also others

where do revenues come from

EMEA 39.4%, Americas 36.8%, Asia

Paci fic 20.1% Mostly As ia Mostly As ia Mostly As ia

49% Japan, 28% North America , 19%

Europe Europe


4 | P a g e

endorsements of internationally known

athletes and celbrities?

YES YES YES YES YES NO

Source: Yahoo Finance, company financial statements Appendix 3: Sportswear forecast North America values in US$Mn except growth 2013A 2014A

2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F

Apparel and foorwear North America 359,804 364,291 373,703 385,764 398,527 410,614 423,047 435,823 448,897 461,915 475,311 489,095

sportswear: Retail Value RSP - current 2014

prices 89,959 96,513 102,867 108,842 114,580 119,117 123,092 126,809 130,614 134,401 138,299 142,310

sportswear market share 25.00% 26.49% 27.53% 28.21% 28.75% 29.01% 29.10% 29.10% 29.10% 29.10% 29.10% 29.10%

growth of market share 4.66% 5.96% 3.90% 2.50% 1.90% 0.90% 0.30% 0.00% 0.00% 0.00% 0.00% 0.00% growth of mkt sh of

jeans -1.67% -4.03% -1.88% -0.55% -0.56% -0.37% 0.93% 1.30% 1.46% 1.62% 1.06% 0.53% growth of sports

nutrition to disposable

income ratio 12.79% 8.26% 7.96% 7.45% 6.88% 6.12% 5.35% 4.80% 4.92% 4.94% 4.95% 4.97%

growth in middle class households 1.4% 0.5% 1.1% 0.9% 0.9% 0.9% 0.8% 0.8% 0.7% 0.7% 0.7% 0.7%

Data from euromonitor

Appendix 4: Sportswear forecast Western Europe values in US$Mn except

growth 2013A 2014A 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F

Apparel and Footwear - Western Europe 419,428 420,373 407,324 414,618 424,272 434,245 444,967 456,358 467,448 478,386 489,963 501,232

Sportswear 54,687 56,191 55,617 58,085 60,775 63,572 66,542 69,337 71,945 74,623 77,422 80,272

market share sportwear 13.04% 13.37% 13.65% 14.01% 14.32% 14.64% 14.95% 15.19% 15.39% 15.60% 15.80% 16.02%


5 | P a g e

growth of market share sportsw 2.55% 2.52% 2.15% 2.60% 2.25% 2.20% 2.15% 1.60% 1.30% 1.35% 1.30% 1.35%

growth of mkt sh of jeans 1.39% 1.07% 0.61% -1.20% -1.30% -0.82% -0.23% 0.89% 1.10% 1.40% 1.30% 1.30%

growth of market share sport nutrition 8.45% 10.16% 10.08% 7.86% 5.69% 4.73% 4.43% 4.26% 4.66% 4.77% 4.75% 4.92%


Appendix 5: Sportswear forecast Eastern Europe

values in US$Mn except growth 2013A 2014A 2015F 2016F 2017F 2018F 2019F 2020F 2021F 2022F 2023F 2024F

Apparel and Footwear - Eastern Europe 116,462 111,531 105,278 112,412 123,004 135,083 149,152 163,924 180,576 198,403 216,317 235,056

Sportswear 15,901 15,276 13,569 14,089 15,028 16,069 17,303 18,495 19,723 20,998 22,203 23,422



growth of mkt sh of jeans 0.61% -0.91% 0.40% -0.44% 0.16% 0.78% 1.42% 1.50% 1.67% 1.70% 1.83% 1.97%

growth of market share sport

nutrition 7.62% 2.50% 1.53% 7.19% 6.53% 6.66% 5.95% 4.73% 4.98% 5.12% 5.14% 5.37%

growth in middle class households 0.8% 0.4% -0.1% 0.2% 0.2% 0.2% 0.1% 0.1% 0.1% 0.0% 0.0% 0.0%

Appendix 6: Sportswear forecast Greater China


Apparel and Footwear Greater

China 292,335 324,665 357,281 391,418 429,281 469,087 512,649 559,958 609,141 660,548 715,228 772,686

Sportswear 21,738 23,106 25,268 27,785 30,496 33,495 36,783 40,364 44,141 48,093 52,324 56,804


growth of market share sportsw -10.60% -2.31% 1.00% 2.50% 2.60% 2.80% 2.90% 3.00% 3.00% 3.00% 3.00% 3.00%

growth of mkt sh of jeans 0.64% 0.80% 0.80% 0.75% 0.68% 0.66% 0.63% 0.53% 0.40% 0.50% 0.50% 0.50%


6 | P a g e

growth of market share sport

nutrition 7.04% 4.97% 6.59% 9.11% 5.10% 5.78% 2.83% 1.96% 2.79% 3.28% 3.31% 3.45%


Appendix 7: Sportswear forecast Japan


Apparel and Footwear – Japan 86,439 82,701 76,259 77,880 81,088 83,548 86,098 87,737 89,349 91,011 92,653 94,344

Sportswear 13,182 12,729 11,926 12,302 12,810 13,188 13,549 13,712 13,856 13,981 14,100 14,199



growth of mkt sh of jeans 0.04% 0.22% -0.75% -0.42% -0.54% -0.37% -0.28% -0.20% 0.10% 0.20% 0.25% 0.30%

growth of market share sport nutrition 2.89% 2.19% 1.85% 1.87% 1.67% 0.31% 0.90% 0.43% 0.93% 1.13% 1.29% 1.53%

growth in middle class households 0.3% -0.8% -0.1% -0.1% -0.3% -0.2% -0.3% -0.3% -0.4% -0.4% -0.5% -0.5%

Appendix 8: Sportswear forecast Latin-America


Apparel and Footwear Latin America 142,000 152,261 164,129 181,365 203,306 229,706 259,491 291,391 328,095 369,165 415,011 464,515

Sportswear 24,429 24,844 25,555 26,994 28,472 30,062 31,767 33,523 35,377 37,333 39,397 41,576



growth of mkt sh of jeans -1.33% -0.23% 5.43% 4.43% 1.38% -0.07% -0.07% -0.10% -0.10% -0.05% -0.05% 0.00%

growth of market share sport nutrition -18.08% -4.09% 4.04% 4.87% 0.85% -2.41% -1.44% -1.16% -1.17% -1.19% -1.17% -1.19%



7 | P a g e

Appendix 9: revenue forecast North America

in $Mn FY 2014 FY 2015 FY 2016

Est FY 2017

Est FY 2018

Est FY

2019Est FY

2020Est FY

2021Est FY

2022Est FY

2023Est FY

2024Est

revenues at RSP

18,872

21,006

23,316

24,387

24,619

25,741

26,407

29,307

29,918

31,942

32,371

Nike market share 19.6% 20.4% 21.0% 20.5% 19.6% 19.4% 18.9% 20.0% 19.4% 19.8% 19.1% growth in female

population 0.7% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% 0.8% growht of

disposable income per capita (female) 2.8% 1.6% 3.5% 3.6% 3.7% 3.6% 3.5% 3.4% 3.4% 3.4% 3.3%

GDP 2.4% 2.4% 2.5% 2.4% 2.4% 2.3% 2.1% 2.0% 2.0% 2.0% 2.0% DTC/wholesale

equivalent 10% 11% 24% 24% 25% 25% 25% 26% 26% 27% 27% internet

retailing/retailing 8% 9% 10% 10% 12% 13% 14% 14% 15% 15% 16%

DTC revenues

1,894

2,300

5,479

5,853

6,032

6,435

6,602

7,473

7,779

8,465

8,740

wholesale revenues

9,677

10,663

10,167

10,564

10,595

11,004

11,289

12,445

12,620

13,382

13,469

NIKE REVENUE NORT AMERICA

11,572

12,962

15,646

16,417

16,626

17,439

17,891

19,919

20,398

21,847

22,209

Appendix 10: revenue forecast Western Europa

in $Mn FY 2014 FY 2015 FY 2016

Est FY 2017

Est FY 2018

Est FY

2019Est FY

2020Est FY

2021Est FY

2022Est FY

2023Est FY

2024Est

revenues at RSP

7,831

8,868

10,192

10,302

11,749

12,561

13,456

13,511

14,736

15,360

17,221



disposable income per capita (female) 1.3% -12.8% 1.5% 3.7% 4.0% 4.0% 4.8% 4.3% 4.2% 4.2% 4.0%


8 | P a g e




DTC revenues

946

1,256

1,478

1,597

1,939

2,261

2,422

2,635

3,006

3,180

3,703

wholesale revenues 3,924

4,339

4,967

4,962

5,592

5,871

6,289

6,200

6,686

6,943

7,706

NIKE REVENUE W Europa

4,870

5,595

6,445

6,559

7,530

8,132

8,712

8,834

9,692

10,123

11,408

Appendix 11: revenue forecast Western Europa

in $Mn FY 2014 FY 2015

FY 2016

Est

FY 2017

Est

FY 2018

Est

FY

2019Est

FY

2020Est

FY

2021Est

FY

2022Est

FY

2023Est

FY

2024Est

revenues at RSP

2,270

2,291

2,347

2,677

2,964

3,295

3,645

4,043

4,476

4,919

5,391


population -0.1% -0.1% -0.1% -0.1% -0.1% -0.1% -0.2% -0.2% -0.2% -0.2% -0.3% growth of

disposable

income per capita (female) -6.0% -25.8% -3.4% 8.0% 8.0% 8.5% 8.9% 9.0% 9.2% 9.1% 8.7%

GDP 1.1% -1.4% 0.9% 1.9% 1.9% 2.1% 2.3% 2.3% 2.3% 2.3% 2.4% DTC/wholesale



DTC revenues

139

184

199

233

267

306

350

485

546

620

733


9 | P a g e

wholesale

revenues

1,215

1,201

1,224

1,393

1,537

1,704

1,878

2,028

2,240

2,451

2,655

NIKE REVENUE Eastern Europe

1,353

1,385

1,423

1,626

1,804

2,010

2,228

2,513

2,786

3,070

3,388

Appendix 12: revenue forecast Greater China

in $Mn FY 2014 FY 2015 FY 2016

Est FY 2017

Est FY 2018

Est FY

2019Est FY

2020Est FY

2021Est FY

2022Est FY

2023Est FY

2024Est

revenues at RSP

4,045

4,651

6,345

8,113

8,749

9,396

10,617

11,896

13,287

14,819

16,489

Nike market share 17.5% 18.1% 22.0% 25.0% 24.0% 23.0% 23.0% 23.0% 23.0% 23.0% 23.0%

growth in female population 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.5% 0.4% 0.4% 0.3% growht of

disposable income per capita (female) 9.1% 8.7% 8.5% 9.5% 5.9% 9.1% 7.5% 8.4% 6.2% 7.9% 7.8%



retailing/retailing 10% 14% 16% 18% 20% 21% 22% 21.7% 21.7% 21.7% 21.7%

DTC revenues 561

834

1,321

2,002

2,362

2,725

3,238

3,569

3,986

4,446

4,947

wholesale revenues

1,986

2,176

2,863

3,483

3,640

3,802

4,206

4,747

5,302

5,913

6,579

NIKE REVENUE Greater China

2,547

3,010

4,185

5,485

6,002

6,527

7,444

8,315

9,288

10,358

11,526

Appendix 13: revenue forecast Japan

9 FY 2014 FY 2015 FY 2016

Est FY 2017

Est FY 2018

Est FY

2019Est FY

2020Est FY

2021Est FY

2022Est FY

2023Est FY

2024Est

revenues at RSP

2,162

2,426

2,595

3,083

3,463

3,894

4,381

4,909

5,483

6,115

6,805

Nike market share 9.4% 9.4% 9.0% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5%


10 | P a g e

growth in female population -0.1% -0.2% -0.2% -0.3% -0.3% -0.4% -0.4% -0.4% -0.5% -0.5% -0.5% growht of

disposable income per capita (female) 0.7% -0.2% 1.7% 2.2% 2.2% 2.3% 0.7% 0.8% 0.9% 1.1% 1.4%

GDP -0.1% 0.6% 1.2% 0.8% 1.0% 1.1% 0.9% 0.8% 0.8% 0.8% 0.8% DTC/wholesale



DTC revenues

544

929

1,279

1,707

935

1,129

1,336

1,473

1,645

1,835

2,041

wholesale revenues 922

853

751

784

1,441

1,576

1,736

1,959

2,188

2,440

2,715

NIKE REVENUE Japan

1,466

1,782

2,029

2,491

2,376

2,705

3,072

3,431

3,833

4,274

4,756

Appendix 14: revenue forecast Emerging Markets

in $Mn FY 2014 FY 2015 FY 2016

Est FY 2017

Est FY 2018

Est FY

2019Est FY

2020Est FY

2021Est FY

2022Est FY

2023Est FY

2024Est

revenues at RSP 6,406

6,193

6,674

8,689

7,988

8,649

9,771

11,068

12,528

14,168

15,953



disposable income per capita (female) -2.5% -15.6% -4.0% 2.9% 5.1% 5.4% 4.8% 4.9% 5.0% 4.9% 5.0%





11 | P a g e

DTC revenues 474

663

801

1,086

1,038

1,168

1,319

1,494

1,817

2,054

2,342

wholesale revenues 3,381

3,152

3,348

4,334

3,961

4,265

4,818

5,457

6,105

6,905

7,759

NIKE REVENUE NORT AMERICA

3,855

3,815

4,149

5,420

4,999

5,432

6,137

6,951

7,922

8,959

10,100

Appendix 15 Equity risk premium

equity risk premium

country risk

premium weights

North America 0% 51%

western Europe 1.93% 19%

Eastern Europe 4.39% 5%

Central and South America 5.50% 13%

China 1.65% 10%

Japan 0.73% 2%

weighted country risk premium 1.45%

mature market risk premium 6%

total equity risk premium of Nike 7.45%


12 | P a g e

Financial Statement

Balance sheet

In Millions of USD FY

2014 FY

2015

FY 2016

Est FY 2017

Est FY 2018

Est FY

2019Est FY

2020Est FY

2021Est FY

2022Est FY

2023Est FY

2024Est

Total Assets

+ Cash, Cash Equivalents & STI 5,142 5,924 5,729 6,439 5,475 5,914 6,368 6,929 7,414 7,988 8,561

+ Cash & Cash Equivalents 2,220 3,852 3,689 4,187 3,128 3,380 3,639 3,959 4,237 4,565 4,892

+ ST Investments 2,922 2,072 2,039 2,252 2,346 2,535 2,729 2,969 3,177 3,424 3,669

+ Accounts & Notes Receiv, net 3,434 3,358 2,795 2,795 2,795 2,795 2,795 2,795 2,795 2,795 2,795

+ Inventories 3,947 4,337 4,782 5,242 5,419 5,810 6,231 6,754 7,200 7,728 8,249

+ Other ST Assets 1,173 2,357 2,438 1,603 1,850 2,017 1,867 2,333 2,508 2,374 2,917 + prepaid expenses and other

current assets 818 1,968 2,037 1,138 1,396 1,516 1,365 1,774 1,901 1,709 2,194

+ Deferred Tax Income Taxes 355 389 401 465 455 501 502 560 607 664 724

Total Current Assets 13,696 15,976 15,744 16,080 15,540 16,537 17,262 18,812 19,917 20,885 22,523

+ Property, Plant & Equip, Net 2,834 3,011 3,106 3,408 3,695 3,945 4,266 4,597 4,942 5,327 5,737

+ Total Intangible Assets 413 412 412 412 412 412 412 412 412 412 412

+ Goodwill 131 131 131 131 131 131 131 131 131 131 131 + Identifiable Intangible Assets

net 282 281 281 281 281 281 281 281 281 281 281 + Deferred income Tax Assets and other LT assets 1,651 2,201 1,681 1,689 1,756 1,613 1,732 1,882 2,013 2,166 2,319

Total Noncurrent Assets 4,898 5,624 5,199 5,508 5,864 5,970 6,410 6,891 7,367 7,905 8,468


13 | P a g e

Total Assets 18,594 21,600 20,943 21,588 21,403 22,507 23,671 25,703 27,284 28,790 30,991

Liabilities & Shareholders' Equity

+ Accounts Payable 1,930 2,131 2,349 2,576 2,663 2,855 3,062 3,319 3,538 3,797 4,053

+ Income Taxes Payable 432 71 90 101 98 111 110 122 133 145 158

+ Accrued l iabilities 2,491 3,951 4,132 3,398 3,587 3,889 4,168 4,489 4,784 5,109 5,430

+ l iabilities of Discontinued Operations 0 0 0 0 0 0 0 0 0 0 0

+ ST Debt 174 181 351 412 247 273 299 332 361 396 430

+ current portion of LT debt 7 107 0 0 0 0 0 0 0 0 0

+ notes payable 167 74 0 0 0 0 0 0 0 0 0

Total Current Liabilities 5,027 6,334 6,922 6,486 6,595 7,127 7,639 8,262 8,815 9,446 10,071

+ LT Debt 1,199 1,079 2,034 2,391 1,435 1,585 1,736 1,929 2,092 2,295 2,493

+ Deferred income taxes and other l iabilities

1,544 1,480 1,253 1,372 1,461 1,586 1,707 1,836 1,955 2,082 2,209

Total Noncurrent Liabilities 2,743 2,559 3,287 3,763 2,896 3,171 3,444 3,765 4,047 4,377 4,702

Total Liabilities 7,770 8,893 10,209 10,249 9,490 10,298 11,083 12,027 12,862 13,824 14,773

+ Share Capital & APIC 5,868 6,776 6,776 6,776 6,776 6,776 6,776 6,776 6,776 6,776 6,776

+ Reta ined Earnings 4,871 4,685 3,958 4,563 5,137 5,433 5,812 6,900 7,646 8,190 9,441

+ Accumulated Other comprehensive income

85 1,246 0 0 0 0 0 0 0 0 0

Total Equity 10,824 12,707 10,734 11,339 11,913 12,209 12,588 13,676 14,422 14,966 16,217

Total Liabilities & Equity 18,594 21,600 20,943 21,588 21,403 22,507 23,671 25,703 27,284 28,790 30,991


14 | P a g e

Income stament

In Millions of USD FY

2014 FY

2015 FY 2016

Est FY 2017

Est FY 2018

Est FY

2019Est FY

2020Est FY

2021Est FY

2022Est FY

2023Est FY

2024Est

Revenue 27,799 30,601 33,990 37,540 39,106 42,246 45,483 49,490 52,958 57,059 61,149

- Cost of Sales -15,353 -16,534 -18,229 -19,983 -20,660 -22,150 -23,756 -25,750 -27,449 -29,460 -31,449

Gross Profit 12,446 14,067 15,761 17,557 18,446 20,096 21,727 23,740 25,509 27,599 29,699

+ Total Selling and Administrative

Expense -8,766 -9,892 -11,428 -12,609 -13,645 -14,734 -16,377 -17,795 -19,053 -20,523 -22,000

Demand creation expense -3,031 -3,213 -4,079 -4,505 -5,084 -5,492 -6,368 -6,929 -7,414 -7,988 -8,561

Operating overhead expense -5,735 -6,679 -7,350 -8,104 -8,561 -9,242 -10,009 -10,867 -11,639 -12,535 -13,440

Operating Income (Loss) 3,680 4,175 4,333 4,948 4,801 5,362 5,350 5,945 6,457 7,076 7,699

+ Interest (Expense) income, Net -33 -28 -47 -60 -34 -40 -42 -45 -50 -57 -62

+ Other Income (expense) net -103 58 -2 -1 -1 0 2 3 4 6 7

Pretax Income 3,544 4,205 4,284 4,888 4,766 5,322 5,310 5,903 6,411 7,025 7,644

+ Income Tax (Expense) Benefit -851 -932 -865 -987 -963 -1,075 -1,073 -1,192 -1,295 -1,419 -1,544

Net Income (Loss) from Cont Ops

2,693

3,273

3,419

3,900

3,804

4,247

4,237

4,710

5,116

5,606

6,100 + Net Income (loss) from discontinued operations, net 0 0 0 0 0 0 0 0 0 0 0

Net Income GAAP

2,693

3,273

3,419

3,900

3,804

4,247

4,237

4,710

5,116

5,606

6,100


15 | P a g e

Free Cash Flow Map Cash Flows Map FY 2013

A FY 2014A FY 2015 A FY 2016F FY 2017F FY 2018F FY 2019F FY 2020F FY 2021F FY 2022F FY 2023F FY 2024F

in millions of USD

EBIT

3,238

3,680

4,175

4,333

4,948

4,801

5,362

5,350

5,945

6,457

7,076

7,699

notional income taxes - 797

- 1,435

- 843

- 875

- 1,000

- 970

- 1,083

- 1,081

- 1,201

- 1,304

- 1,429

- 1,555

operating taxes - 4

531

- 83

-

-

-

-

-

-

-

-

-

NOPLAT 2,437

2,776

3,249

3,457

3,949

3,831

4,279

4,270

4,744

5,152

5,646

6,144

non-cash adjustments

Depreciation 502

586

649

608

673

734

778

843

909

976

1,053

1,134

Operating Gross Free Cash Flow

2,939

3,362

3,898

4,065

4,621

4,565

5,057

5,113

5,653

6,129

6,699

7,278

Net Operating Capex - 664

- 961

- 825

- 702

- 975

- 1,021

- 1,028

- 1,164

- 1,241

- 1,321

- 1,438

- 1,544

Change in Net Working Capital

502

48

- 360

230

- 307

- 271

- 224

- 11

- 622

- 290

- 27

- 701

unlevered operating cash

flow

2,778

2,449

2,713

3,593

3,340

3,272

3,804

3,938

3,790

4,517

5,234

5,033

change in short term deferred tax -

46

-

47

-

34

-

12

-

65

11

-

47

-

1

-

58

-

48

-

57

-

59


16 | P a g e

change in other long-term assets

448

-

645

-

510

-

59

-

9

-

68

145

-

120

-

150

-

130

-

153

-

153 change in other liabilities -

125 262

- 89

102

115

78

109

111

118

108

118

117

Operating free cash flows

3,055

2,019

2,080

3,624

3,381

3,293

4,012

3,928

3,700

4,448

5,142

4,937

non operating income (loss) & income (loss) from discontinued operations

15

-

103

58

-

2

-

1

-

1

0

2

3

4

6

7

notional income taxes of non-operating (loss) &

income

-

4

40

-

12

0

0

0

-

0

-

0

-

1

-

1

-

1

-

1 net extraordinary gains (losses)

21

-

-

-

-

-

-

-

-

-

-

-

change in pension liability

104

-

4

-

2

31

4

11

17

10

11

11

10

10 change in deferred tax

assets and liabilities - 231

26

- 23

228

-

-

-

-

-

-

-

-

change in liabilities of

discontinued operations -

152

-

18

-

-

-

-

-

-

-

-

-

- comprehensive income

125 - 189

1,161

-

-

-

-

-

-

-

-

-

total non-operating free

cash flows

-

122

-

248

1,182

257

4

10

17

11

13

15

14

16

Total Free Cash Flow Available to Investors

2,933

1,771

3,262

3,881

3,385

3,304

4,029

3,940

3,713

4,462

5,156

4,953


17 | P a g e

Cash flows from financing

interest (expense) income net

3

- 33

- 28

- 47

- 60

- 34

- 40

- 42

- 45

- 50

- 57

- 62

tax shield on interest expense (income) net -

1 13

6

9

12

7

8

9

9

10

11

12

Change in net debt -1,089 1,005 -699 1,557 -43 -48 -44 -49 -55 -52 -49 -55

change in other net debt i tems -11 5 10 -9 1 1 -2 0 0 -1 0 0

Net Change in Equity (in

Cash) -1,835 -2,761 -2,551 -5,392 -3,296 -3,229 -3,951 -3,858 -3,623 -4,370 -5,061 -4,849

cash flows from financing -2,933 -1,771 -3,262 -3,881 -3,385 -3,304 -4,029 -3,940 -3,713 -4,462 -5,156 -4,953

Key assumptions

Historical & Forecast Ratios

Key Assumptions FY 2015 FY 2016

Est FY 2017

Est FY 2018

Est FY

2019Est FY

2020Est FY

2021Est FY

2022Est FY

2023Est FY

2024Est

Revenues Growth 10.08% 11.07% 10.45% 4.17% 8.03% 7.66% 8.81% 7.01% 7.74% 7.17%

EBIT Margin 13.64% 12.75% 13.18% 12.28% 12.69% 11.76% 12.01% 12.19% 12.40% 12.59%

Ave. Depreciation Rate 10% 9% 9% 9% 9% 9% 9% 9% 9% 9%

Income Tax Rate (legal) 20% 20% 20% 20% 20% 20% 20% 20% 20% 20%

Ave. Days net Working Cap.

67.42 58.23 55.70 56.00 53.78 50.04 50.58 49.27

45.90

47.02

Capex 825 702 975 1,021 1,028 1,164 1,241 1,321

1,438

1,544

Change in Employee Pensions

-

2 31 4 11 17 10 11 11

10

10

Dividends Payout 28.44% 97.75% 7.58% 6.03% 22.39% 20.24% -8.01% 7.24% 18.94% 13.91% Debt / Enterprise Value

(accounting) 9.02% 18.18% 19.82% 12.37% 13.21% 13.92% 14.19% 14.53% 15.24% 15.27%


18 | P a g e

Debt / Enterprise Value (@ market) -2.71% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00% -1.00%

Equity / Enterprise Value (@ market) 103% 101% 101% 101% 101% 101% 101% 101% 101% 101%

Cost of Debt 2.93% 2.93% 2.93% 2.93% 2.93% 2.93% 2.93% 2.93% 2.93% 2.93%

Cost of Equity 7.93% 7.93% 7.93% 7.93% 7.93% 7.93% 7.93% 7.93% 7.93% 7.93%

WACC 7.98% 7.98% 7.98% 7.98% 7.98% 7.98% 7.98% 7.98% 7.98% 7.98%

FCF Growth Rate 84% 19% -13% -2% 22% -2% -6% 20% 16% -4%

FCF Growth Rate in Perpetuity 4.20%

ROE 26% 32% 34% 32% 35% 34% 34% 35% 37% 38%

ROA 15% 16% 18% 18% 19% 18% 18% 19% 19% 20%

current ratio

2.52 2.27 2.48 2.36 2.32 2.26 2.28 2.26

2.21

2.24

ROIC 23% 26% 28% 28% 30% 29% 30% 31% 32% 32%

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