Description
NIKE, Inc. designs, develops and markets athletic footwear, apparel, equipment, and accessory products for men, women, and children. The Company sells its products worldwide to retail stores, through its stores, subsidiaries, and distributors.1
Investment Rationale
Nike (NKE) continues to develop innovative platforms and drive digital growth while making strategic wholesale partnerships. We are encouraged by management’s confidence in its long-term digitalisation strategy and strong pipeline ahead in footwear and apparels.
Ongoing America and China strength despite a challenging economic backdrop. The recent 4Q19 results for NKE showed that growth in North America remains strong at 8% YoY. This is driven by the strength in NKE’s wholesale consumer partners and investments in Nike Consumer Experience (NCX). As for Greater China, same-store-sales grew 23% YoY for FY19 (FY18: >10% YoY). This implied that 4Q China same-store-sales grew ~30% vs ~20% for Q1 to Q3. This is consistent with management’s confidence that there is no change in Chinese consumer strength despite fears of slowing consumer spending. Management’s FY20 guidance remained optimistic as they reiterated expectations for high-single-digit revenue growth despite foreign exchange headwinds.
Revenue to accelerate with product innovation. We see consistent innovative products from NKE. Some of the new products include the new Joyride technology unveiled last week, and the Air Max React 270 (already scaling in 1Q19). Management also expressed confidence in the strong pipeline for the Tokyo Olympics, which would likely benefit earnings in 4Q20 due to the pre-Olympics sales. In our view, NKE’s continued product innovation and scalability of their new technologies will drive growth moving forward.
Digital growth to offset net store closures. There was a decline in Nike brand physical stores for the first time in 10 years. Nike had 246 North American Stores in FY19, down 2% from FY18, whereas international store count was down 3% YoY. Despite the headwind from store closures, NKE’s direct-to-consumer (DTC) achieved 16% YoY constant-currency growth, driven by investments in NKE’s digital ecosystem. The Nike SNKRs app now accounts for 20% of NKE’s digital revenue. Other digitalisation efforts include the Nike app going live in China in FY20, Nike Fit (2H19) and RFID for all products. We believe NKE’s digitalisation strategy has bear fruit and will continue to expand NKE’s e-commerce footprint.
RECOMMENDATION
We have a TECHNICAL BUY rating for NKE. We believe NKE’s focus on digitalisation and innovation and its strong momentum for international sales make it an attractive investment. NKE is currently trading at a P/E ratio of 33.4, which is above one standard deviation. However, we think NKE’s PE multiple is justified given its robust digital growth and earnings potential.
[1] Source: Bloomberg
Support 1: 77.09 Resistance 1: 89.87
NKE’s recent price weakness provides an opportunity for a long position. We expect further correction to the bottom of the triangle, at which there would be a rebound upwards.
The main indication is the weekly formation of the ascending triangle. Once the stock price touches the base of the triangle for the 3rd time, we expect a breakout of resistance level 1 and a strong rally upwards.
We also see a potential inverted head and shoulder pattern, with the 50SMA touching support level 1. The confluence of various trading indicators provides a strong bullish signal for NKE going forward.
However, the ascending triangle may be invalidated if prices break below 80.00. This will result in a prolonged ranging pattern.
CHART LEGENDS
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