Innovation and Quality Boost Nike

04/27/2017 2:50 am EST


Ingrid Hendershot

Founder and President, Hendershot Investments, Inc.

Nike (NKE) was founded by University of Oregon track athlete Phil Knight and his coach Bill Bowerman in 1964. Making sales at track meets out of Phil Knight's car, Nike sold 1,300 pairs of shoes grossing $8,000 during their first year, says Ingrid Hendershot, editor of Hendershot Investments.

Today, Nike boasts a strong global brand with revenues expected to top $34 billion in fiscal 2017. For more than 40 years, Nike has designed and shaped the athletic footwear and apparel market with innovative products, endorsement deals and advertising campaigns making it the most recognized name in the industry.

Nike has generated a track record of consistent growth with sales compounding at an 8.5% annual rate over the last five years and EPS running even faster at a 15.8% annual pace.

With strong competitive advantages, Nike has posted 28 consecutive quarters of growth in the face of fierce industry competition, a volatile economy and a rapidly changing retail landscape.

Revenue growth for fiscal 2017 is expected to be in the high single-digit range with sales in China, emerging markets and direct to consumer outlets driving the company’s long-term growth.

Nike’s business is highly profitable with Nike’s return on shareholders’ equity hurdling the 30% mark in fiscal 2016. Return on equity has averaged more than 25% since 2012, showcasing the company’s ability to price products at a premium and drive margin expansion through technical innovation in their supply chain.

A border-adjusted tax could impact Nike’s future margins. However, Nike’s position as a premium price brand and 53% non-U.S. sales reduces the tax risk.

During the first half of fiscal 2017, Nike’s free cash flow more than doubled to a robust $1.2 billion with the company repurchasing $2 billion of its own shares under a four-year $12 billion share repurchase program announced in 2015.

Nike recently increased its dividend 13% to an annual rate of $0.72 per share, marking the 15th consecutive year of dividend increases.

The dividend increase together with the substantial share repurchase program reflects management’s continued confidence in their strategies to generate sustainable, profitable growth and strong cash flows.

Long-term investors seeking a potential slam dunk should run to Nike, a high-quality company with a strong global brand, consistent growth, outstanding profitability and robust cash flows. Buy.

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