Headquartered in Beaverton, OR, NIKE Inc. Was Instituted in 1964. the Company Is Engaged

/ Equity Research / NKE | Page 2

Nike Inc.

/ (NKE-NYSE)
/ Equity Research / NKE | Page 2
Current Recommendation / NEUTRAL
Prior Recommendation / Outperform
Date of Last Change / 12/31/2014
Current Price (12/30/14) / $96.88
Target Price / $102.00
We remain impressed with Nike’s strong growth and product innovation that have facilitated consistent positive earnings surprises for 10 straight quarters, alongside strong revenue growth. The company also boasts a robust financial status, as is evident from its recent dividend hike. Nike aims to increase its global reach and market share by expanding its operations in the emerging markets, while focusing on direct-to-consumer business and other brands. However, we remain slightly uncertain about the company’s future owing to unfavorable currency fluctuations coupled with the impact of recent currency devaluation in the developing markets. Further, soft future orders and macroeconomic headwinds may undermine Nike’s future prospects. Hence, we downgraded our recommendation on the stock to Neutral.

SUMMARY

/ Equity Research / NKE | Page 2

SUMMARY DATA

52-Week High / $99.33
52-Week Low / $70.51
One-Year Return (%) / 24.35
Beta / 0.80
Average Daily Volume (sh) / 3,863,399
Shares Outstanding (mil) / 862
Market Capitalization ($mil) / $83,463
Short Interest Ratio (days) / 2.61
Institutional Ownership (%) / 65
Insider Ownership (%) / 17
Annual Cash Dividend / $1.12
Dividend Yield (%) / 1.16
5-Yr. Historical Growth Rates
Sales (%) / 10.1
Earnings Per Share (%) / 12.1
Dividend (%) / 15.3
P/E using TTM EPS / 28.7
P/E using 2015 Estimate / 27.1
P/E using 2016 Estimate / 23.5
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Below Avg.,
Type of Stock / Large-Growth
Industry / Shoes&Rel Apprl
Zacks Industry Rank * / 117 out of 267

OVERVIEW

Headquartered in Beaverton, OR, NIKE Inc. was instituted in 1964. The company is engaged in the business of designing, developing and marketing of footwear, apparel, and equipment and accessory products for men, women and children worldwide. With the help of a strong brand portfolio, including Nike Pro, Nike Golf, Nike+ and Air Jordan, it offers premium, well-designed and high quality products in line with the latest customer trends. Nike Inc. is the global leader in athletic footwear, apparel, equipment and sports-related accessories with operations in over 160 countries.

With the help of its retail stores in the U.S. and abroad, Nike Inc. sells its products to more than 23,000 retail accounts in the U.S. and more than 24,000 retail accounts outside the U.S. to reach a wide array of customers. Nike’s “swoosh” logo and “just do it” tagline are widely recognized across the world, while its association with celebrity sportspersons, such as Michael Jordon and Roger Federer as well as top professional and college teams ensure a strong brand recall in the key U.S., U.K., Japanese and Chinese markets.

Nike currently reports its operating results under 2 segments, namely NIKE Brand segment and Converse. NIKE Brand is divided into six divisions, primarily on a geographical basis: North America (contributed 46% of total NIKE Brand sale in second-quarter fiscal 2015), Western Europe (19%), Central & Eastern Europe (5%), Greater China (11%), Japan (3%) and Emerging Markets (16%).

REASONS TO BUY

Ø Brands and Innovation Strategy Strengthen Nike’s Position: Nike is the industry leader in the U.S. footwear and athletic apparel industry. The company’s strong portfolio of globally recognized brands, Nike, Converse, Chuck Taylor, Hurley, All Star, One Star, Star Chevron, and Jack Purcell along with focus on innovation has helped in further strengthening its leadership position. These attributes also provide Nike with a competitive edge over its peers, Adidas and Brown Shoe Co.

Ø Nike Remains Focused on Global Expansion: Nike continues to seek opportunities for increasing its global footprint and market share. In the process, over the years it has acquired renowned brands such as Converse, Hurley and others. In order to better manage its global operations, the company recently appointed Tom Peddie as GM and VP of its Emerging Markets region, as his appointment is expected to complement the company’s goal of expanding in premium markets. Another major tool used by Nike to broaden its ambit is the development of direct-to-consumer business model. Taken together, these strategies not only facilitate enhancement of market share but also provide a competitive platform. Further, the company is in the process of doing away with its underperforming brands in order to boost its bottom line.

Ø Nike Results Gain on Innovation, Stock Appears Promising: We are impressed by the strong growth and innovation that Nike has been demonstrating every quarter, which has resulted in robust performance for over a year. The company has delivered positive earnings surprises for 10 consecutive quarters, representing an average surprise of 8.7%. Moreover, it has been consistently recording strong revenue growth. Based on Nike’s remarkable top-line growth as well as margin expansion, we believe the stock will be a sound asset for yield-seeking investors in the near term.

Ø Financials Look Strong: Nike boasts a strong balance sheet, which offers it financial flexibility to drive future growth. Further, the company remains committed toward enhancing shareholder return, as evident from its regular practice of returning value to shareholders in the form of share repurchases and dividend. The company recently hiked its quarterly dividend by 17% to $0.28 a share, marking its 13th year of dividend increase in a row, reflecting management’s confidence in its future prospects. Also, during the second quarter, the company bought back 5.1 million shares for about $425 million. As of quarter-end, Nike has nearly $3.3 billion worth of authorization left under its four-year, $8.0 billion stock repurchase program approved in Sep 2012.

REASONS TO SELL

Ø Downward Estimate Revisions on Soft Future Orders: Nike’s future orders slated for delivery from Dec 2014 through Apr 2015 came in lower than expected, indicating sluggish demand for the third quarter. This led the company to remain conservative on its third quarter and fiscal year guidance. We believe that these factors triggered a downward revision in the Zacks Consensus Estimate for both, the current quarter and fiscal 2015, over the past 30 days.

Ø Currency Headwinds to Hinder Growth: The positivity surrounding Nike’s strong quarterly performance and momentum of its business growth may be subdued by the unfavorable currency fluctuations coupled with the impact of recent currency devaluation in developing markets. Due to its exposure in the international market, Nike remains prone to currency fluctuations. The weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or contract profit margins in locations outside the country. An increase in product price may have a direct impact on consumer demand.

Ø Macroeconomic Headwinds: Nike’s customers remain sensitive to macroeconomic factors, including increase in input costs, fuel and energy costs, unemployment levels, and high household debt levels, which may negatively impact their discretionary spending, and in turn, the company’s growth and profitability.

Ø Political, Social and Economic Conditions in Countries with Business Operations Affect Profitability: The company’s footwear products are entirely manufactured outside the U.S. in the developing countries such as China, Vietnam, Indonesia and Thailand. Accordingly, the company is exposed to political, social and economic risks associated with operations in these countries.