Growth - Nike (NKE) Stock Analysis - Part 6

What is going to drive NKE's growth in the next 5-10 years? The answer is innovation and Asian countries. Let's dig a little deeper.

Innovation is particularly important for Nike in matured markets such as North America and Europe, where the product saturation already reached, price levels were set, brand image/perception was well established, and competition yet fierce, but won't take any new forms unless some of the players have significant missteps. In these markets, we have two levels of innovation. First, some technology progression and innovative marketing ideas seem to be a necessity to retain its current market position. The second level is beyond the first one, referring to the type of innovation that drives up revenue and market share, and we can call it growth innovation. The very last such innovation is Nike+, the marriage between Nike and Apple, which is one of the key drivers of its footwear growth in US region in the past few years. Technically, it is not something that you can count on 100% for sure, nobody could answer questions such as ‘when should we expect the next Nike+?’, further, also a legitimate question, ‘will there be such an innovation at all?’. So you can say nothing is guaranteed. However, given its history, I would like to believe NKE would come up with more growth innovations. And if such ideas do come up, I would also like to believe Nike, as its past illustrated, will execute them well and turn in good numbers on its book.

Compared to innovation, Asian countries are a much more concrete driving force of growth.

Modernization and westernization of the Asian countries created certain form of crave to American culture, and for reasons that we won't dig here, Nike became one of the symbols of American culture. I think partially this is the outcome of Nike's marketing efforts, but also I believe it is something Nike, as a pure business runner, didn't expect. Originating from this is its huge popularity. And Nike never stopped consolidating such popularity with successful marketing moves. In the discussion about the economic moat of NKE, I talked about Nike's branding. In its 10K, NKE stated its strategy as, 'to create long-term revenue growth by creating compelling consumer experiences by creating and delivering innovative, "must have" products; deep personal connections with our brands; and compelling retail presentation'. Nothing interpreted this better than Nike's success in these Asian countries, especially China and India - the fancy sportswear technologies, the fashion sense, the influence of those endorsed sports heroes made Nike not only a "must have" brand, but a "proud-to-have" brand. One more thing to add here, NKE actually put a higher price tag on its products in Asia, adding an extra luxury flavor, which matches perfect with its overall strategy, also results in higher margin.

The other side of the story, economic development in countries such as China and India created a bigger and bigger middle class group. Normally they are the younger generations, growing up in a relative open environment, having higher education, descent income, good sense of fashion and proper knowledge and awareness of health and exercise. Using China as the example, "The number of middle-class consumers on the mainland is expected to nearly triple to 100 million in 10 years from 2006" (source: http://www.chinadaily.com.cn/bizchina/2007-12/08/content_6307152.htm). They are the target consumer of NKE. In other words, NKE already has a huge consumer base and it is growing , and this will be the strongest driving force of Nike's future growth. (Several more words to revisit a previous topic, this explains why the international revenue is so critical for us to screen companies nowadays, especially considering China was hit not nearly as hard as the US by the financial crisis.)

One last contributor is from China. Chinese government is under great pressure from America and Europe to loose its currency policy. For Nike, since virtually all footwear and apparel products are produced outside the United States (a significant portion in China), the appreciation of Chinese currency value against American dollar may translate directly into surging numbers in revenue/profit on Nike's book.

Nike is well aware of the opportunities. One of the indicators, in Feb 2009, Nike broke ground on a distribution center in China, "a further demonstration of our (Nike's) long-term and unwavering commitment to China" (source: http://www.bizjournals.com/portland/stories/2009/02/16/daily28.html).

Come up next: Risks and Conclusion