Nike Pitch

8/10/2019 Nike Pitch

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Nike Inc. (NYSE: NKE)Consumers & Healthcare

December 16th, 2014


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Many factors may affect the applicability of any statement or comment that appear in our documents to

an individual's particular circumstances.

Queens University 2014


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3

Pitch Outline

Industry Overview & Macro Thesis

Investment Thesis I

Company Overview

Investment Thesis II

Catalyst & Risks

Valuation

Investment Thesis III


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- Globally, the market for sporting goods including apparel, equipment and footwear is estimated to be worth $310 billion

- Global footwear (including athletics, casual, fashion etc.) is projected to grow at an annualized rate of 7.3% to $175 billion by 2019

- The sports event market has outpaced GDP in nearly every country and is expected to continue to grow at a considerable rate intothe near future. More than 3 billion people watched at least a minute of the 2014 World Cup

- As the world of sport continues to become increasingly popular, sponsoring brands and related companies gain further exposureand opportunity to capture percentage of wallet

- The U.S market for athletic footwear in 2013 was approximately $13.8 billion or roughly 19% of the $75 billion global market forathletic footwear

- Chinas sportswear market is generating mid-single digit SSS during Q3 14 and margins improved 200bp YoY to 41.9%

- Europe has exhibited positive trends in footwear with growth in the mid-single digits but margins remain depressed in the regionpresenting an attractive opportunity for margin expansion

Source: AT Kearney, UBS, IBIS World, NDP Group, Credit Suisse 4

Athletic Footwear Breakdown by TypeGlobal Sports Market ($Billions of USD)

Industry Overview

Global Athletics Industry

0

10

20

30

40

50

60

70

80

90

100

2005 2009 2013 2017E

SportsMarketRevenue

24.8 23.6

8.87.5 7.3

4.4 3.8 3.6

16.2

0

5

10

15

20

25

30

CasualAthletic

Running

Cold

/AllWeather

Basketball

Work/Saftey

C

rossTraining

Walking

Aerobic

Other

PercentageofMark

etShare

The consumer appears to be gravitating towards lifestyle running, as opposed to performance running. Lifestyle running shoes are notdesigned with true track, trail or road performance in mind, but rather with appealing silhouettes


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Preferred Apparel Brand Timeline: Upper-Income Teens

Sources: Piper Jaffray

Preferred Apparel Brands Running

Over the last year, micro surveys indicate that Nike is the preferred fashion brand for upper- and average-income teens and young adultswhich speaks to the momentum in the health, wellness and fitness segment

3.5 years 3.5 years 2.5 years 4 years

Spring2001

Fall2001

Spring2005

Fall2008

Spring2011

Overall

Rank Fall 2014 %

1 Nike 37%

2 lululemon 22%

3 Under Armour 9%

4 Asics 5%

Adidas 5%

Brooks 5%

7 Pearl Izumi 3%

8 New Balance 3%

9 Athleta 1%

10 Moving Comfort 1%

Males

Rank Fall 2014 %

1 Nike 38%

2 Asics 10%

Under Armour 10%

4 Adidas 6%

Pearl Izumi 6%

6 New Balance 5%

7 Brooks 3%

8 11 other brands tied 2%

Females

Rank Fall 2014 %

1 Nike 35%

lululemon 35%

3 Under Armour 9%

4 Brooks 5%

5 Adidas 3%

6 Asics 2%

Athleta 2%

Moving Comfort 2%

9 CW-X 1%

5


6/14

- Nike, Inc. designs, develops, markets and sells athletic apparel, equipment footwear and accessories to men, women and childrenworldwide

- Nike has approximately 645 company owned stores where it distributes its products but also sells merchandise through numerouslarge retailers and wholesalers

- Nikes products are focused in 7 categories: action sports equipment, mens and womens training equipment, NIKE Sportswear,soccer, basketball and running

- The company operates in over 120 countries worldwide and is headquartered in Oregon, USA. It has approximately 40,000employees around the world

- Nike reported FY2014 revenues of $27.8B up 11% over FY2013 and net income of $2.7B which was an increase of 10% YoY

Sources: UBS, Macquarie Research, Credit Suisse, Piper Jaffray 6

Geographic Revenue BreakdownSegmented Revenue

Nike Overview

Company Overview I

64%

30%

6% 1%

Footwear

Apparel

Equipment

Global Brand Divisions

Nike is the largest sportswear company in the world. They are the number one preferred footwear and apparel performance brand with a47% market share in footwear and a 40% market share in apparel

43%

21%

17%

10%

5%4%

North America

Emeriging Markets &

Other

Western Europe

China

Central & Eastren

Europe

Japan


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Converse is a American shoe company thatprimarily retails sports wear and lifestylefootwear. It also operates under the names OneStar, Chuck Taylor All Star and Jack Purcell

- Nike is known for its commitment to creating innovativeand industry leading products, and was ranked the #1

most innovative company of 2013- In 2012, it developed the FuelBand which tracks physical

activities, steps taken, calories burned and allows you tovisualize your progress while competing with friends

- Flyknit Racer, which was developed in 2013, are featherlight shoes that use a reduced number of upper overlays.This helps to significantly reduce production costs andmakes the shoes more comfortable for long-term wear

Sources: UBS, Macquarie Research, Credit Suisse, Piper Jaffray, 7

Recent Innovation

Nike Global Footwear Market share

Nikes Subsidiaries

Company Overview II

Management

Mark Parker, President & CEO

Competitive runner for Penn State who joined Nike as afootwear designer in 1979

Over 30 years of experience in management roles at Nike

Philip H. Knight, Chariman

Has been a director of the company since 1968 and is oneof Nikes co-founders

Previous experience as a CPA with PWC

Don Blair, EVP & CFO

CFO of Nike since 1990, prior to holding various financeand planning roles at PepsiCo.

Holds an MBA from The Wharton School and is a CPA

Nikes continued product innovation has helped it todifferentiate from competitors

Hurley is a global manufacturer and retailer ofapparel, surf equipment, accessories andservices. It was acquired by Nike in 2002

Jordan brand designs and produces shoes and

athletic clothing. The brand was originallyproduced for Michael Jordan; however, wasmade available for public sale in 2001

34%

30%

19%

5%4%

4%

Nike

Other

Adidas

Asics

Puma

VFC


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- Nikes high margin DTC business has been steadily growing over the past 5 years as Nike begins to focus more on its relationshipswith customers and less on wholesaling. Management has indicated they intend to continue investing in its DTC business to reach a

revenue goal of $5B in 2015 (a year earlier than anticipated) and $8B by 2017- DTC margins are significantly higher than any of Nikes other businesses meaning that its gross margin will continue to

expand as DTC becomes a larger percentage of Nikes total sales

- Nike has made significant investments in its e-commerce platform to make it easier for its customers to purchase products fromanywhere in the world

- Continued development of the e-commerce platform will help Nike capitalize on the shift towards online channels. In2013, Nikes e-commerce platform helped drive DTC growth of 30% in the footwear and apparel segments

- North America currently accounts for 60% of DTC revenues. In order double emerging market DTC revenues over the next fouryears, Nike is working to increase store count and finalize an e-commerce platform in its secondary markets


DTC Revenues by RegionDTC Growth as a Percentage of Total Sales

DTC Expansion

Investment Thesis I: Direct to Consumer (DTC) Growth Acceleration

Continued growth of Nikes high margin DTC business will be driven by increased SSS growth, new store openings in large cities, factorystore openings and development of its e-commerce platform

16.4%

23.2%22.8%

26.8%

14.0%

18.0%

22.0%

26.0%

30.0%

Q2 2011 Q4 2011 Q2 2012 Q4 2012 Q2 2013 Q4 2013 Q2 2014

Nike (NKE) Under Armour (UA)

NKEs DTC growth as a percentage of sales is accelerating fasterthan its competitors

$0

$1,000

$2,000

$3,000

$4,000

2010 2012 2014 2016E

International Western Europe North America

Geographic segmentation of Nikes DTC revenues


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- Cash on Hand:Currently, Nike has approximately $4.6B in cash on its balance sheet. Management has indicated that this could beused for acquisitions to further diversify its product offerings or for increased investments in its research and development

programs- Free Cash Flow Generation: Nike is known for its impressive FCF generation. Over the next five years, free cash flow from

operations is expected to exceed $12B, allowing them more flexibility when looking at expansion opportunities or reducing debt.Nikes generated over $2.1B in free cash flow in 2013, whereas its competitor Under Armour, generated approximately $32MM

- Share repurchases: Nike is committed to repurchasing shares. In Q1 2015, the company repurchased 10.6MM shares, valued atapproximately $819MM ($77 per share). This is in line with its four year share buyback plan, where it will repurchase $8B shares(commenced in 2013, and approximately $3.8B remains)

- Dividend Increases:Nikes current quarterly dividend is $0.24 per share. Nike typically increases its dividend in December eachyear, and it is expected that Nike will increase its dividend double digits this year as a result of strong performance


Dividend and Share Repurchases2014 FCF Yield Compared to Peers

Cash Rich Balance Sheet & Capital Deployment

Investment Thesis II: Strong Financial Position

Nikes unparalleled balance sheet and strong commitment to shareholder return makes it an attractive long-term investment

$1,814$1,674 $1,728

$1,800

$2,000$2,100

$619$703

$822$961

$1,115$1,291

$0

$500

$1,000

$1,500

$2,000

$2,500

2012 2013 2014 2015E 2016E 2017E

CapitalDeployed

($B)

Repurchases Dividends

3.8%

(3.5%)

4.8%

3.0%

(4.0%) (2.0%) 0.0% 2.0% 4.0% 6.0%

NKE

Low

High

Median


10/14Sources: Morgan Stanley, UBS 10

Nike ASP effect on Footwear IndustryIncreasing ASP driving GM growth

Pricing Power & Exposure to Global Markets

Investment Thesis III: Dominant Global Player

- New Pricing Strategy:At the end of 2013, Nike introduced a new pricing strategy. This strategy has allowed it to increase ASP by6% in 2014, at a time when the market has been under significant pricing pressure. This year Nike contributed 1.88pp to footwear

industry sales dollar growth- Improved EPS Algorithm: It is important to note that these ASP increases are even more beneficial than initially foreseen. A recent

study of Nikes EPS algorithm showed that a 1pp revenue growth for price has 2.2x the effect on EPS as 1pp revenue growth fromvolume. This has allowed Nike to add 160bps to gross margins in 2013 and another 170bps in 2014

- Chinese Turnaround: Nike has begun to make a comeback in China. This has been driven by DTC and their new category offensestrategy. Revenues from China were up 20% in Q1 2015 due to these changes. The biggest take away is that only 50% of storeshave been reset to reflect these strategies, leaving huge potential for upcoming growth

- Chinese Manufacturing: Mainland Chinese labour costs have been rising at a rate of 20% YoY. Nike is ahead of others and hasalready moved much of its production further south. They only have 20% of manufacturing in mainland China compared to an

industry average of 42%. This will give them an advantage in future years as Chinese manufacturing costs continue to rise

Nikes clear pricing power advantage and growth opportunities will continue to drive earnings growth in upcoming years

42.50%

43.00%

43.50%

44.00%

44.50%

45.00%

21

22

23

24

25

26

27

28

29

2012 2013 2014

GrossMargin

s

USD($BB)

Revenue Gross Margin

Industry Growthvs. Nike Growth

2013 YTD 2014 YTDYoY YoY

Industry Sales ($) $9,173 $9,300 $127 1.4%

Nike Sales ($)Contribution - UnitGrowthContribution - NikeASP

$5114 $5,439 $324$156$168

6.3%

Conclusion:

Total Industry Sales Dollar Growth:Contribution to Industry Growth YOY

$127+1.4%

Contribution to Industry from Nike ASP

Contribution to Industry Growth YOY

$168

+1.8%


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Increasingly Competitive Landscape:

As more and more competitors enter the

retail market it becomes more difficult forNike to differentiate. Under Armour is one ofthe newer companies that could potentiallysteal market share away from Nike,particularly in untapped markets like China.This competition is what is driving innovationfor Nike and it is important that they maintaininnovation moving forward.

Change in Consumer Spending or Preferences

Nike is at risk to both decreases in consumerspending or changes in consumer preference.However, it is currently outpacing theindustry in all growth metrics despite lowerconsumer spending and has a track record ofinnovating to meet customer performance

Effective Mitigation of FX Fluctuations

Nike is a company which has historically beenlargely affected by foreign exchange

fluctuations. However, their trading companywhich opened about two years ago has donea remarkable job at mitigating the effect ofintra-quarter FX changes

Acceleration in Chinese Futures:

As Nike continues to expand in the Chinese

market, any acceleration in futures is likely tobe viewed very positively. Investors like theChinese's market due to the huge potentialfor growth and any sign of increasingpresence in the region would increase sharevalue

Potential Acquisition

Nike has completed a successful string ofaccretive acquisitions. Hurley continues to

outperform, Umbro has extended Nikesposition to make it the biggest player in thefootball (soccer) industry, and Converse is anearly $1B business. Nikes strong balancesheet present opportunities for potentialacquisitions and we believe that Nike wouldbe able to use those to drive earnings due toan impressive track record

Emerging Markets Expansion Driving Revenue

Emerging markets made up $4 billion ofNikes revenue in 2014 and there is still hugeroom for growth in these markets. As Nikecontinues to differentiate from itscompetitors, we see emerging markets as anexcellent place to do this

11

Catalysts Risks

Catalysts & Risks

If Nike is unable to adapt and maintain its placeat the head of athletic apparel and footwear industry, it risks

losing substantial profits to competitors

If Nike is able to expand its global brand while maintainingthe strong margins it is currently operating with we see

significant room for growth

Sources: Morgan Stanley, UBS


12/14Source: CapIQ, Company Reports 12

Valuation I DCF Analysis

Projection Period

2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Footwear 10,307 10,333 11,493 13,426 14,359 16,208 18,153 19,968 21,566 23,075 23,998

Year over Year Growth % 0.3% 11.2% 16.8% 6.9% 12.9% 12.0% 10.0% 8.0% 7.0% 4.0%

Apparel 5,245 5,037 5,475 6,333 6,820 8,109 9,244 10,354 11,389 12,243 12,855

Year over Year Growth % -4.0% 8.7% 15.7% 7.7% 18.9% 14.0% 12.0% 10.0% 7.5% 5%

Equipment 1,110 1,034 1,013 1,202 1,405 1,670 1,904 2,132 2,324 2,510 2,610

Year over Year Growth % -6.9% -2.0% 18.7% 16.9% 18.9% 14.0% 12.0% 9.0% 8.0% 4.0%

Global Brand Divisions & Other 2,514 2,611 2,881 3,167 2,549 1,812 2,000 2,169 2,338 2,521 2,647

Year over Year Growth % 3.8% 10.4% 9.9% -19.5% -28.9% 10.4% 8.5% 7.8% 7.8% 5%

Total Revenue 19,176 19,014 20,862 24,128 25,133 27,799 31,301 34,623 37,617 40,349 42,111

Historical Period

Projection Period

2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

Revenue 19,014 20,862 24,128 25,133 27,799 31,301 34,623 37,617 40,349 42,111

Year over Year Growth % 9.7% 15.7% 4.2% 10.6% 12.6% 10.6% 8.6% 7.3% 4.4%

Direct Costs 10,214 11,354 13,657 14,279 15,353 17,327 19,112 20,689 22,111 22,951

% of Revenue 53.7% 54.4% 56.6% 56.8% 55.2% 55.4% 55.2% 55.0% 54.8% 54.5%

Gross Profit 8,800 9,508 10,471 11,034 12,446 13,973 15,511 16,928 18,238 19,161Margin % 46.3% 45.6% 43.4% 43.9% 44.8% 44.6% 44.8% 45.0% 45.2% 45.5%

Total Selling and Adimn 6,326 6,693 7,079 7,796 8,766 9,844 10,733 11,511 12,266 12,718

% of Revenue 33.3% 32.1% 29.3% 31.0% 31.5% 31.4% 31.0% 30.6% 30.4% 30.2%

EBITDA 2,474 2,815 3,392 3,238 3,680 4,130 4,778 5,417 5,972 6,443

% of Revenue 13.0% 13.5% 14.1% 12.9% 13.2% 13.2% 13.8% 14.4% 14.8% 15.3%

Year over Year Growth % 13.8% 20.5% -4.5% 13.7% 12.2% 15.7% 13.4% 10.2% 7.9%

Less: Depreciation and Amortization 396 358 405 513 632 613 678 736 790 824

% of Revenue 2.1% 1.7% 1.7% 2.0% 2.3% 2.0% 2.0% 2.0% 2.0% 2.0%

EBIT 2,079 2,457 2,987 2,725 3,048 3,517 4,100 4,680 5,182 5,619

% of Revenue 10.9% 11.8% 12.4% 10.8% 11.0% 11.2% 11.8% 12.4% 12.8% 13.3%


Less: Income Taxes 537 736 638 702 856 807 941 1,075 1,190 1,290

Net Operating Profit After Taxes 1,541 1,721 2,349 2,023 2,192 2,709 3,159 3,606 3,992 4,329


Plus: Depreciation and Amortization 396 358 405 513 632 613 678 736 790 824

Less Capital Expenditures 432 563 598 880 897 924 970 1,018 1,069 1,069

% of Revenue 2.3% 2.7% 2.5% 3.5% 3.2% 3.0% 2.8% 2.7% 2.6% 2.5%

Less: Change in Net Working Capital (809) 651 1,123 (431) 710 460 548 494 451 291

Unlevered Free Cash Flow 2,314 865 1,033 2,087 1,217 1,938 2,318 2,830 3,262 3,793

Discount Period 0.5 1.5 2.5 3.5 4.5

Discount Factor 97.2% 91.7% 86.6% 81.8% 77.2%

Present Value of Unlevered Cash Flows 1,883 2,127 2,452 2,668 2,930

Historical Period

Revenue Breakdown


13/1413Sources: Capital IQ, Bloomberg

Valuation II DCF Output & Target Price

Commentary & Assumptions

Discounted Cash Flow Calculations

We broke down Revenue into the companys four main

operating divisions

Revenue growth is on par with analyst estimates

We used a 5 year average calculation to determinedepreciation and amortization and net working capital lineitems

We are projecting a share price of $110.75 which is slightlyhigher than most analysts

Share Price Calculation

PV of UFCF 12,059

Terminal Year Growth Rate 2.75%Discount Rate 5.91%

PV of Terminal Value 73,595

Enterprise Value 85,655

Enterprise Value 85,655

Less: Total Debt 1,347

Plus: Cash and Cash Equivalents 11,105

Implied Equity Value 95,413

Shares Outstanding 862Implied Share Price 110.75

Target Return

Current Share Price $96.17

Target Share Price $110.75

Equity Upside 15.16%

Dividend Yield 0.99%

12-Month Return 16.15%

WACC Calculation

Risk-Free Rate 2.32%

Market Risk Premium 6.70%

Levered Beta 0.83

Cost of Equity 5.96%

Cost of Debt 4.50%

Tax Rate 22.96%After Tax Cost of Debt 3.50%

Capital Structure

Debt 1.9%

Equity 98.1%

Total: 100.0%

WACC 5.9%


14/14

Comparables

Sources: Capital IQ, Company Reports, Thomson One

Valuation I Comparable Companies

Nike trades relatively in line with peers on a Price/Earnings basis and at a premium on an EV/EBITDA basis. We believe that thisvaluation gap is justified and will continue to exist due to Nikes superior strategy execution and brand recognition

NKE has one of the strongest FCF yields, and has a superior ROE to almost all of its comparable peers

NKE issues a 1.1% dividend yield, and is one of the few companies in its peer group to do so

Commentary

Consumers Sector

Company Name Market Enterprise EV / EBITDA 2014 EBITDA FCF Dividend

Discretionary Cap ($MM) Value ($MM) LTM 2014E 2015E 2014E 2015E 2014E 2015E 2014E 2015E ROE Margin Yield Yield

Consumer Discretionary

V.F. Corporation $31,388 $32,975 16.1x 15.7x 14.1x 24.3x 21.4x 0.8x 0.7x 3.4% 3.1% 22.5% 17.5% 2.7% 1.7%

Ralph Lauren Corporation $15,931 $15,517 11.3x 11.2x 10.1x 21.6x 18.8x (0.3x) (0.3x) 9.1% 8.5% 18.8% 18.3% 3.6% 1.0%

Michael Kors Holdings Limited $15,849 $14,837 11.6x 10.5x 9.0x 18.4x 15.8x (0.7x) (0.6x) 4.5% 4.2% 43.3% 36.3% 1.9% -

Under Armour, Inc. $14,709 $14,651 39.3x 35.0x 27.9x 76.7x 60.2x (0.1x) (0.1x) 1.1% 0.9% 16.6% 14.6% 0.4% -

Tiffany & Co. $13,462 $14,165 13.0x 12.7x 11.5x 24.9x 21.9x 0.6x 0.6x 4.7% 4.3% 6.4% 26.2% 2.0% 1.4%

Adidas AG $12,093 $12,300 10.7x 9.5x 8.7x 20.5x 18.1x 0.2x (0.4x) 0.0% 3.1% 10.7% 8.8% 3.8% 2.3%

Coach, Inc. $9,701 $8,963 6.9x 9.4x 8.5x 19.8x 18.2x (0.8x) (0.7x) 1.9% 1.9% 28.3% 20.3% 2.3% 3.6%

Lululemon Athletica Inc. $7,519 $6,793 15.0x 16.4x 14.5x 27.1x 23.6x (1.8x) (1.5x) 1.9% 1.8% 22.4% 24.7% 2.4% -

Skechers USA Inc. $3,058 $2,737 11.3x 15.7 14.4x 27.2x 23.9x (1.2x) (1.0x) 2.9% 3.6% 13.8% 12.9% 2.4% -

Columbia Sportswear Company $3,070 $2,902 12.6x 12.4x 11.1x 24.8x 19.8x (0.7x) (0.6x) 2.1% 1.8% 9.5% 11.9% 1.5% 1.3%

Mean $12,678 $12,584 14.8x 14.9x 13.0x 28.5x 24.2x (0.4x) (0.4x) 3.1% 3.3% 19.2% 19.2% 2.3% 1.9%

Median $12,777 $13,232 12.1x 12.6x 11.3x 24.6x 20.6x (0.5x) (0.5x) 2.5% 3.1% 17.7% 17.9% 2.3% 1.6%

Nike, Inc. $82,851 $79,619 17.9x 16.6x 14.8x 27.5x 24.0x (0.7x) (0.4x) 3.8% 3.6% 25.7% 16.7% 3.8% 1.1%

Price / Earnings Net Debt / EBITDA EPS Growth

$95.00

$100.00

$100.00

$100.00

$105.00

$110.00

$110.75

Deutsche Bank

Macquarie

JP Morgan

Credit Suisse

Morgan Stanley

BAML

QUIC

Analyst Target Price Analysis Share Price Sensitivity

Terminal Growth Rate

2.25% 2.50% 2.75% 3.00% 3.25%

5.51% 107.73$ 114.80$ 123.14$ 133.15$ 145.38$

5.71% 102.97$ 109.22$ 116.53$ 125.19$ 135.61$

5.91% 98.72$ 104.30$ 110.76$ 118.33$ 127.32$

6.11% 94.92$ 99.92$ 105.67$ 112.34$ 120.18$

6.31% 91.49$ 96.01$ 101.15$ 107.08$ 113.98$

WACC

14

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