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Nike Adidas LuluLemon Athletica Under Armour

NIKE, Inc. (NYSE: NKE) Consumer Discretionary – Sportswear

November 7, 2018 D

Riley Callahan Paige Overmohle riley-callahan@uiowa.edu paige-overmohle@uiowa.edu

Lauren Meyer Kelli DeGeorge lauren-k-meyer@uiowa.edu kelli-degeorge@uiowa.edu

Analysts

Investment Thesis

Current Price: $77.97 DCF & EP Intrinsic Value: $85.51

Target Price Range: $83-93

12 Month Performance

NIKE, Inc. (NYSE: NKE) is the world's largest sportswear provider. Nike earns revenue through six reportable segments: Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Training, and Sportswear. They have the largest market share in the footwear and apparel sectors, with 51.8% and 9.5% respectively. Incorporated in 1967, NIKE distributes through a mix of sales representatives, independent distributors, and licensees internationally. Internationally there are 884 NIKE Brand factory stores, 96 NIKE Brand in-line stores (including employee-only stores), 173 Converse stores, and 29 Hurley stores (U.S. only)24.

BUY

Krause Fund Research Fall 2018

Stock Rating:

We recommend a buy rating for Nike, Inc. because their new Consumer Direct Offense grow strategy has experienced initial success in a time of changing consumer trends by capitalizing on international expansion, leading the e-commerce tailwind, and further prioritizing an agile supply chain.

Drivers of Thesis • Nike’s 51.8% and 9.5% respective market stakes in footwear and apparel

will translate to continued growth as the sportswear market expands due toan increase in global physical activity participants and trends in athleisure.

• We forecasted revenues to increase 8.2% in fiscal year 2019, streamlined byrestored North American growth of 3.5% and robust international growthof 39%.

• Technological acquisitions will drive the Nike direct e-commerce platformby adapting online experience to changing consumer preferences.

• We expect Nike’s grow strategy will hold high gross margins due to largeinvestments in supply chain accuracy and speed.

Risks to Thesis • Growth assumptions lack impact of foreign exchange volatility, which

undercut operating income by 11% in fiscal year 2018.• Nike faces large amounts of competitive imitation due to a moderate barrier

to entry and high volume of generic competitors.

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Macroeconomic Outlook U.S. Real Gross Domestic Product (GDP) Steady gains in U.S. real Gross Domestic Product (GDP) are a positive indicator for Nike, as well as the comprehensive consumer discretionary sector, because upwards movement in real GDP indicates increased consumer spending and personal consumption expenditures (PCE). Real GDP represents the market value of all goods and services produced in a nation during a specific time-period, generally in any given year1. Thus, real GDP provides an overarching measure of the health and well-being of an economy in addition to a society’s wealth by indicating how fast profits may grow and expected return on capital. Despite a drop in real GDP from exceptional second quarter reports, third quarter real GDP came in stronger than initial estimates. Third quarter real GDP is reportedly growing at 3.5% which was 0.2% higher than the average consensus1. The primary driver of increased real GDP is consumer spending, which is composed of three subcomponents: durable goods, nondurable goods, and services. Consumer spending and PCE contribute to approximately 70% of real GDP1. Therefore, the steady increase of real GDP provides favorable growth in the consumer discretionary space. Nike directly profits from consumers spending their disposable income on discretionary, goods and services. The most recent forecast estimate for fourth quarter real GDP growth is 2.9%. While we do not expect the growth rate to rise above the recent second quarter spike, we expect real GDP to maintain a steady rate by meeting the historical 80-year average rate of approximately 3.0% due to increases in consumer spending and PCE before dropping closer to 2.2% in the long-run1.

Source: Bureau of Economic Analysis10 Consumer Spending Growth in consumer spending is fostering a healthy macroeconomic outlook for the consumer discretionary sector by encouraging consumption of discretionary goods, such as the athletic apparel and footwear offered by Nike. Consumer

spending is the private expenditures on goods and services including durable goods, nondurable goods, and services4. Consumer spending is an essential factor to the consumer discretionary sector because spending determines expenditures on discretionary goods. When consumers are optimistic about the economy, their spending increases due to minimized concerns regarding unemployment, wages, or recession. Since 2009, consumer spending and after-tax income has been steadily rising. In June 2009, the consumer spending growth rate was –1.4% and the consumer income growth rate was –0.9%6. As shown in the graph below, during 2013, there was a drastic spike and decline in disposable income. Conversely, consumer spending during that time remained relatively constant, thus demonstrating consumer spending’s ability to combat large volatility in short term disposable income. Therefore, while consumer spending and disposable income generally move together, if disposable income experiences radical volatility then Nike will maintain high demand based on consumer spending trends.

Source: Statista21

Consumer spending is strong and income is growing faster than average spending, allowing consumer to save. During the third quarter of 2018, consumer spending grew 4%, which made up two thirds of U.S. economic activity. This increase in consumer spending is the strongest growth since 2014. Disposable personal income increased 4.1% during the third quarter of 2018 and 4.5% during the second quarter. The personal savings rate as a percentage of disposable personal income grew 6.4% in the third quarter and 6.8% in the second quarter. Disposable income and personal savings grew as a result of tax cuts and low unemployment rate, wage growth. Consumer spending and consumer income is on track to continue growing throughout the year. We forecast that consumer spending will grow between 3.6% and 4.0% through the end of the year. We also believe that consumer income will grow between 3.6% and 4.0%. We predict consumer savings to grow between 5.8% and 6.2%. These stimulating economic factors are leaving consumers with higher after-tax income, which has allowed consumers to increase spending.

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Inflation Constant year over year inflation changes provide an opportunity for Nike to grow product price rates as the price of competing consumer products also escalate. Inflation is a sustained increase in the general level or prices for goods and services generally measured by the Consumer Price Index and Personal Consumption Expenditures. In July of 2018, U.S. inflation hit a six-year high of 2.9% CPI, which was well above the Federal Reserve’s (Fed) target rate of 2.0%3. This drastic upward pressure primarily resulted from spikes in fuel oil and gasoline. Third quarter year over year percentage change for CPI in 2018 dropped to 2.6% while the year over year percentage change for PCE came in at 2.2% as a result of the Fed raising interest rates to mitigate increasing inflation. In 2007, the federal funds rate, the 1-year treasury and the 10-year treasure constant maturity rate were all near 5%. Since then, the federal funds rate and the 1-year treasury dropped near zero. Then in 2016, the Federal Reserve began raising rates and are now over 2%. The 10- year treasury experienced less fluctuation and dropped down to 1.5% and has now increased to meet the federal funds rate and the 1-year treasury7. Forecasts estimate CPI to maintain an average 2.4% year over year percentage change2. We implement this 2.4% change to adjust for inflation while forecasting increasing prices of monthly membership. Our total growth rate decays through the 2027 terminal year, but consistently sustains a growth rate above 2.4%.

Source: Bloomberg2

Source: FRED Economic Research7

Consumer Confidence Index Long-term growth shown by the Consumer Confidence Index favorably positions Nike by encouraging spending within the consumer discretionary sector overall. The Consumer Confidence Index (CCI) measures consumer optimism regarding the future outlook of the economy. CCI is a significant economic indicator for the U.S. economy and for the consumer discretionary sector. When CCI is high, meaning that consumers are optimistic about the economy, individuals tend increase spending and purchase more goods/ services, thus stimulating the economy. In 2009, consumer confidence was at an 18-year low hitting below 40.0. The index has risen consistently since that record-low and reached an all-time high of 144.7 in 2000. The most recent release in October 2018 reported CCI as 137.9. We predict that the consumer confidence index will maintain strong performance but decrease approximately 5.0 by the year-end to justify the index before approaching record high levels.

Source: Bloomberg2 Labor Market Unemployment Rate Record-low unemployment rate lows are partially driving Nike’s market share growth and consumer discretionary sector overall because as more workers earn a steady income, more are making discretionary spending purchases. The unemployment rate reflects the number of unemployed people as a percentage of the labor force, the number of people either working or actively seeking work. The unemployment rate is considered a lagging indicator as it measures the effect of economic events; therefore, the rate is essentially a strong confirmation of other economic indicators. The unemployment rate peaked at 10% during the downturn in October 2009. Subsequent rates have gradually fallen to its historical average of 5%, while breaking record lows near 4% in the past few years8.

The primary factors of job creation and level of employment have great influence on the demand for consumer goods, especially discretionary Nike sportswear products. As of the October job

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report, the U.S. economy added 250,000 jobs, continuing more than a seven-year streak of growth. This unanticipated spike in job growth caused the unemployment rate to remain at 3.7% for October, the lowest level since December of 1969. Strong economic stimulation has driven the creation of record jobs levels. For example, the Tax Cuts and Job Act of 2017 has incentivized companies to make additional investments in human capital, such as additional job creation. There are currently more open jobs in the U.S. market than there are workers to fill them. Consequently, we expect the unemployment rate to fall to 3.6% and remain stagnant in the next 6 months as jobs continue to fill. The economy has performed strong; however, we do not think the record lows will persist into the long term. We expect the rate to climb higher to a more consistent 4.2% in the next 3 years. Wage Growth Gains in wage growth will continue to benefit Nike and the consumer discretionary sector as workers generate larger amounts of disposable income. Wage growth is described as the growth in average hourly earnings. Wage growth has been the largest laggard amongst economic measures in making up progress since the 2008 recession. The unemployment rate has reached record lows, while wages have grown steadily from 1.6% to a stagnated average of 3% in the past 8 years9. While wages are increasing, certain analysts are showing concerns that growth has been occurring too slowly. One possible reason for wage growth moving slower than expectations is that workers are being rewarded in alternative ways to their salary, such as signing bonuses, health benefits, and flexible personal leave time. Another potential reason is that more senior workers receiving higher wages are retiring and are being replaced by junior employees with entry level earnings, thus decreasing average wages which slows wage growth. Wage growth is necessary to keep up with inflation growth and provide excess discretionary income for Nike and the consumer discretionary sector. Inflation increases prices on goods, alternatively decreasing the amount of consumer spending power. Inflation measured by the year-over-year PCE change reflected 2.2% for September 2018, hovering just above the Fed’s 2% target3. Wage growth increased to 3.1% in October 2018, nearly 30 basis points higher to the same time as last year10. Wage growth enables consumers to mitigate the effects of inflation, which is likely to remain around 2.4% in the long term. Excess wage growth results in the generation of discretionary income to be spent on Nike products. Unemployment rate and wage growth have an inverse relationship. As the unemployment rate lowers, wage growth economically tends to increase. The unemployment rate has been experiencing record-breaking lows, including a large worker shortage. We predict wages will increase because companies “will have to start paying people higher wages as they compete over the dwindling supply of workers”5. We expect wages to grow to the 3.5% range in the next 6 months. In the

next 3 years, we expect wages to grow but at a cooler rate of the 3% average.

Source: U.S. Bureau of Labor Statistics5 Foreign Currency Foreign currency poses a significant risk for Nike because 65% of revenue is generated internationally24. Strengthening domestic currency equates to lower returns of foreign investment when converted back to domestic currency. Exporting internationally also makes products more expensive to foreign consumers. This year, the U.S. dollar index has surged to highs of 97.13. Moves in emerging market currencies have also been staggering, especially for companies with exposure to India, Latin America, and Asia. The fluctuations have cut into corporate earnings and caused companies to issue warnings prior to earnings season. Through October 11, FactSet searched 24 earnings calls for keywords and themes. This research showed that 60% of the companies mentioned stronger dollar and foreign exchange issues as a negative impact on revenue and profit, up from 28% mentioned last quarter17. Many companies use hedging programs to lessen the impact of currency swings. Moving forward, foreign exchange will likely cause companies to continue to face headwinds as the Fed increases interest rates and the trade war rhetoric continues. Although it poses a risk for Nike, we believe their hedging efforts are proactive and can withstand the slight impact on margins. Nike’s foreign exchange risk is discussed further in the Company Analysis.

Source: Yahoo Finance12

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Capital Markets Outlook We expect positive market conditions for the consumer discretionary sector based on relatively high real GDP growth rates and record-low unemployment rates driving wage growth. These macroeconomic factors are positively influencing the consumer discretionary sector due to their impact on consumer spending, specifically in the non-durable goods space. Given the strong correlation between consumer spending and overall economic health, we expect the consumer discretionary to present favorable growth opportunities moving forward.

Industry Analysis The sportswear industry is a specific subset of the retailing industry within the consumer discretionary sector. In this subindustry, the primary goods sold are athletic apparel and footwear, both of which are discretionary items. Consumer spending on these goods is heavily influenced by the economic factors described above. Therefore, the revenues for companies competing in this space are very dependent on the performance of the entire economy. Globally, the sportswear industry is estimated to be worth $1.3 trillion23. Specifically, the footwear market in the U.S. is forecasted to be worth $79.86 billion in 2018 alone. The industry focuses on manufacturing and selling a variety of products including athletic footwear, athletic apparel, equipment, and any other products designed to enhance physical activity performance23. As shown in the graph below, the sportswear industry has been on a rising trend in terms of global revenue. We expect population growth, recent trends, and new opportunities to propel continued growth in the industry.

Source: Statista19

There are many players at a wide variety of sizes within the sportswear industry, as shown in the graph below. Across the spectrum of industry competitors, Nike and Adidas have the largest stake in the market overall at 15.7% and 10.3% respectively. Their significant hold on the sportswear market results primarily from product quality and an established brand name. Specifically, Nike has the largest market share due to the company’s extensive history in the industry which has allowed them to be recognizable across multiple generations.

Source: Net Advantage29

Global Physical Activity A key societal metric for the sportswear industry is the number of consumers participating in physical activity around the world. It provides a vision for the number of potential consumers and growth opportunities available within the market. The world population is comprised of nearly 7.7 billion people, including nearly 75% over the age of 15. In 2016, 72% of adults were sufficiently physically active25. This means nearly 4 billion adults participate in some form of physical activity. Geographically, 500 million people in the United States and China alone are active on a weekly basis24. The desire to live a healthier lifestyle has been a large driver of this metric. Social media is also playing a large role in connecting fitness, diet, and group morale. We expect the number of physically active people to continue to grow for the foreseeable future. Consequently, these factors will widen the sportswear market, creating new opportunities for growth and expansion within the industry.

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Competitive Positioning The sportwear industry is extremely competitive. The market is saturated with big name players and numerous generic brands competing for even the slightest market share across footwear, apparel, and complementary equipment. Industry leaders, including Nike, Adidas, and Under Armour, have been forced to make their own strategic shifts to adapt to consumer trends and promote their premium competitive advantage. Footwear

Source: Net Advantage23

In the footwear subindustry, there are far fewer major players. Nike holds the largest share in the market, followed by Adidas. Combined. As shown in the graph above, the two sportswear companies maintain a 62.7% share of athletic footwear. This competitive hold on the market is primarily based on their research and development investments made in innovative platforms and cushions. However, the subindustry has seen increased amounts of footwear brands emerge in the last 5-10 years in an attempt to gain market share through shifting trends. These new entrances have caused the “Other” market share to be larger now than in previous years. Apparel

Source: Statista4

In the past 10 years, branded athletic apparel sales have grown by $2.2 billion (13.03%). Industry leaders maintain the largest market shares, but there is a larger number of competitors in the apparel subindustry. Recent societal shifts towards casual dress have incentivized new entrants to venture into the athleisure market. This social shift has led to higher demand for athletic apparel designed to be worn for casual activities and even in the workplace. The athletic apparel industry has also expanded into new trending physical activities, such as all-condition outdoors gear and yoga attire. This expansion has also contributed to the recent boost in industry sales. Equipment In the past seven years, the equipment industry has grown from $11.3 billion to $13 billion23. Equipment has largely grown through the sport specific training and competition gear space. Accessories have also been popular from a fashion sense. Fishing articles and equipment, summer sports equipment, and winter sports equipment have remained relatively steady throughout this time. Key Industry Metrics

Source: Statista4 The graph above demonstrates the major players’ relative revenue and operating income performances in 2017. Nike is the clear leader, but the opposing competitors have cut into their market share. In 2017, both Adidas and Lululemon Athletica experienced 14.8% and 13% revenue growth respectively compared to Nike’s growth of 6.1%. The revenue growth took a specific cut into Nike’s North American market share as the segment’s revenues decreased by 2.4%.

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Nike Adidas Under Armour Lululemon Athletica

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The graph below provides an analysis of Nike’s largest publicly traded competition in the sportswear industry. The industry as a whole is experiencing a higher P/E multiple than years past due to high growth and returns in the last few quarters. Under Armour and Lululemon Athletica are both on much steeper growth slopes than competitors, so their P/E multiples are even higher than the industry average. COGS/Net Sales ratios were also examined because the analysis of gross margins is vital when for companies that outsource their products. Lululemon has the highest returns on their sales, followed by Adidas and V.F. Corporation. COGS/Net Sales is a key metric that Nike will focus on having faced backlash in their most recent earnings announcement. While Nike clearly has the largest by market cap, the company will need to remain competitive across all financial metrics to satisfy high investor expectations.

Source: Bloomberg2 Recent Industry Trends Lifestyle Developments Recent cultural trends have developed massive popularity for athleisure, with the style’s revenue up 17% in the US alone24. Historically, sportswear was exclusively worn to the gym for working out. However, the production of more fashionable sportswear, increased health consciousness, and increasingly relaxed work environments have made wearing sportswear acceptable for activities outside of working out. The chart below reflects Morgan Stanley’s projection for global activewear sales based on these lifestyle developments. In our forecasts we projected similar growth to those reported by Morgan Stanley based on these factors.

Source: Morgan Stanley8

Personalization As technology continues to allow retailers to easily tailor products around consumer preferences, the cultural demand for personalization of consumer products is steadily increasing. Society has recently seen brick-and-mortars suffer while the digital age has taken the retail industry by storm. Personalization is bridging the gap between physical store and e-commerce experience. The graph below shows the willingness generational consumers possess to exchange their own personal data for a more personalized shopping experience. To engage in new trends, large sportswear brands, including Nike and Adidas, offer a variety of custom-designed shoe options. Simultaneously, small boutique industry competitors are investing in customized functional enhancements, such as connecting footwear to smartphones. Companies are also utilizing artificial intelligence to understand a consumer’s individual style and suggest additional purchases. To gain a competitive advantage, companies will need to invest in new technologies that have long-term potential to increase positive product and experience engagement.

Source: Revel Systems26 Technology Innovation The most successful companies within the industry exemplify commitment to agile technology innovation. Advancements in technology includes improvements to the manufacturing process as well as physical apparel improvements. Market leaders including Nike and V.F. Corp differentiate themselves within the industry through innovative disruptive technologies which eliminate supply chain inefficiencies while simultaneously facilitating convenience and personalization opportunities for consumers. We expect capitalizing on these technology advancements will allow leading companies to effectively sustain long term growth by meeting consumer demands for convenience and functionality23.

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Catalysts for Growth Performance Products The performance category is defined as higher priced products because their high-tech specifications guarantee improved performance. The category encompasses products that are made with materials that benefit a specific type of activity, such as climate-cool shirts for running. It has become one of the most dynamic categories within sportswear, with expectations to generate nearly a total of 10% growth from 2016-2021. The large players in sportwear are well positioned and equipped to capture such growth opportunities because of their product development capabilities and consumer reach. Although the companies are experiencing price pressure from other markets, the key players are still in a strong competitive position to be both fitness-focused and fashion-focused. International Expansion Key players in the sportswear industry generate significant revenues in their domestic markets but are also pursuing international revenue growth in emerging markets. Data availability and digital innovation has allowed retail, specifically e-commerce, to expand internationally. The majority of sportswear industry leaders have successfully established a strong presence in Europe, Latin America, and the Asia-Pacific region. The leader in international sales is currently the Asia-Pacific region which represents one third of total sales in the apparel and footwear industry. Companies are now developing a larger presence in emerging markets such as Africa and the Middle East. Movement into these new markets will require identification of local market conditions and cultural customs for optimal growth and success. The industry is working to reach more diverse audiences. For example, in December of 2017 Nike released a hijab23. This release was due to a wide variety of athletes, including professionals, previously wearing children’s hijabs made from a “doubled georgette material”. As athletes began to sweat, the small hijab inhibited their hearing and interfered with their ability to compete at the highest level. Nike’s strategic move to expand internationally through these diversification efforts will provide a long-term benefit to growth forecasts. E-Commerce Development Companies within the industry are shifting their focus from traditional brick-and-mortar to direct-to-customer channels in accordance with customer demand. Total sales growth for e-commerce channels increased 14.7% in 2017 as compared to 201623. This shift to online commerce is driven by benefits provided to both the consumers and retail manufacturers. Internet sites enable retailers to tailor merchandise items to customers’ specific needs, thus improving customer relations for the company. Additionally, consumers can shop in any location at their convenience. This plays a pivotal role in competitors’ ability to gain global market share in the industry, especially in emerging markets. Nike is at the forefront of this strategy for the sportswear industry.

The graph below outlines both the growth catalysts of international expansion and e-commerce development. It is evident that e-commerce is growing across the entire world, but it is more specifically being driven in emerging markets. China and Europe have provided the largest growth opportunities for industry competitors. An e-commerce platform especially drives growth in these regions for companies who do not have the physical store capabilities such that of Nike. Although, Nike has even larger growth opportunity through both brick-and-mortar stores and Nike Direct.

Source: Shopify11

Porter's Five Forces Threat of New Entrants: Moderate and Increasing Nike sustains new entrant threats because of their high loyalty as a premium brand, but competitors emerging with closely-imitated products are becoming an increasing factor. The industry is currently experiencing an athletic leisure-wear trend that is creating a niche following by an abundance of new retailers, especially in footwear and clothing. The investment to begin a company is not large, but it will be difficult to make additional investments into a company that is solely niche-based. It will take large amounts of time and investment for a company to reach the brand image and revenue streams of Nike. We don’t expect the athleisure trend to wane off in the short term, but when the trend begins to cool, Nike’s outlook will also be favorable because it is more challenging for the niche companies to become a mainstream brand when their only revenue stream declines.

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Threat of Substitute: Moderate and Increasing Nike faces high threats of substitutes because of the nature of their products. Nike is a premium brand with high quality products, so it is much lower cost to switch companies for a slightly lower quality product. Due to the athletic trend, large brick-and-mortar retailers and online ecommerce stores, including Amazon, have added generic footwear and apparel to their inventory as a cheaper alternative to brands such as Nike. There is also a threat of counterfeit goods being sold online. It will be important for Nike to promote their premium quality and use their innovation capabilities to lessen the threat of substitutes. Bargaining Power of Buyers: Moderate and Increasing Nike is the current market leader of the sportswear industry, but their large amount of competition mitigates their control over buyers. Buyers face the decision to choose a premium brand, like Nike, or a more generic brand, like Champion for Target. However, Nike prides themselves in their strong brand loyalty. It believes its consumers will pay a premium for its products, so it still holds moderate control over buyers in the industry. Bargaining Power of Suppliers: Low and Decreasing Nike holds strong control over its suppliers, so their bargaining power is relatively low. Nike holds its suppliers, especially finished goods, to highly regulated standards in order to be audited each year. Nike has hundreds of suppliers around the world and if a supplier doesn’t adhere to the standards, Nike can easily hire a new supplier or increase production at a current supplier. A supplier could easily lose a large source of revenue, so it holds them very accountable to respect Nike’s decisions and goals. Competitive Rivalry: High and Increasing The competition in the sportwear industry is strong. The mainstream brands, like Adidas and Under Armour, are battling for new market penetration, especially internationally, as the entire sportswear industry is widening. The number of direct competitors to Nike is low, but it makes competition very aggressive amongst its few mainstream competitors.

Company Analysis Corporate Strategy In June 2017, Nike announced the implementation of a new corporate strategy called Consumer Direct Offense. Nike recognized that that although they were growing, it was at a slower pace than in early 2014 and 2015. The new strategy is to better serve its customers in a changing retail environment by focusing on their biggest growth opportunities. Nike is breaking old models by realigning teams to add resources to fast growing cities, edit lines to create more choice of top selling products, invest in data analytics, and lead in mobile activation and speed. The following operating segments were realigned and consolidated from 6 to 4 by geography to improve marginal efficiency: North America; Europe, Middle East, and Africa (EMEA); Greater China; and Asia Pacific and Latin America (APLA). The Consumer Direct Offense initiative is driven by Nike’s Triple Double strategy of 2X innovation, 2X speed, and 2X direct connection to consumers. In the new strategy, Nike is targeting 12 key cities across 10 countries to streamline their production cycle by testing highly dense and diverse markets with new products to understand the changing trends of consumers. The cities include: New York, London, Shanghai, Beijing, Los Angeles, Tokyo, Paris, Berlin, Mexico City, Barcelona, Seoul, and Milan. The performance of the cities will be closely monitored as they are expected to account for 80% of Nike’s growth until 2020. Nike is aiming to revitalize the North American retail landscape and accelerate international momentum. In fiscal 18, Nike experienced immediate progress of 5-year financial goals set for the new strategy. New innovation platforms scaled across multiple categories helped fuel Nike sportswear to a $10 billion category, the largest sportswear business in the world. Through investment in technology and mobile personalization, digital e-commerce grew 27%. Geographically, Greater China experienced the greatest segment gain of 21% along with growth in other international segments. North America, the largest segment, also returned to sustainable growth metrics. Aside from financials, Nike made progress through marketing initiatives that solidified their goal to leverage deeper connections with consumers.

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Analysis of Recent Earnings Nike released fiscal 2019 Q1 earnings on September 25th, 2018. Analysts’ estimated earnings of $0.62 were beat by actual earnings of $0.67. Revenue guidance of $9.9 billion was mirrored by a $9.9 billion performance, up from $9.79 billion in fiscal 2018 Q4. We expected earnings to best the estimates as the Consumer Direct Offense strategy has begun to fuel operations and push revenue growth back to similar levels of 2015 (10%). Nike also benefited from tax cuts and their international presence in the World Cup Final (both teams are sponsored by Nike). However, investors had much higher expectations of the corporate strategy and were disappointed in an increased gross margin of only 50 basis points to 44.2%. The slight increase can be attributed to higher average selling prices and margin expansion in Nike Direct with larger than expected offsets by Consumer Direct Offense costs. The strategic investments are beginning to make an impact on the gross margin, but we think they are being absorbed well by the incremental revenue streams. Following fiscal year 18, Nike raised its guidance expectations of FY19 revenue growth from mid-to-high single digits to high single digits. Historically, Nike has performed higher in Q1 and Q4, so guidance and expectations are slightly lower for fiscal 19 Q2. Analysts are estimating a Q2 EPS to be $0.45.

Source: Nike 2017 Annual Report24

Product Lines Nike’s product lines include footwear, apparel, equipment/accessories, and the Converse/Hurley brands. These product lines are Nike’s primary source of revenue. The Nike brand product lines are segmented further into six categories: Runnings, NIKE Basketball, Jordan Brand, Football (soccer), Training, and Sportwear.

Footwear Nike’s footwear product line will continue to increase revenue by focusing on their extensive research and development. Footwear accounts for 61% of Nike revenue, with strong growth in the Sportswear and Running segments. Footwear sales grew 4% in 2018 with 2% attributed to higher sales prices, as inflation increases, and 2% to unit sales, primarily due to favorable impact of Nike Direct24. Because footwear impacts the bottom line more than any other product line, Nike emphasizes their efforts on research and innovative construction. In fiscal 18, Nike revealed their React cushioning platform to be used in Running shoes. Due to its popularity, Nike intends to reveal shoes in categories such as Sportswear and Jordan using the same React platform. We also expect Sportswear and Running growth opportunities across all geographic areas given lifestyle trends and higher prices. Footwear’s future success will be very dependent on changing consumer trends and its ability to capitalize quickly on Consumer Direct Offense feedback. Apparel Nike apparel will continue to grow at record-high levels by appealing to both the sports and leisure markets. Apparel accounts for nearly 30% of total Nike revenue, led by top-selling categories in Sportswear, Nike Basketball, and Football (soccer). Apparel grew 9% in 2018 with 5% attributed to sales prices and 4% to unit sales24. In the sports market, Nike experienced growth in Nike basketball due to their new partnership with the NBA and in Football from an all-Nike World Cup Final between France and Croatia. Continued growth on the international sports stage will be driven by the health of Nike’s endorsement deals with major athletes and teams. Nike’s leisure market also has growth opportunities that include not only in Sportswear but the Training category as well. Apparel in these categories is bought for more casual/lifestyle purposes. Nike must continue to seek out customer preferences to adapt to both markets. We think the markets will contribute to revenue growth at higher rates to provide a larger cushion for footwear’s large revenue share. Equipment Equipment will maintain its complementary purpose to the footwear and apparel product lines by adapting to consumer trends. The product line includes bags, socks, sport balls, eyewear, timepieces, and other equipment designed for sports activities. Equipment accounts for nearly 4% of total Nike revenue24. Although we do not expect drastic growth from this category, we think the largest driver of its growth will be its mobile device applications. NIKE+ and a variety of other downloadable applications give consumers real-time digital access to new releases, sponsorship information, and fitness training. Other forms of equipment will likely depend on the performance of the footwear and apparel lines revolving around latest fashion trends and endorsed athletes/teams.

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Converse/Hurley The Converse and Hurley brands have generated decreasing returns in recent years due to increased competition. The Converse brand creates casual sneakers, apparel and accessories, making up 5% of total revenue. The Hurley brand produces action sports and youth lifestyle apparel; however, its financials are consolidated with the North American operating segment. Converse will likely need to focus its efforts on added design and innovation under the Chuck Taylor trademark to regain market share it once obtained. Both Converse and Hurley were not large factors behind our growth analysis because of their differentiated purpose within the company.

Source: Nike 2017 Annual Report24

Source: Nike 2017 Annual Report24

Manufacturing/Distribution Manufacturing A large component of Nike’s supply chain is their manufacturing processes and logistics. Nearly all footwear and apparel manufacturing take place outside of the United States by independent contractors in 529 factories across 41 countries24. Nike chooses to manufacture remotely as a cost-effective way to produce inventory in mass amounts. The price of labor is also a primary choice to manufacture abroad rather than domestically. We do not expect Nike to move manufacturing to the United States, unless the efficiency of automatic factory implementation becomes a greater cost advantage.

Source: Nike 2017 Annual Report24

The manufacturing gross margin has suffered unfavorable changes in foreign currency the past two fiscal years. Recently, the trade tariff rhetoric has also raised questions about manufacturing costs. China supplies more than 50% of Nike footwear, which accounts for 30% of revenue. Although prices for Nike will increase, we believe their margins will be less impacted because of 2 factors. One, Nike margins fares much better than other companies in the industry because of their ability to lessen their presence in China, especially over the last few years (32% in 2012 to 27% in 2017). They’ve been able to relocate to other factories in Asia, like Vietnam6, without much harm done. Additionally, Nike has a greater ability to pass increased prices along to their customers than other competitors as a premium wholesaler. Despite foreign currency and trade tariff headwinds, we expect each to become more promising as the United States' international affairs begin to cool down following the midterm elections. We also expect the Consumer Direct Offense to mitigate the macroeconomic factors and boost margins even further.

Footwear, 64.57%

Clothing, 29.49%

Equipment, 3.84%

Converse, 5.18%

Nike Product Line Breakdown(as % of revenue)

Running, 17.15%

Nike Basketball, 4.93%

Jordan, 9.43%

Football, 7.08%

Training, 10.32%

Sportswear, 33.06%

Other, 18.03%

Nike Sport Line Breakdown(as % of revenue)

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Distribution Nike has 57 distribution centers across 4 countries, including 5 in the United States, available to distribute merchandise. Products are distributed through wholesale operations and the Nike Direct operations. Wholesale operations, such as large department stores and Nike’s merchandise stores, account for nearly 70% of distribution, making Nike highly dependent on the performance of the rest of the retail industry. Nike Direct operations grew 3% in fiscal 18, and we expect even higher levels for the upcoming fiscal years. Nike distribution will be driven by their new take on high-speed supply chain for footwear called Express Lane. The digital world has given consumers much higher expectations for creation-to-market speed. Retailers previously had to put in orders for footwear months in advance. The Express Lane system cuts down the time period of product design to availability on store shelves from months to weeks. For example, in 2016, the LunarCharge shoe platform took 2 weeks to appear on Nike’s website from when it was released by company executives. The system is also being heavily used in China to sustain satisfaction and double-digit growth. Express Lane has direct correlation with the Triple Double strategy to double product creation speed, so we expect the improved output to provide a large competitive advantage internationally, especially in the key 12 cities. Competitive Positioning Nike primarily competes against mainstream sportswear and outdoors retailers. Nike and its competitors focus on creating footwear and clothing that enhances physical activity experience. The competitive environment requires Nike to continually improve upon quality, selection variety, and consumer experience through innovative research and development. Adidas and Under Armour are currently the largest threats to Nike, but there is a vast quantity of off-brands competing for market share. Consumer retail leader Amazon recently ventured into the athletic apparel space under their private label, AmazonBasics. Lululemon, which started as women’s yoga-inspired apparel, intends to masculinize their brand and target more men consumers. Regardless of new entrants, we expect Nike to remain a leading contender due to their product selection and customization capabilities.

Catalysts for Growth Technology Acquisitions In such a competitive environment, companies are attempting to regain popularity by getting as close to the consumer as possible. Consumer Direct Offense has demonstrated Nike's grasp on the changing conditions of the industry to more personally serve consumers. The underlying driver of consumer connection is information technology and how to interpret its data. In March 2018, Nike acquired Zodiac, a leader in consumer data and analytics based in New York. Nike intends to use their capabilities to power a 1:1 relationship with consumers through both digital and physical experiences24. Additionally, in April 2018, Nike acquired Intervex, a strategic computer vision firm based in Israel. Interex’s expertise in artificial intelligence will give Nike an advantage in the consumer experience at every click on the Nike Direct platform24. To solidify Consumer Direct Offense, we think Nike will benefit from continuing to invest in technology acquisitions to strengthen full price sales. Although the growth cannot be numerically proven, we think the investment will prove to be profitable in the long term. M&A Activity Increases:

Transaction Date Strategic Use

Zodiac acquisition

March 2018 Focus on customer relationships and lifetime value

Intervex acquisition

April 2018 Computer vision and artificial intelligence

Source: Nike 2017 Annual Report24

Demand Creation The cultivation of Nike’s strong brand and consumer loyalty will push them forward in the competitive environment in both the sportswear and textile industries. Nike presents themselves as an innovative company while also looking to impact society. They do so by hosting large marketing campaigns, endorsing the highest-level of athletes, and placing their brand on a variety of media outlets. The line item Nike attributes these costs to is called “Demand Creation”. In fiscal year 18, Nike spend $3.58 billion on demand creation, including an increase of 7% from fiscal year 17 attributed to higher marketing costs24. Although the expense is steep, we think It's essential that Nike makes incremental increases in their demand creation each year to have immediate visible impact on consumers. As the preferences of consumers change, the larger the positive public presence Nike has, the better.

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SWOT Analysis Strengths Strong Brand Image Nike relies greatly on their strong brand loyalty to attract customers. Their strength is their ability to adapt to changing consumer trends while also centralizing campaigns around social issues. Nike’s “Swoosh” logo and iconic slogan “Just Do It” have been trademarked for over 30 years, living through years of changing lifestyles. Their logo is visible amongst athletes across the globe. They’ve penned lifetime contracts with Michael Jordan, Lebron James, and Christiano Ronaldo to be the face of their mission. James’s exclusive Nike brand was the top-selling basketball shoe in 201724, providing high returns on a growing category. In fiscal year 18, Nike spent $1.4 billion on endorsement contracts that represented base compensation minimum guarantee royalty fees. The endorsements are costs of brand awareness and positive product connotation with increased credibility. The goal of endorsement deals is to ultimately pay them off through increased profits. For example, Nike recovered 57% of its $181 million Tiger Woods investment solely through U.S. golf ball sales28. Products are also licensed with the NBA, NFL, collegiate athletics, and number football (soccer) clubs/national teams. Nike marketing campaigns have also heavily influenced their success in the digital era. Their most recent commercial, “Dream Crazy” featured Colin Kaepernick, former NFL quarterback, that created stimulation in society. While it gave Nike the publicity of nearly 27 million views on YouTube alone, they also took a stance on an issue that’s much larger than sport. Nike’s attempt to sell more than a product – an attempt to tell a story and sell inspiration has resonated with consumers’ brand loyalty, creating a ripple effect to their products for decades. Extensive Global Reach Nike’s global presence has given them an advantage over numerous competitors. Nike’s expansion into international markets has been one of their best assets for a long period of time. Besides North America, the other three of their operating segments are located on five other continents that account for 55% of their total revenue. North America experienced a –2% change in revenue for fiscal year 18, so international expansion played a key role in beating earnings expectations. The other three segments accounted for a combined 45% revenue growth. International growth has provided a cushion for the North American segment to take necessary time to revitalize and restore its market share. We think the three international operating segments, especially EMEA and Greater China, have extensive room for growth nearing double-digits.

Source: Nike 2017 Annual Report24

Operating Segment Growth:

Segment 2016 2017 2018 North America 7.5% 3.1% -2.4% Greater China 23.5% 11.9% 21.2% EMEA - 5.3% 16% APLA - 9.7% 9.1%

Source: Nike 2017 Annual Report24

Weaknesses Dependency on athletic footwear The roots of Nike originate in footwear, dating back to Bob Bowerman in 1971, and has been their mainstay ever since. Running and basketball have generated the highest revenue in the company’s existence. Today, footwear accounts for 61% of total revenue, largely affecting the bottom line. However, the athletic footwear industry has experienced fashion trends that have affected Nike’s market share in recent years. Consumer preferences are changing to leisure-inspired and not athletics. Basketball shoes, like the Nike Jordan brand, have especially taken a toll as a result. In fiscal year 17, Nike and Jordan lost market share, while Adidas’s share boosted ahead of the Jordan brand. Moving forward, Nike’s focus on athletic footwear could hurt their market share if they do not expand more of their lines in the casual fashion space.

Source: Yahoo Finance1

North America40.81%

EMEA25.39%

Greater China14.11%

APLA14.19%

Other5.49%

Nike Operating Segment Breakdown(as % of revenue)

35.90%

14.80%

6.30%

34.70%

11.80% 11.30%

0%

10%

20%

30%

40%

Nike Jordan Adidas

U.S. Athletic Footwear Market Share (%)

2016 2017

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Dependency on independent contractors As previously stated, Nike relies solely on independent contractors in foreign countries to manufacture their products. Independent contractors are responsible for purchasing materials, producing goods based on specific blueprints, and shipping products to distribution centers around the world. A key downside to the use of independent contractors is Nike’s ability to monitor quality control, especially as a premium brand. When products are manufactured by an entirely different entity, Nike officials have close to zero say in the way assembly lines and factory workers complete their job. It could result in diminishing margins and increased product cycle time. As automatic manufacturing become a larger topic of conversation, Nike could minimize quality control risk if they begin to manufacture in their own factories. However, this poses a large investment that we do not expect Nike to venture into soon. Opportunities Clothing Expansion Although Nike holds over 30% in footwear market share, clothing expansion has positive growth opportunities as a response to changing trends of consumers, especially non-athletes. The overall wardrobe of consumers has become much more casual, including workplace dress codes. A new generation is looking for not only fashion-inspired shoes but also extensive choices in trendy clothing and accessories. It has widened the overall market for sportswear, creating an even bigger growth opportunity for Nike in their clothing product line. Nike’s clothing sales growth was larger than footwear in fiscal year 18 because of growth in the Sportswear and Training categories. We believe these lifestyle-inspired categories provide large room for growth and market share as consumer preferences change. It will not only increase market share within the sportswear industry but also gives Nike a competitive advantage in the overall retail/textiles industry. Product Line Revenue Growth:

Segment 2016 2017 2018 Footwear 15% 8% 4% Apparel 11% 9% 9% Equipment -2% -3% -2%

Source: Nike 2017 Annual Report24

Leveraging Technology The partnership of fitness and technology has become increasingly popular in the last few years. Nike has an established relationship with Apple through downloadable applications. The apps, like NIKE+ and SNKRS, provide original fitness workouts, an activity tracking device, immediate product releases. Nike’s activity tracker is a fuel band, worn on your wrist to track fitness achievements. We think Nike can leverage technology even beyond their apps and accessories. With extensive research and development, Nike has an opportunity to explore the area of wearable devices in both clothing and footwear. Nike could potentially break through into a whole new market by, for

example, creating an activity tracking device that is placed directly into a pair of running shoes or a shirt that tracks heart rate and blood circulation. Especially as the world population becomes more health conscience, the use of new technologies would be a great resource for consumers to self-improve. An investment in this type of research and investment could be very profitable for Nike, whose products are already considered premium to consumers. Threats Foreign Currency A large factor for the Nike operating segments is the threat of foreign currency exchange. Foreign currency not only squeezes foreign sales but foreign manufacturing costs as well. In fiscal year 18, Nike’s operating income decreased by 11% due to negative foreign exchange effects, most heavily influencing Inventory and Cost of Sales. To mitigate these risks, Nike uses a currency hedging program. The program delays the impact of foreign exchange movements for a 12-24-month period in developed markets such as the Euro, Yen, and Sterling. In some cases, hedging avoids volatility all together, usually in the short term. Nike does not hedge some emerging markets, such as Argentina, Turkey, and Brazil, because they do not make as much economic sense to do so. The emerging markets have used much of Nike’s recent focus to determine alternatives to mitigate negative impact. Whether hedged or not, Nike’s risk management team will be instrumental in monitoring quality of growth and earnings by assessing the risk of volatility. Imitation Nike’s large market share in the sportswear industry makes them the company everyone is targeting to beat. A major threat to Nike is the abundance of substitutes available to consumers. Nike's competitors, such as wholesalers, department stores, and even Amazon, sell nearly the exact type of products as Nike, except in a more generic, discounted form. Nike’s largest argument is their premium brand in which they believe their customers will pay more for a higher quality product. However, competitor quality has become increasingly similar in the last few years. Products are near perfect replicas but without the visible Swoosh. Nike’s strategy to continue their innovative edge and become more consumer-focused will be critical in setting them apart from the competitors.

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Valuation

To arrive at our current stock price, we conducted research and analysis on the economy, sportswear industry, and company. We especially considered catalysts of growth that would affect not only Nike but its competitors. We incorporated the use of four models: Discounted Cash Flow (DCF), Economic Profit (EP), Dividend Discount Model (DDM), and Relative Valuation using comparable companies. We think the DCF model is the most accurate valuation method. It best incorporates the origins of high grow potential we see through the Consumer Direct Offense strategy, revolving around emerging market tailwinds, North American market share recapture, and e-commerce extensions. Revenue Decomposition & Growth In Q1 of fiscal 19, Nike posted 8% growth in revenue and raised their fiscal year revenue guidance from mid-to-high single digit to high single digit. Revenues are decomposed based on geographic operating segments. In Q1, North America revitalized its market share by posting positive revenue growth of 3% after suffering a -2.4% loss in fiscal 18. The three international segments sustained their global takeover by posting 35% total growth. We projected revenues to grow by 8.2% in fiscal year 19, 8.5% In fiscal year 20, and begin to fall for the next 5 years in our model as a result of a more saturated market. As we broke down revenue growth for each operating segment, we considered previous growth rates, their fiscal 19 Q1 performance, and the individual upcoming guidance. We followed this methodology throughout the model and incorporated external factors into each of the operating segments. (It should be noted that Nike realigned their operating segments in 2016, so the model lacks historical growth in the EMEA and APLA segments as their previous revenue compositions were not transparent). Operating Segment Forecasted Growth:

Segment 2019E 2020E 2021E North America 3.5% 3.5% 3.5% Greater China 20% 20% 20% EMEA 10% 10% 8% APLA 9% 9% 7%

Continuing Value Growth CV growth was projected based on our estimated growth relative to long-term real GDP growth of 2.2%. We projected a CV growth of 4% because not only is the market for sportswear increasing, but we think Nike’s continuing value could potentially be even farther into the future.

Cost of Goods Sold COGS consist of inventory costs, warehousing costs, third-party royalties, and shipping costs. Cost of goods sold has remained consistently hovered above the 55% threshold while facing some volatility due to outsourced manufacturing. We forecasted COGS to decrease from 56.16% and remain constant at 55.25% for the entire model. In the Q1 fiscal 19 earnings announcement, Nike received the most backlash due to only increasing the gross margin by 50 basis points. We expect Nike to especially work towards lower inventory costs by further implementing the Consumer Direct Offense with a leaner production model. Nike’s supply chain lacks control in the beginning stages, but the strategic investment’s goal is to eliminate surplus of products and diminish overall costs of distribution. Selling, General, & Administration Expense (SG&A) As a percentage of sales, SG&A has totaled consistently at the 30% range for the past three fiscal years. SG&A is broken down into two separate line items: Demand Creation and Operating Overhead Expense. Demand Creation consists of selling and marketing costs related to endorsements, sponsorships, and advertisement campaigns. We projected a constant 10% demand creation expense because Nike maintains a great deal of brand image through the use of its paid athletes and sports team visibility. Operating overhead expense consists of all other general and administrative costs. It is projected to slightly decreased from 19.75% of sales to a constant 19.2% of sales for the entire model. We expect the company to continue to make investments in Consumer Direct Offense and higher administration, but similarly to COGS, we anticipate Nike to strive to be more efficient in overhead costs. Margins We grew both the gross and operating margins to reflect Nike’s new Consumer Direct Offense strategy and their increased pressures from investors following fiscal 19 Q1. We expect their focus to be especially on the gross margin with the intention to implement higher selling prices and unit sales while also maintaining COGS at a reasonable rate to compete with competitors and remain attractive to investors. Capital Expenditures Nike spent nearly $1.03 billion on capital expenditures in fiscal 18. Nike outsources all manufacturing costs, so the amount of fixed assets they own is much lower relative to large cap companies. Their main long-lived assets consist of the world headquarters and distribution facilities in the United States and distribution facilities in Belgium, China, and France. We forecasted capital expenditures for PPE as 2.91% of total revenues each year, essentially growing to the extent it needs to fund investments as the business grows. The Consumer Direct Offense strategy has required an expansion in Nike Direct and supply chain stages once ready for distribution. We expect their capital expenditures to continue grow as they build out technology platforms and distribution facilities.

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Stock Repurchases Nike is currently in a four-year, $12 billion share repurchase program that will commence in fiscal 19. 149.4 million shares have been repurchased through the program. Following fiscal 18, the company announced a new four-year, $15 billion repurchase program that will begin upon the completion of the current program. As a result, we projected their treasury stock to increase by $3.75 billion each year. We are encouraged by Nike’s plans to continue buying back stock, so it is forecasted within the model that another repurchase program will likely proceed after fiscal 23. Issuance of Debt After examining Nike’s debt financing, we have discovered Nike issues debt in both U.S. dollars and Japanese Yen notes, with maturities upcoming in 2020-2025 and again in 2043-2046. Nike issues debt largely to use its cash proceeds for stock repurchases and other capital expenditure projects. We think the issuance of Japanese Yen is due to Nike’s attempt to mitigate tax and interest rate effects of investment in foreign countries. With both contexts in mind, we grew debt to provide a cushion for stock repurchases and investments for the forecast period. Provision for Income Tax Expense We estimated the forecasted income tax provision by considering the recent tax rates Nike has paid on products. In 2016, Nike paid nearly a 7% tax rate, largely due to foreign tax credits. In 2017, the Tax Cuts and Jobs Act decreased the corporate tax rate to 21%. However, Nike was required to pay a large one-time transition tax for undistributed foreign earnings, resulting in a 55% tax rate. Due to the nature of the one-time cost, we expected the tax rate to drastically decrease for 2018. Nike announced a 14% tax rate in their fiscal 19 Q1 earnings release on September 25th, so that is the rate we used consistently throughout the model. Weight Average Cost of Capital (WACC) We used the Weighted Average Cost of Capital in our model to discount the unlevered free cash flow in the Discounted Cash Flow and Economic Profit models. Cost of Debt

Pre-Tax Cost of Debt: 3.86%

Marginal Tax Rate: 14.0%

Nike’s publicly traded debt currently has an investment grade rating of AA-. To find the pre-tax cost of debt, we chose the cost of debt using debt with a maturity similar to our model’s forecast horizon. The debt that matures in 2028 has a premium of 0.7% relative to our 10-year treasury yield risk-free rate. We used 3.86% and incorporated the 14% tax shield to arrive at an after-tax cost of debt of 3.32%.

Cost of Equity Raw Beta: 0.8835

Risk-Free Rate: 3.16%

To determine the cost of equity, we used the capital asset pricing model. We sourced a raw beta of 0.88 and a 10-year treasury yield for the risk-free rate from Bloomberg. We calculated the equity risk premium to be 4.80%, creating a cost of equity at 7.24%. After multiplying each capital cost by their respective weights of 94.57% (equity) and 5.43% (debt), we arrived at our WACC of 7.04%. Valuation Models Our discounted cash flows (DCF) and economic profit (EP) models result in a target price of $85.51. We calculated free cash flow into an eight-year term because of Nike’s continuous growth of market share in the industry. We forecasted a continuing value period in 2026 to reflect cash flows into perpetuity. The WACC was used to discount the cash flows back to their intrinsic value today. The original target price was $82.52 but was adjusted to reflect the current date. We believe the DCF model provides the most accurate representation of the entire model using our assumptions for sales, COGS, SGA, and taxes used within the Value of Operating Assets from both the income statement and balance sheet. The DDM model generated a target price of $94.42. We think the DDM is a skewed representation of the intrinsic value because although Nike pays dividends, the P/E multiple for the CV year is higher relative to comparable companies. We inferred the P/E was higher than average due to being driven by the CV ROE, a ratio in which is being driven by stock repurchases that are not certain that far into the future. It is additionally being driven by the CV growth, a metric that is also very high compared to competitors. As previously stated, we assumed the steady-state year, but it could very well be much further than 2026. Nike will likely continue to undertake a larger market share, thus making a 4% CV growth realistic as an assumption. Using assumptions only from the income statement and equity section of the balance sheet, the DDM provides a much less accurate intrinsic value than the DCF. In the relative valuation model, we used the fundamental P/E ratio to calculate an implied relative value of $91.45. We chose comparable companies based on those that are publicly traded and closest in sportswear market share and global reach to Nike. We narrowed the companies to Adidas, Under Armour Inc., Lululemon Athletica Inc., VF Corporation, and Columbia Sportswear Co. It should be noted that we think this valuation is also a bit skewed due to the high P/E ratios of Under Armour, as their earnings are going through a rebound, and Lululemon Athletica, as they are still young and growing within the market.

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Sensitivity Analysis

We used a series of sensitivity analysis tests to determine the impact of certain factors on valuation results. Throughout the sensitivity analysis, we focused on assumptions we consider imperative to the model as a whole. The results are as follows: CV Growth Rate against Risk Free Rate The CV growth rate against the risk-free rate demonstrates the effects of a changing interest rate environment. The Federal Reserve has announced another likely interest rate increase in December 2018 to remain responsive to the current inflation environment. The risk-free rate is in increments of 15 basis points to show how the stock price would react to changing costs of borrowing. The continuing value (CV) growth rate reflects the growth rate of the company into perpetuity. We project that continuing value of the company will be approximately 4.00% because that is the rate at which we expect for continuous economic growth

Revenue Growth against the WACC Revenue growth against the WACC captures the effect of two independent variables on Nike’s share price. Revenue is an operational measure of product sales, achieving growth from higher selling prices, higher unit sales, or a combination of higher prices and sales. The weighted average cost of capital (WACC) is a measure of a company’s capital structure, demonstrating uses of debt and equity to raise capital. Revenue growth and the WACC demonstrate how Nike’s share price changes based on operational and capital structure differences.

CV Operating Overhead against CV Demand Creation Operating Overhead and Demand Creation are both selling, general, and administrative costs to Nike demonstrated as a percentage of sales. The table shows how sensitive the stock price can be to slight changes in operating expenses that directly affect earnings. Our model predicts that as demand creation rises, Nike will attempt to squeeze margins by decreasing operating overhead to maintain a competitive share price.

Beta against Risk Premium The assumption chosen for the risk premium has a direct correlation to the stock price. We believe that the equity market risk premium is approximately 4.80%, which is the geometric average risk premium from 1928 to 2017. As the risk premium continues to decrease, stock prices become higher due to a lower cost of capital. We believe testing the risk premium against our beta is interesting because Nike’s beta is relatively low compared to peers.

CV COGS against Pre-Tax Cost of Debt The continuing value cost (CV) of goods sold measures the expense as a percentage of sales. We forecasted a constant cost of goods sold over the horizon period, but this analysis gives a good interpretation of a potential different margin in eight years. We tested CV cost of goods sold against the pre-tax cost of debt, a measurement derived from the yield of a Nike bond that matures within the same continuing value horizon. The variables analyze operational metrics and capital structure while both having significant impacts on the stock price.

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Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

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Nike, Inc.Revenue Decomposition(in Millions)Fiscal Years Ending May 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026CV

Geographic RegionNorth America 14,764 15,216 14,855 15,375 15,913 16,470 16,964 17,473 17,997 18,537 18,908 Greater China 3,785 4,237 5,134 6,161 7,393 8,872 10,468 12,143 13,843 15,505 16,590 Europe, Middle East, & Africa 7,568 7,970 9,242 10,166 11,183 12,077 13,044 14,087 14,932 15,828 16,303 Asia Pacific 4,317 4,737 5,166 5,631 6,138 6,567 7,027 7,519 7,895 8,290 8,787 Global Brand Divisions 73 73 88 90 92 93 95 97 99 101 102

Total Nike Brand 30,507 32,233 34,485 37,423 40,718 44,080 47,599 51,320 54,767 58,261 60,690 Converse 1,955 2,042 1,886 1,943 2,001 2,061 2,123 2,186 2,252 2,320 2,343 Corporate (86) 75 26 26 26 26 26 26 26 26 26

Total Revenues 32,376 34,350 36,397 39,391 42,745 46,167 49,747 53,532 57,045 60,606 63,058

Growth Rates:Geographic Region

North America 7.5% 3.1% -2.4% 3.5% 3.5% 3.5% 3.0% 3.0% 3.0% 3.0% 2.0%Greater China 23.4% 11.9% 21.2% 20.0% 20.0% 20.0% 18.0% 16.0% 14.0% 12.0% 7.0%Europe, Middle East, & Africa - 5.3% 16.0% 10.0% 10.0% 8.0% 8.0% 8.0% 6.0% 6.0% 3.0%Asia Pacific - 9.7% 9.1% 9.0% 9.0% 7.0% 7.0% 7.0% 5.0% 5.0% 6.0%Global Brand Divisions -36.5% 0.0% 20.5% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 0.5%

Total Nike Brand 6.3% 5.7% 7.0% 8.5% 8.8% 8.3% 8.0% 7.8% 6.7% 6.4% 4.2%Converse -1.4% 4.5% -7.6% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 1.0%Corporate 4.9% -187.2% -65.3% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Total Revenues 5.8% 6.1% 6.0% 8.2% 8.5% 8.0% 7.8% 7.6% 6.6% 6.2% 4.0%

% of Total Net Revenue:Geographic Region

North America 45.6% 44.3% 40.8% 39.0% 37.2% 35.7% 34.1% 32.6% 31.5% 30.6% 30.0%Greater China 11.7% 12.3% 14.1% 15.6% 17.3% 19.2% 21.0% 22.7% 24.3% 25.6% 26.3%Europe, Middle East, & Africa 23.4% 23.2% 25.4% 25.8% 26.2% 26.2% 26.2% 26.3% 26.2% 26.1% 25.9%Asia Pacific 13.3% 13.8% 14.2% 14.3% 14.4% 14.2% 14.1% 14.0% 13.8% 13.7% 13.9%Global Brand Divisions 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%

Total Nike Brand 94.2% 93.8% 94.7% 95.0% 95.3% 95.5% 95.7% 95.9% 96.0% 96.1% 96.2%Converse 6.0% 5.9% 5.2% 4.9% 4.7% 4.5% 4.3% 4.1% 3.9% 3.8% 3.7%Corporate -0.3% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.0% 0.0% 0.0% 0.0%

Total Revenues 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Nike, Inc.Income Statement(in Millions)Fiscal Years Ending May 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026CV

Revenues 34,350 34,350 36,397 39,382 42,734 46,155 49,735 53,519 57,031 60,592 63,043Cost of sales 17,405 19,038 20,441 21,758 23,611 25,501 27,479 29,569 31,510 33,477 34,831Gross profit 14,971 15,312 15,956 17,623 19,124 20,655 22,256 23,950 25,521 27,115 28,212Expenses:Demand creation expense 3,278 3,341 3,577 3,938 4,273 4,616 4,974 5,352 5,703 6,059 6,304Operating overhead expense 6,542 6,516 7,187 7,561 8,205 8,862 9,549 10,276 10,950 11,634 12,104Depreciation expense 649 706 747 859 915 978 1,048 1,125 1,209 1,296 1,386Amortization expense 13 10 27 14 14 14 14 14 14 14 14Total selling and administrative expense 10,469 10,563 11,511 12,373 13,407 14,470 15,585 16,767 17,876 19,003 19,809Other Income (expense)Operating Income (loss) 4,502 4,749 4,445 5,250 5,716 6,185 6,671 7,183 7,645 8,112 8,403Interest expense (income) 19 59 54 90 -120 -120 -126 -151 -155 -172 -208Other expense (income) -140 -196 66 39 43 46 50 54 57 61 63Income (loss) before Income Taxes 4,623 4,886 4,325 5,121 5,794 6,259 6,747 7,280 7,743 8,224 8,548Income tax expense 863 646 2,392 717 811 876 945 1,019 1,084 1,151 1,197Net income (loss) 3,760 4,240 1,933 4,404 4,983 5,382 5,803 6,261 6,659 7,072 7,351

Weighted average shares outstanding - basic 1,698 1,658 1,624 1,592 1,564 1,538 1,516 1,496 1,474 1,442 1,413Basic EPS 2.21$ 2.56$ 1.19$ 2.77$ 3.19$ 3.50$ 3.83$ 4.18$ 4.52$ 4.90$ 5.20$ Dividends declared per common share 0.62$ 0.70$ 0.78$ 0.87$ 0.98$ 1.10$ 1.23$ 1.37$ 1.54$ 1.72$ 1.93$

Nike, Inc.Balance Sheet(in Millions)Fiscal Years Ending May 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026CV

AssetsCurrent assets:

Cash & equivalents 3,138 3,808 4,249 3,520 3,475 3,669 4,578 4,712 5,330 6,660 6,077 Short-term investments 2,319 2,371 996 1,022 1,049 1,077 1,106 1,135 1,165 1,196 1,228 Accounts receivable, net 3,241 3,677 3,498 4,010 4,351 4,700 5,064 5,450 5,807 6,170 6,419 Inventories 4,838 5,055 5,261 5,322 5,775 6,237 6,721 7,232 7,707 8,188 8,519 Prepaid expenses & other current assets 1,489 1,150 1,130 1,513 1,641 1,773 1,910 2,056 2,191 2,327 2,421

Total current assets 15,025 16,061 15,134 15,387 16,292 17,456 19,379 20,585 22,200 24,541 24,665 Property, plant & equipment, net 3,520 3,989 4,454 4,741 5,070 5,435 5,834 6,266 6,717 7,184 7,633 Identifiable intangible assets, net 281 283 285 271 257 242 228 214 200 185 171 Goodwill 131 139 154 154 154 154 154 154 154 154 154 Deferred Taxes 1,076 1,370 763 1,075 1,217 1,314 1,417 1,529 1,626 1,727 1,795 Other Assets 1,433 1,139 1,746 1,706 1,851 1,999 2,154 2,318 2,470 2,624 2,730

Total Assets 21,396 23,259 22,536 23,333 24,840 26,600 29,166 31,065 33,366 36,416 37,148

Liabilities & Stockholders' EquityLiabilitiesCurrent liabilities:

Current portion of long-term debt 44 6 6 6 3 - 500 - - 1,000 - Notes payable 1 325 336 237 256 276 296 317 337 358 372 Accounts payable 2,191 2,048 2,279 2,545 2,761 2,982 3,214 3,458 3,685 3,915 4,074 Accrued liabilities 3,037 3,011 3,269 3,687 4,001 4,321 4,656 5,011 5,339 5,673 5,902 Income taxes payable 85 84 150 86 97 105 113 122 130 138 144

Total current liabilities 5,358 5,474 6,040 6,561 7,119 7,684 8,779 8,909 9,492 11,084 10,491 Long-term debt 2,010 3,471 3,468 3,560 3,828 4,107 4,403 4,717 5,018 5,325 5,562 Deferred Taxes 364 346 425 358 406 438 472 510 542 576 598 Other Liabilities 2,852 2,870 2,791 3,112 3,377 3,647 3,930 4,229 4,507 4,788 4,982

Total Liabilities 10,584 12,161 12,724 13,592 14,730 15,877 17,584 18,364 19,559 21,773 21,634

Commitments and contingencies (Note 15)

Shareholders' EquityCommon Stock 10,786 8,710 6,384 7,050 7,716 8,382 9,048 9,714 10,183 10,183 10,183 Accumulated other comprehensive income (loss) 318 (213) (92) (92) (92) (92) (92) (92) (92) (92) (92) Retained earnings 4,151 3,979 3,517 2,781 2,484 2,430 2,622 3,077 3,717 4,552 5,424

Total Shareholders' Equity 12,258 12,407 9,812 9,742 10,111 10,723 11,581 12,701 13,808 14,643 15,515 Total Liabilities & Shareholders' Equity 21,396 23,259 22,536 36,925 39,570 42,477 46,750 49,429 52,925 58,188 58,782

Nike, Inc.Cash Flow Statement(in Millions)

Fiscal Years Ending May 31 2016 2017 2018

Cash provided by operations: Net income (loss) 3,760,000 4,240,000 1,933,000 Adjustments to reconcile net income to net cash provided by operations:

Depreciation 649 706 747 Deferred income taxes (80,000) (273,000) 647,000 Stock-based compensation 236,000 215,000 218,000 Impairment of goodwill, intangibles & other assets - - -Amortization & other 13,000 10,000 27,000 Net foreign currency adjustments 98,000 (117,000) (99,000)

Changes in certain working capital componenets and other assets and liabilities:Accounts receivable 60,000 (426,000) 187,000 Inventories (590,000) (231,000) (255,000) Prepaid expenses & other current & non-current assets (161,000) (120,000) 35,000 Accounts payable, accrued liabilities & income taxes payable (889,000) (364,000) -Accounts payable, accrued liabilities & other current & non-current assets - - 1,515,000

Cash provided by operations 3,096,000 3,640,000 4,955,000

Cash provided (used) by investing activities:Purchases of short-term investments (5,367,000) (5,928,000) (4,783,000) Maturities of short-term investments 2,924,000 3,623,000 3,613,000 Sales of short-term investments 2,386,000 2,423,000 2,496,000 Investments in reverse repurchase agreements 150,000 - -Additions to property, plant & equipment (1,143,000) (1,105,000) (1,028,000) Disposals of property, plant & equipment 10,000 13,000 3,000 Other investing activities - (34,000) (25,000)

Cash provided (used) by investing activities (1,034,000) (1,008,000) 276,000

Cash used by financing activities:Net proceeds from long-term debt issuance 981,000 1,482,000 -Long-term debt payments, including current portion (106,000) (44,000) (6,000) Increase (decrease) in notes payable (67,000) 327,000 13,000 Payments on capital lease obligations & other financing obligations (7,000) (17,000) (23,000) Proceeds from exercise of stock options & other stock issuances 507,000 489,000 733,000 Excess tax benefits from share-based payment arrangements 281,000 177,000 -Issuance (repurchase) of common stock (3,238) (3,223) (4,254) Dividends - common & preferred (1,022) (1,133) (1,243) Tax payments for net share settlement of equity awards - - (55,000)

Cash used by financing activities (2,671,000) (1,942,000) (4,835,000)

Net increase (decrease) in cash & equivalents (714,000) 670,000 441,000 Cash & equivalents, beginning of year 3,852,000 3,138,000 3,808,000 Cash & equivalents, end of year 3,138,000 3,808,000 4,249,000

Nike, Inc.Cash Flow Statement(in Millions)Fiscal Years Ending May 31 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026CV

Cash provided by operations:Net income (loss) 4,404 4,983 5,382 5,803 6,261 6,659 7,072 7,351 Adjustments to reconcile net income to net cash provided by operations:

Depreciation 859 915 978 1,048 1,125 1,209 1,296 1,386 Amortization of non-goodwill intangibles 14 14 14 14 14 14 14 14 Deferred Income Taxes (379) (94) (65) (68) (75) (65) (67) (45)

Changes in certain working capital components and other assets and liabilities:Accounts receivable (512) (341) (348) (365) (385) (358) (363) (250) Inventories (61) (453) (462) (484) (511) (475) (481) (331) Prepaid expenses & other current assets (383) (129) (131) (137) (145) (135) (137) (94) Other Assets 40 (145) (148) (155) (164) (152) (154) (106) Accounts payable 266 217 221 231 245 227 230 158 Accrued liabilities 418 314 320 335 354 329 333 230 Income Taxes Payable (64) 11 8 8 9 8 8 5 Other Liabilities 321 265 270 283 299 278 281 194

Cash provided by operations 4,924 5,556 6,039 6,514 7,026 7,539 8,033 8,512

Cash provided (used) by investing activities:Purchase (sale) of short-term investments (26) (27) (28) (29) (29) (30) (31) (32) Purchase of property, plant, & equipment (1,146) (1,244) (1,343) (1,447) (1,557) (1,660) (1,763) (1,835) Purchase of intangible assets - - - - - - - -

Cash provided (used) by investing activities (1,172) (1,271) (1,371) (1,476) (1,587) (1,690) (1,794) (1,866)

Cash used by financing activities:Change in short-term debt (99) 16 16 520 (479) 20 1,020 (986) Change in long-term debt 92 268 279 295 314 301 308 237 Purchases of treasury stock (3,750) (3,750) (3,750) (3,750) (3,750) (3,750) (3,750) (3,750) Issuance of common stock 666 666 666 666 666 466 - - Dividends paid (1,391) (1,530) (1,686) (1,860) (2,056) (2,269) (2,487) (2,729) Change in accumulated other comprehensive income - - - - - - - -

Cash used by financing activities (4,481) (4,330) (4,474) (4,129) (5,305) (5,232) (4,909) (7,228)

Net increase (decrease) in cash & equivalents (729) (45) 194 909 135 618 1,330 (583)Cash & equivalents, beginning of year 4,249 3,520 3,475 3,669 4,578 4,712 5,330 6,660 Cash & equivalents, end of year 3,520 3,475 3,669 4,578 4,712 5,330 6,660 6,077

Nike, Inc.Common Size Income Statement(in Millions)Fiscal Years Ending May 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026CV

Revenues 100% 100% 100% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of sales 50.67% 55.42% 56.16% 55.25% 55.25% 55.25% 55.25% 55.25% 55.25% 55.25% 55.25%Gross profit 43.58% 44.58% 43.84% 44.75% 44.75% 44.75% 44.75% 44.75% 44.75% 44.75% 44.75%Expenses:Demand creation expense 9.83% 9.73% 9.83% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%Operating overhead expense 19.75% 18.97% 19.75% 19.20% 19.20% 19.20% 19.20% 19.20% 19.20% 19.20% 19.20%Depreciation expense 1.98% 1.89% 2.06% 2.18% 2.14% 2.12% 2.11% 2.10% 2.12% 2.14% 2.20%Amortization expense 0.04% 0.03% 0.07% 0.04% 0.03% 0.03% 0.03% 0.03% 0.02% 0.02% 0.02%Total selling and administrative expense 29.57% 28.70% 31.70% 31.42% 31.37% 31.35% 31.34% 31.33% 31.34% 31.36% 31.42%Operating Income (loss) 14.01% 15.88% 12.14% 13.33% 13.38% 13.40% 13.41% 13.42% 13.41% 13.39% 13.33%Other Income (expense):Interest expense (income) 0.06% 0.17% 0.15% 0.23% -0.29% -0.27% -0.26% -0.29% -0.28% -0.29% -0.33%Other expense (income) -0.41% -0.57% 0.18% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10% 0.10%Income (loss) before Income Taxes 13.46% 14.22% 11.88% 13.14% 13.85% 13.87% 13.89% 13.88% 13.93% 13.94% 13.73%Income tax expense 2.51% 1.88% 6.57% 1.84% 1.94% 1.94% 1.94% 1.94% 1.95% 1.95% 1.92%Net income (loss) 10.95% 12.34% 5.31% 11.30% 11.91% 11.93% 11.94% 11.93% 11.98% 11.99% 11.81%

Nike, Inc.Common Size Balance Sheet(in Millions)Fiscal Years Ending May 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026CV

AssetsCurrent assets:

Cash & equivalents 9.14% 11.09% 11.67% 8.94% 8.13% 7.95% 9.20% 8.80% 9.35% 10.99% 9.64%Short-term investments 6.75% 6.90% 2.74% 2.60% 2.46% 2.33% 2.22% 2.12% 2.04% 1.97% 1.95%Accounts receivable, net 9.44% 10.70% 9.61% 10.18% 10.18% 10.18% 10.18% 10.18% 10.18% 10.18% 10.18%Inventories 14.08% 14.72% 14.45% 13.51% 13.51% 13.51% 13.51% 13.51% 13.51% 13.51% 13.51%Prepaid expenses & other current assets 4.33% 3.35% 3.10% 3.84% 3.84% 3.84% 3.84% 3.84% 3.84% 3.84% 3.84%

Total current assets 43.74% 46.76% 41.58% 39.07% 38.12% 37.82% 38.96% 38.46% 38.93% 40.50% 39.12%Property, plant & equipment, net 10.25% 11.61% 12.24% 12.04% 11.86% 11.78% 11.73% 11.71% 11.78% 11.86% 12.11%Identifiable intangible assets, net 0.82% 0.82% 0.78% 0.69% 0.60% 0.52% 0.46% 0.40% 0.35% 0.31% 0.27%Goodwill 0.38% 0.40% 0.42% 0.39% 0.36% 0.33% 0.31% 0.29% 0.27% 0.25% 0.24%Deferred Taxes 3.13% 3.99% 2.10% 2.73% 2.85% 2.85% 2.85% 2.86% 2.85% 2.85% 2.85%Other Assets 4.17% 3.32% 4.80% 4.33% 4.33% 4.33% 4.33% 4.33% 4.33% 4.33% 4.33%

Total Assets 62.29% 67.71% 61.92% 59.25% 58.13% 57.63% 58.64% 58.05% 58.51% 60.10% 58.93%

Liabilities & Stockholders' EquityLiabilitiesCurrent liabilities:

Current portion of long-term debt 0.13% 0.02% 0.02% 0.02% 0.01% 0.00% 1.01% 0.00% 0.00% 1.65% 0.00%Notes payable 0.00% 0.95% 0.92% 0.60% 0.60% 0.60% 0.60% 0.59% 0.59% 0.59% 0.59%Accounts payable 6.38% 5.96% 6.26% 6.46% 6.46% 6.46% 6.46% 6.46% 6.46% 6.46% 6.46%Accrued liabilities 8.84% 8.77% 8.98% 9.36% 9.36% 9.36% 9.36% 9.36% 9.36% 9.36% 9.36%Income taxes payable 0.25% 0.24% 0.41% 0.22% 0.23% 0.23% 0.23% 0.23% 0.23% 0.23% 0.23%

Total current liabilities 15.60% 15.94% 16.59% 16.66% 16.66% 16.65% 17.65% 16.65% 16.64% 18.29% 16.64%Long-term debt 5.85% 10.10% 9.53% 9.04% 8.96% 8.90% 8.85% 8.81% 8.80% 8.79% 8.82%Deferred Taxes 1.06% 1.01% 1.17% 0.91% 0.95% 0.95% 0.95% 0.95% 0.95% 0.95% 0.95%Other Liabilities 8.30% 8.36% 7.67% 7.90% 7.90% 7.90% 7.90% 7.90% 7.90% 7.90% 7.90%

Total Liabilities 30.81% 35.40% 34.96% 34.51% 34.47% 34.40% 35.36% 34.31% 34.29% 35.93% 34.32%Commitments and contingencies (Note 15)

Shareholders' Equity:Common Stock 31.40% 25.36% 17.54% 17.90% 18.06% 18.16% 18.19% 18.15% 17.86% 16.81% 16.15%Accumulated other comprehensive income (loss) 0.93% -0.62% -0.25% -0.23% -0.22% -0.20% -0.18% -0.17% -0.16% -0.15% -0.15%Retained earnings 12.08% 11.58% 9.66% 7.06% 5.81% 5.27% 5.27% 5.75% 6.52% 7.51% 8.60%

Total Shareholders' Equity 35.69% 36.12% 26.96% 24.74% 23.66% 23.23% 23.29% 23.73% 24.21% 24.17% 24.61%Total Liabilities & Shareholders' Equity 62.29% 67.71% 61.92% 93.76% 92.59% 92.03% 94.00% 92.36% 92.80% 96.03% 93.24%

Nike, Inc.Value Driver Estimation(in Millions)Fiscal Years Ending May 31 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026CV

NOPLATSales 34,350 34,350 36,397 39,382 42,734 46,155 49,735 53,519 57,031 60,592 63,043

Cost of Sales 17,405 19,038 20,441 21,758 23,611 25,501 27,479 29,569 31,510 33,477 34,831SGA 10,469 10,563 11,511 11,499 12,478 13,477 14,523 15,628 16,653 17,693 18,409Depreciation 649 706 747 859 915 978 1,048 1,125 1,209 1,296 1,386Amortization 13 10 27 14 14 14 14 14 14 14 14Implied Interest on Operating Leases 150 178 182 204 217 232 249 267 287 307 329

EBITA 5,964 4,211 3,853 5,454 5,933 6,417 6,920 7,449 7,932 8,419 8,732Adjusted TaxesIncome Tax Provision 863 646 2,392 717 811 876 945 1,019 1,084 1,151 1,197

Add: Tax Shield on Interest Expense (Income) 3 9 6 13 -17 -17 -18 -21 -22 -24 -29Add: Tax Shield on Interest on Operating Leases 27 27 22 29 30 32 35 37 40 43 46

Less: Adjusted Taxes 893 682 2,420 758 825 892 962 1,035 1,102 1,170 1,214Deferred TaxesDeferred Tax Liability -1,492 -1,798 -1,283 -717 -811 -876 -945 -1,019 -1,084 -1,151 -1,197

Less: Previous year deferred tax liability -1,328 -1,492 -1,798 -1,283 -717 -811 -876 -945 -1,019 -1,084 -1,151Plus: Deferred Taxes -164 -306 515 566 -94 -65 -68 -75 -65 -67 -45NOPLAT 4,907 3,222 1,948 5,262 5,014 5,460 5,890 6,339 6,765 7,182 7,473

Invested Captial Operating Current Assets: 12,706 13,386 13,601 14,783 16,041 17,325 18,669 20,089 21,408 22,744 23,664

Normal Cash 3,138 3,504 3,712 3,938 4,273 4,616 4,974 5,352 5,703 6,059 6,304Accounts Receivable 3,241 3,677 3,498 4,010 4,351 4,700 5,064 5,450 5,807 6,170 6,419Inventories 4,838 5,055 5,261 5,322 5,775 6,237 6,721 7,232 7,707 8,188 8,519Prepaid Expenses & Other Current Assets 1,489 1,150 1,130 1,513 1,641 1,773 1,910 2,056 2,191 2,327 2,421

Operating Current Liabilities: 5,313 5,143 5,698 6,318 6,860 7,409 7,983 8,591 9,155 9,726 10,119Accounts Payable 2,191 2,048 2,279 2,545 2,761 2,982 3,214 3,458 3,685 3,915 4,074Income Taxes Payable 85 84 150 86 97 105 113 122 130 138 144Accrued Liabilities 3,037 3,011 3,269 3,687 4,001 4,321 4,656 5,011 5,339 5,673 5,902

Net Operating Working Capital 7,393 8,243 7,903 8,465 9,182 9,917 10,686 11,498 12,253 13,018 13,545Plus: Net PPE 3,520 3,989 4,454 4,741 5,070 5,435 5,834 6,266 6,717 7,184 7,633Plus: Net Other Operating Assets 2,781 3,247 3,326 3,667 3,871 4,108 4,372 4,662 4,977 5,306 5,649

PV of Operating Leases 2,500 2,964 3,041 3,396 3,615 3,865 4,144 4,448 4,777 5,121 5,478Intangible Assets 281 283 285 271 257 242 228 214 200 185 171

Less: Other Long-Term Operating Liabilities 0 0 0 0 0 0 0 0 0 0 0Invested Capital (IC) 16,194 18,443 18,725 20,268 21,737 23,325 25,035 26,874 28,724 30,630 32,304

FCFNOPLAT 4,907 3,222 1,948 5,262 5,014 5,460 5,890 6,339 6,765 7,182 7,473Less: Change in Invested Capital 1,677 2,249 282 1,543 1,469 1,588 1,710 1,839 1,850 1,906 1,674Free Cash Flow (FCF) 3,230 974 1,666 3,719 3,546 3,872 4,179 4,501 4,914 5,276 5,798

ROICNOPLAT 4,907 3,222 1,948 5,262 5,014 5,460 5,890 6,339 6,765 7,182 7,473Beginning Invested Capital 14,517 16,194 18,443 18,725 20,268 21,737 23,325 25,035 26,874 28,724 30,630Return on Invested Capital (ROIC) 33.80% 19.90% 10.56% 28.10% 24.74% 25.12% 25.25% 25.32% 25.17% 25.00% 24.40%

EPBeginning Invested Capital 14,517 16,194 18,443 18,725 20,268 21,737 23,325 25,035 26,874 28,724 30,630ROIC 33.80% 19.90% 10.56% 28.10% 24.74% 25.12% 25.25% 25.32% 25.17% 25.00% 24.40%WACC 8.00% 8.00% 8.00% 7.19% 7.19% 7.19% 7.19% 7.19% 7.19% 7.19% 7.19%Economic Profit (EP) 3,745 1,927 473 3,916 3,558 3,898 4,213 4,540 4,833 5,117 5,271

Nike, Inc.Weighted Average Cost of Capital (WACC) Estimation

Risk Free Rate 3.16%Risk Premium 4.80%Beta 0.88Cost of Equity 7.40%

Cost of DebtPre-Tax Cost of Debt 3.86%Marginal Tax Rate 14.00%After-Tax Cost of Debt 3.32%

Value of EquityShare Price 78Shares Outstanding 1,588.15 Value of Equity 123,828

Value of DebtBV of Short-Term Debt 342BV of Long-Term Debt 3468PV of Operating Leases 3041Value of Debt 6851

WeightsEquity 94.76%Debt 5.24%

WACC CalculationCost of Equity 7.40%Weight of Equity 94.76%After-Tax Cost of Debt 3.32%Weight of Debt 5.24%WACC 7.19%

Nike, Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models(In Millions)

Key Inputs: CV Growth 4.00% CV ROIC 24.40% WACC 7.19% Cost of Equity 7.40%

DCF ModelFiscal Years Ending May 31 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026CV

NOPLAT 5262 5014 5460 5890 6339 6765 7182 7473Less: Invested Capital 20,268 21,737 23,325 25,035 26,874 28,724 30,630 32,304

Free Cash Flow 3,719 3,546 3,872 4,179 4,501 4,914 5,276 5,798 Continuing Value (CV) 196,017 PV of FCF 3,470 3,086 3,144 3,166 3,181 3,240 3,246 120,585

Value of Operating Assets 143,118 Add: Excess Cash 537 Add: Marketable Securities 996 Less: Debt (3,810) Less: PV of Operating Leases (3,041) Less: Underfunded Pension Liabilities (70) Less: ESOP (3,736) Value of Equity 133,993 Shares Outstanding 1,624 Price 82.52$ Partial Year Adjustment 1.04 Intrinsic Value of Stock 85.51$

Economic ProfitFiscal Years Ending May 31 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026CV

NOPLAT 1,948 5,341 5,085 5,510 5,910 6,320 6,733 7,134 7,510 Beginning Invested Capital 18,725 20,221 21,613 23,115 24,707 26,393 28,135 29,916 31,690 ROIC 28.14% 24.70% 25.05% 25.12% 25.13% 25.06% 24.91% 24.36%WACC 7.19% 7.19% 7.19% 7.19% 7.19% 7.19% 7.19% 7.19%EP 3,916 3,558 3,898 4,213 4,540 4,833 5,117 5,442Continuing Value (CV) 165,387 PV of EP 3,654 3,097 3,165 3,192 3,209 3,187 3,148 101,742

PV (Economic Profit) 124,393 Beginning Invested Capital 18,725 Value of Operating Assets 143,118 Add: Excess Cash 537 Add: Marketable Securities 996 Less: Debt (3,810) Less: PV of Operating Leases (3,041) Less: Underfunded Pension Liabilities (70) Less: ESOP (3,736) Value of Equity 133,993 Shares Outstanding 1,624Price 82.52$ Partial Year Adjustment 1.04Intrinsic Value of Stock 85.51$

Nike, Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026CV

Key Assumptions CV growth 4.00% CV ROE 50.21% Cost of Equity 7.40%

EPS 2.77$ 3.19$ 3.50$ 3.83$ 4.18$ 4.52$ 4.90$ 5.20$

Future Cash Flows P/E Multiple (CV Year) 27.06 EPS (CV Year) 5.20$ Future Stock Price 140.75$ Dividends Per Share 0.87$ 0.98$ 1.10$ 1.23$ 1.37$ 1.54$ 1.72$ Future Cash Flows 0.87$ 0.98$ 1.10$ 1.23$ 1.37$ 1.54$ 1.72$ 140.75$

Discount Rate 1.074 1.154 1.239 1.331 1.429 1.535 1.648 1.648 Discounted Cash Flows 0.81$ 0.85$ 0.88$ 0.92$ 0.96$ 1.00$ 1.05$ 85.39$

Price 91.87$ Partial Year Adjustment 1.03Intrinsic Value of Stock 94.42$

Nike, Inc.Relative Valuation Models

EPS EPSTicker Company Price 2019E 2020E P/E 19 P/E 20ADDYY Adidas $200.50 $9.51 $10.92 21.08 18.36 UAA Under Armour Inc $18.49 $0.31 $0.46 60.01 39.99 COLM Columbia Sportswear Co $87.53 $3.90 $4.33 22.44 20.23 LULU Lululemon Athletica Inc $137.19 $3.59 $4.23 38.25 32.40 VFC VF Corporation $86.46 $3.68 $4.16 23.49 20.78

Average 33.06 26.35

NKE Nike, Inc. $77.97 $2.77 $ 3.19 $ 28.18 24.467

Implied Relative Value: P/E (EPS19) $ 91.45 P/E (EPS20) 83.98$

Nike, Inc.Key Management Ratios

Fiscal Years Ending 2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2024E 2025E 2026E

Liquidity RatiosCurrent Ratio 2.80 2.93 2.51 2.35 2.29 2.27 2.21 2.31 2.34 2.21 2.35 2.38Quick Ratio 1.62 1.80 1.45 1.30 1.25 1.23 1.22 1.27 1.30 1.27 1.31 1.34Cash Ratio 0.59 0.70 0.70 0.54 0.49 0.48 0.52 0.53 0.56 0.60 0.58 0.61

Activity or Asset-Management RatiosFixed Asset Turnover 9.76 8.61 8.17 8.31 8.43 8.49 8.53 8.54 8.49 8.43 8.26 8.17Inventory Turnover 7.10 6.80 6.92 7.40 7.40 7.40 7.40 7.40 7.40 7.40 7.40 7.40

Financial Leverage RatiosDebt Ratio 0.10 0.16 0.17 0.16 0.16 0.16 0.18 0.16 0.16 0.18 0.16 0.16Debt to Equity Ratio 0.86 0.98 1.30 1.40 1.46 1.48 1.52 1.45 1.42 1.49 1.39 1.36Equity Ratio 0.57 0.53 0.44 0.42 0.41 0.40 0.40 0.41 0.41 0.40 0.42 0.42

Profitability RatiosGross Margin 43.58% 44.58% 43.84% 44.75% 44.75% 44.75% 44.75% 44.75% 44.75% 44.75% 44.75% 44.75%Profit Margin 10.95% 12.34% 5.31% 11.18% 11.66% 11.66% 11.67% 11.70% 11.68% 11.67% 11.66% 11.91%Return on Asset 17.57% 18.23% 8.58% 18.88% 20.06% 20.23% 19.90% 20.15% 19.96% 19.42% 19.79% 20.00%Return on Equity 30.67% 34.17% 19.70% 45.21% 49.28% 50.19% 50.10% 49.29% 48.23% 48.30% 47.38% 47.30%

Payout Policy RatiosDividend Payout Ratio 28.05% 27.34% 65.55% 31.58% 30.70% 31.32% 32.06% 32.85% 34.07% 35.17% 37.13% 38.11%Total Payout Ratio 113% 103% 284% 117% 106% 101% 97% 93% 90% 88% 88% 86%

Ratio DefinitionsCurrent Ratio Total Current Assets / Total Current LiabilitiesQuick Ratio Near Cash Assets / Total Current LiabilitiesCash Ratio Cash / Total Current LiabilitiesFixed Asset Turnover Total Revenue / Property & Equipment, NetInventory Turnover Total Revenue / Total Selling and Administrative ExpenseDebt Ratio Total Liabilities / Total AssetsDebt to Equity Ratio Total Liabilities / Total Equity Equity Ratio Total Equity / Total Assets Profit Margin Total Contribution Profit / Total RevenueReturn on Asset Net Income / Total AssetsReturn on Equity Net Income / Total Stockholders' Equity Dividend Payout Ratio Total Dividends Declared / EPSTotal Payout Ratio (Dividends + Issuance of Common Stock)/ Net Income

Nike, Inc.Operating Leases

Present Value of Operating Lease Obligations (2018) Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016)

Operating Operating OperatingFiscal Years Ending May 31 Leases Fiscal Years Ending May 31 Leases Fiscal Years Ending May 31 Leases2019 589 2018 537 2017 4912020 523 2019 509 2018 4532021 472 2020 438 2019 3952022 412 2021 399 2020 3472023 361 2022 350 2021 301Thereafter 1608 Thereafter 1672 Thereafter 1244Total Minimum Payments 3965 Total Minimum Payments 3905 Total Minimum Payments 3231Less: Interest 924 Less: Interest 941 Less: Interest 731PV of Minimum Payments 3041 PV of Minimum Payments 2964 PV of Minimum Payments 2500

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 6.00% Pre-Tax Cost of Debt 6.00% Pre-Tax Cost of Debt 6.00%Number Years Implied by Year 6 Payment 4.5 Number Years Implied by Year 6 Payment 4.8 Number Years Implied by Year 6 Payment 4.1

Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment1 589 555.7 1 537 506.6 1 491 463.22 523 465.5 2 509 453.0 2 453 403.23 472 396.3 3 438 367.8 3 395 331.64 412 326.3 4 399 316.0 4 347 274.95 361 269.8 5 350 261.5 5 301 224.96 & beyond 361 1027.8 6 & beyond 350 1059.1 6 & beyond 301 802.3PV of Minimum Payments 3041.3 PV of Minimum Payments 2964.1 PV of Minimum Payments 2500.1

2016 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026CVPV of Operating Leases 2,500 2,964 3,041 3,396 3,615 3,865 4,144 4,448 4,777 5,121 5,478Growth Rate 8.85% 18.56% 2.61% 11.66% 6.44% 6.94% 7.20% 7.34% 7.41% 7.20% 6.96%Interest Rate 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%Interest 150 178 182 204 217 232 249 267 287 307 329

Nike, Inc.Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 93Average Time to Maturity (years): 5.70Expected Annual Number of Options Exercised: 16

Current Average Strike Price: 40.73$ Cost of Equity: 7.40%Current Stock Price: $77.97

2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027EIncrease in Shares Outstanding: 16.35 16.35 16.35 16.35 16.35 11.45Average Strike Price: 40.73$ 40.73$ 40.73$ 40.73$ 40.73$ 40.73$ Increase in Common Stock Account: 666 666 666 666 666 466

Change in Treasury Stock 3,750 3,750 3,750 3,750 3,750 3,750 3,750 3,750 3,750 3,750Expected Price of Repurchased Shares: 77.97$ 83.74$ 89.94$ 96.59$ 103.74$ 111.42$ 119.67$ 128.53$ 138.04$ 148.25$ Number of Shares Repurchased: 48 45 42 39 36 34 31 29 27 25

Shares Outstanding (beginning of the year) 1,624 1,592 1,564 1,538 1,516 1,496 1,474 1,442 1,413 1,386Plus: Shares Issued Through ESOP 16 16 16 16 16 11 0 0 0 0Less: Shares Repurchased in Treasury 48 45 42 39 36 34 31 29 27 25 Shares Outstanding (end of the year) 1,592 1,564 1,538 1,516 1,496 1,474 1,442 1,413 1,386 1,361

Nike, Inc.VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol NKECurrent Stock Price $77.97Risk Free Rate 3.16%Current Dividend Yield 1.09%Annualized St. Dev. of Stock Returns 22.06%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 93 40.73 5.70 40.09$ 3,736$ Total 93 40.73$ 5.70 44.59$ 3,736$

Nike, Inc.Sensitivity Analysis

85.51$ 3.25% 3.50% 3.75% 4.00% 4.25% 4.50% 4.75%2.71% 74.20 77.85 82.04 86.91 92.61 99.39 107.582.86% 73.83 77.45 81.59 86.39 92.02 98.71 106.783.01% 73.47 77.04 81.14 85.89 91.44 98.04 105.993.16% 73.11 76.65 80.70 85.39 90.87 97.38 105.213.31% 72.75 76.25 80.26 84.89 90.31 96.72 104.443.46% 72.40 75.86 79.82 84.40 89.75 96.08 103.683.61% 72.04 75.47 79.39 83.91 89.19 95.44 102.93

85.51$ 7.90% 8.00% 8.10% 8.20% 8.30% 8.40% 8.50%6.89% 94.92 95.01 95.11 95.21 95.30 95.40 95.496.99% 91.45 91.54 91.64 91.73 91.82 91.91 92.007.09% 88.21 88.30 88.39 88.47 88.56 88.65 88.747.19% 85.17 85.25 85.34 85.43 85.51 85.60 85.687.29% 82.31 82.40 82.48 82.56 82.65 82.73 82.817.39% 79.63 79.71 79.79 79.87 79.95 80.03 80.117.49% 77.10 77.18 77.25 77.33 77.41 77.49 77.57

85.51$ 18.90% 19.00% 19.10% 19.20% 19.30% 19.40% 19.50%8.50% 93.77 93.75 93.73 93.71 93.69 93.67 93.659.00% 90.99 90.97 90.95 90.93 90.91 90.90 90.889.50% 88.22 88.20 88.18 88.16 88.14 88.12 88.10

10.00% 85.44 85.42 85.40 85.38 85.36 85.34 85.3210.50% 82.66 82.64 82.62 82.60 82.58 82.56 82.5411.00% 79.88 79.86 79.84 79.82 79.80 79.78 79.7611.50% 77.10 77.08 77.06 77.04 77.02 77.00 76.98

85.51$ 0.8535 0.8635 0.8735 0.8835 0.8935 0.9035 0.91354.20% 107.80 106.04 104.33 102.67 101.06 99.50 97.984.40% 100.96 99.32 97.74 96.20 94.71 93.25 91.844.60% 94.88 93.36 91.88 90.45 89.06 87.70 86.384.80% 89.45 88.03 86.65 85.30 84.00 82.73 81.495.00% 84.57 83.23 81.94 80.67 79.44 78.25 77.095.20% 80.16 78.90 77.67 76.48 75.32 74.20 73.105.40% 76.15 74.96 73.80 72.67 71.58 70.51 69.47

85.51$ 54.50% 54.75% 55.00% 55.25% 55.50% 55.75% 56.00%3.56% 85.92 85.87 85.82 85.77 85.72 85.67 85.623.66% 85.79 85.74 85.69 85.64 85.59 85.54 85.493.76% 85.66 85.61 85.56 85.51 85.46 85.41 85.363.86% 85.53 85.48 85.43 85.38 85.33 85.28 85.233.96% 85.40 85.35 85.30 85.25 85.20 85.15 85.104.06% 85.27 85.22 85.17 85.12 85.07 85.02 84.974.16% 85.14 85.09 85.04 84.99 84.94 84.89 84.84

Risk Premium

Beta

Pre-Tax Cost of Debt

CV COGS %

Risk Free Rate

CV Growth Rate

WACC

Revenue Growth

CV Demand Creation

%

CV Operating Overhead %