Natasha Chou

Spring 2013

Student Managed Investment Fund

Agenda Our Recommendation: HOLD Business Description Industry Overview Competitive Positioning Revenue and Margin Drivers Valuation Financial Analysis Investment Risks Q&A Session

Business Description

Founding and History Founded in 1964 as Blue Ribbon sports - originally a distributor Became “Nike” in 1978 – now a global iconic brand Ever since Nike was established, innovation has been a key

driver to the company’s success

Management Founded in 1964 as Blue Ribbon sports - originally a distributor Became “Nike” in 1978 – now a global iconic brand

Leader in Innovation Nike Sports Watch Nike Plus Fuel Band iPod Nike app Shox Dri-Fit

Business Description

Product Mix Corporate restructuring

Sold Umbro and Cole Haan in 4Q 2012 to refocus business model Focus on Jordan, Converse, NIKE brands

Expected: Increased profit margins and dividends

FY 2010 FY 2011 FY 201241.00%

42.00%

43.00%

44.00%

45.00%

46.00%

47.00%

NIKE Gross Margin

Gross Margin

Sales Mix

Footwear64%

Apparel30%

Equipment6% Global Brand Divisions

1%

FY 2012 Sales Mix

Growth Strategy Focus on China

Utilizing Basketball and NBA Players to raise awareness Targeting the youth market 17% Growth from FY 2010 to FY 2011 23% Growth from FY 2011 to FY 2012

FY 2010 FY 2011 FY 2012$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

Reveue from China

Reveue from China

FY 2010 FY 2011 FY 20128.00%

8.50%

9.00%

9.50%

10.00%

10.50%

11.00%

Percentage of Total Revenue

Percentage of Total Revenue

Industry Overview Nike is the leading player in the athletic footwear industry

Company Market Cap.

NIKE (NYSE) $54.82 billion

Adidas (FWB) $16.6 billion

Under Armour (NYSE) $5.87 billion

Asics (TYO) $3.60 billion

Sketchers (NYSE) $1.13 billion

Industry OverviewCompany Fiscal 2010 Fiscal 2011 Fiscal 2012 CAGR (2010-

2012)Nike $10,301 $11,518 $13,426 14.2%

Adidas Group (includes Reebok)

$7,021 (€5,389)

$8,132 (€6,242)

$9,018 (€6,922)

13.3%

Puma $1,856 (€1,425)

$2,006 (€1,540)

$2,078 (€1,595)

5.8%

Asics $1,759 (¥165,808)

$1,857 (¥175,057)

$1,940 (¥182,807)

5.0%

SWOT Analysis

Strengths• Global Market Leader with Iconic

Brand Name• Heavy emphasis in R&D• Share buyback program will restore

shareholders’ confidence in company

Opportunities• Potential to penetrate relatively

unsaturated emerging markets• Product Development – Nike is

arguably a fashion brand and has potential to market to fashion forward youth culture

Weaknesses• Labor and factory conditions has hurt the

company’s publicity• Nike has wasted resources in the past

few years by investing in a fashion focused company

Threats• Fierce sponsorship competition from

Adidas and other well known brands• Possibility of having unforeseen losses

due to currency fluctuation

Porter’s Five Forces

Factor Score Description

Buyer’s Power Neutral Buyers have many different options when it comes to which brand they choose. However, they have very little influence over prices.

Supplier’s Power Weak Suppliers have very little power since they are supplying raw materials and there is no differentiation from one supplier to another.

Industry Rivalry Intense There are many different brands with similar products offered at similar prices.

Threat of Substitution High There is little differentiation between products of one brand and products of another.

Barriers to Entry High Brands that are already in the market have built brand equity that can be difficult to challenge.

Valuation

DCF: $48.91 to $57.29

Key assumptions Valuation Date Revenue Growth Terminal Value

Valuation

Comparable Model: $38.82 to $62.31 Competitors PE TEV/EBITDA TEV/REVENUE

Residual Income: $49.91 to $79.19 LT Growth of 1.5%

Valuation

- Final Price Range $49.91 to $57.29- Market Price at Valuation Date: $59.53

Revenue and Margin Drivers

Revenue Drivers Focus on the consumer Research and Development

Margin Drivers Low Manufacturing Cost Adapting to global economies

Financial Analysis Revenue, Net income and Profit margin

2008 2009 2010 2011 2012 0

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

30,000.0

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Revenue(M)

Net income(M)

Profit Magain(%)

EBT Excl. Unusual Items

2,442.3

2,553.0

2,517.0

2,844.0

3,007.0

3,087.0

　 　 　 　 　 　 　

Restructuring Charges

- (195.0)

- - (24.0)

(24.0)

Impairment of Goodwill

- (199.0)

- - - -

Gain (Loss) On Sale Of Assets

60.6

- - - - -

Asset Writedown

- (202.0)

- - - -

Other Unusual Items

- - - - - -

EBT Incl. Unusual Items

2,502.9

1,957.0

2,517.0

2,844.0

2,983.0

3,063.0

Sale of Umbro to Iconix (December 2012)

Working capital and Free cash flow

2008 2009 2010 2011 20120

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Working capital

Free cash flow

•Working capital decreased by $782 million from $3,377 million in 2009 to $2,595 million in 2010 because of the increase of cash and cash equivalents

Investment Risks

Financial results may be adversely affected if substantial investments fail to produce expected returns

Risks associated with overseas sourcing, manufacturing, and financing

Concentration of retail market share among a few retailers may increase Nike’s credit risk and ability to sell their products

Conclusion

Our Recommendation: HOLD A global iconic brand name Penetrating relatively unsaturated markets globally Refocusing its business model on its core competency Steady increase in dividends Stock buyback program will restore shareholder confidence

Q&A Session

Appendix

Appendix