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How Nike Raises the Bar on Fundamentals

Nike’s strong brand and product pipeline have enabled it to raise prices and increase sales of both its apparel and footwear.

We are upgrading Nike Inc. (NKE) from Hold to Buy. Nike’s strong brand and product pipeline have enabled it to raise prices and increase sales of both its apparel and footwear, asserts John Staszak, analyst with Argus Research.

We think some retailers seeking to boost weak sales are turning to Nike to increase customer traffic, increasing its bargaining power as a supplier.

Meanwhile, in response to changing purchasing trends, Nike is beefing up its direct-to-consumer (DTC) channel (company-owned stores and website), particularly its e-commerce business and we expect DTC sales to grow at a high-teens pace over the next two years.

Over the long term, we expect Nike to continue to dominate the athletic apparel and footwear market, and note that it has a particularly strong presence in high-end footwear, thanks to its marketing strength and endorsements from famous athletes.

Although the industry remains fiercely competitive, we expect the company to build on its dominant position through its globally recognized brand, innovative products, economies of scale, and rapid growth in emerging markets.

In the near term, we expect an accelerating U.S. economy and solid results in China to benefit earnings. Based on NKE’s investments in its company-owned stores and e-commerce business and management’s ability to execute its growth strategies, we are raising our FY18 EPS estimate to $2.50 from $2.46. For FY19, we are raising our forecast to $2.80 from $2.78.

Our financial strength rating for Nike remains High, the top of our five-point scale. Nike has a strong balance sheet, very low debt and enough cash to cover all current obligations.

Nike shares are trading at 25.1-times our revised FY18 estimate, a high P/E relative to other apparel and footwear companies. However, given an accelerating U.S. economy and continued solid sales in China, we expect the shares to trade at the top of their five-year range of 15-30. Multiplying our revised FY18 estimate by 30, generates a price target of $75. As such, our rating is now Buy.

John Staszak is a consumer discretionary analyst with Argus Research.

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