Lauren Thomas of CNBC recently published a very good article on Nike (NYSE:NKE) and its women’s business. In a nutshell, the article says that there’s a lot of momentum in the women’s active-wear market right now, Nike’s women’s business is tiny relative to its potential opportunity, and that Nike management is “editing and shifting” resources (CEO Mark Parker’s words) to capitalize on that opportunity in Nike stock.
Big takeaway? Buy Nike for its upside in the women’s market.
The argument makes sense, and I qualitatively agree with it. Women’s active-wear is arguably the hottest market in the global retail landscape right now. There’s a lot of reasons why, but mostly, the widespread proliferation of visual-first social media has created a surge in consumer desire to look healthy and fit. This surge has hit the female demographic especially hard, and as such, there’s been a massive pivot among women towards active-wear styles.
With respect to Nike, the women’s business at Nike represents less than a quarter of total revenues. But, the women’s athletic apparel and footwear market measures 1.5-times that of the men’s athletic apparel and footwear market. Thus, the opportunity for Nike to grow its women’s business over the next several years is tremendous.
All that makes sense. But, what the article didn’t clarify is just how big this opportunity is, and how far it can take Nike stock. That’s why I’ve done just that in this article.
The answers? Nike’s women’s business could add upwards of $15 billion in revenue over the next several years, and upside therein supports Nike stock hitting $100 before the year is out.
Nike’s Women’s Business Could Add $15B+ In Revenue
Broadly speaking, Nike has an opportunity scale its women’s business from under $7 billion in 2018, to nearly $25 billion by 2025.
The math here isn’t hard to follow. Based on multiple market research reports, the global women’s active-wear market measures around $130 billion today and is growing at an 8% pace. Assuming that holds up for the foreseeable future (which it should, given the aforementioned secular trends), then the women’s active-wear market could hit $225 billion in revenues by 2025.
Nike’s wholesale equivalent revenues (revenues ex DTC) in the women’s category were just under $7 billion last year. That gives Nike roughly 5% market share in the women’s market. That’s tiny. Nike management said that the global women’s active-wear market is 1.5-times the size of the men’s active-wear market.
If true, that would put the men’s market at roughly $90 billion in 2018. Nike’s wholesale equivalent revenues in the men’s category were over $17 billion 2018, good enough for nearly 20% market share.
It’s tough to see Nike going from 5% to 20% market share in the women’s busin
ess within the next several years. The market is very competitive, athlete endorsement (which Nike relies heavily on) is less important, and Nike’s 20% market share in the men’s market took several decades to build. Nonetheless, it is reasonable to assume that as Nike dedicates more resources to the women’s category over the next several years, the company’s market share in the women’s market could double to 10% by 2025.
Further assuming the women’s market measures in at $225 billion, then Nike’s wholesale women’s business could be a $22.5 billion business by 2025. That represents huge growth of over $15 billion in revenues over the next several years.
Nike Stock Is Supported to $100
Assuming the women’s business does add upwards of $15 billion in wholesale revenue over the next several years, then Nike stock is supported to prices near $100 in 2019.
Again, the math here isn’t hard to follow. I’m projecting that Nike’s wholesale women’s business can do about $22.5 billion in sales by 2025, based on 10% market share in the women’s active-wear market.
Meanwhile, the men’s business should hold steady at roughly 20% market share, while the market should expand some to $100 billion, implying $20 billion wholesale revenue. Throwing in roughly $10 billion for the Young Athletes and Other segments, that would lead to Nike brand wholesale equivalent revenues of $52.5 billion by 2025.
Usually, Nike brand revenues are 10% above wholesale equivalent revenues, due to a boost from the direct business. If that holds up, that would put 2025 Nike brand revenues at roughly $57.8 billion. Adding in roughly $2 billion for Converse, Nike could reasonably hit $60 billion in revenue by 2025, representing a 7.4% compounded annual growth rate from 2018’s revenue base.
If Nike does hit $60 billion in revenue by 2025, then further assuming gradual gross margin expansion and natural opex leverage with scale, that should produce around $6 in earnings per share by 2025. Based on a historically average 25 forward multiple, that implies a fiscal 2024 price target for NKE stock of $150. Discounted back by 9% per year (one point below 10% to account for the yield), that equates to a fiscal 2019 price target of just under $100.
Bottom Line on NKE Stock
Nike has a tremendous opportunity in front of it to turn its ~$7 billion women’s business into a $20 billion-plus business. If the company successfully executes on that opportunity, then Nike stock has equally tremendous upside in a long term window.
As of this writing, Luke Lango was long NKE.