Athletic giant Nike Inc. said Wednesday it plans to increase sales by more than 40% to $27 billion in five years, and to do it profitably, by expanding the company's apparel business and retail stores, as well as growing in top markets such as China.
Nike plans to increase sales by more than 40% to $27 billion in five years. MarketWatch's Andria Cheng talks to Nike brand President Charlie Denson about how apparel and retail expansion fit into that growth plan and how Nike aims to increase its soccer share in this year's World Cup.
Chief Executive Mark Parker, speaking at the company's first analyst meeting in three years in New York, said the Beaverton, Ore.-based company also plans to generate $12 billion in cumulative free cash flow through 2015.
Nike (NKE 70.84, -1.46, -2.02%) -- which also owns brands including Converse, Hurley, Umbro and Cole Haan through acquisitions -- had $19.2 billion in sales last year. It kept its long-term growth forecast of annual sales increasing in the high single-digit percentage with profit per share rising in the middle teens. While the company's existing brands will represent the bulk of the company's growth, Parker said he's also looking for acquisitions like the 2003 purchase of Converse, which Nike has more than tripled in size.
In addition to retail and apparel, Nike also sees the fast-growing action sports market, which it called underpenetrated, as a growth opportunity for both its namesake brand and Hurley, according to Parker. The company also said it will do a better job gaining the wallet share of its female customers.
Converse, which Nike bought in 2003, will help fuel growth as well. Nike wants to double the size of the $1 billion brand in the next five years, with plans to open the first full-priced Converse store in Boston this summer. The company also seeks to take back ownership of the brand, currently operated by licensees, in China, the United Kingdom and other markets
"We saw a lot of opportunities," Parker said. "We are going to continue to fuel and accelerate the Nike Inc. portfolio. You can expect us to invest significantly in both owned retail and wholesale opportunities."
Investors appeared to be skeptical. Nike shares, which have risen 15% this year, fell 2.8% to $75.21 Wednesday.
"They are pretty ambitious targets," said Susquehanna Financial Group analyst Christopher Svezia in an interview after the meeting. "They lay a good framework. Now 'Show me.'"
Apparel, retail goals
Nike -- which says it has a 5% share of the market in the highly fragmented U.S. apparel sector (versus 26% share it has in footwear) and is also a small player overseas -- has centralized its apparel team around the world and is reducing the number of styles, vendors and materials it uses to focus on top-selling items such as T-shirts, track jackets and its Pro line of performance gear. Nike brand has about $4.9 billion in apparel sales, compared to $10.2 billion for footwear.
It plans to quadruple the investment it makes in apparel innovation and trends each year over the next five years, according to Eric Sprunk, Nike's vice president of product and merchandising. "Apparel is the single biggest opportunity that we have as a company," he said.
Nike plans to double its $2.4 billion in Nike brand retail sales, which includes online sales, in five years and increase the number of Nike brand retail stores to 738 from 452. To achieve that, the company plans to spend between $500 million to $600 million over the next five years to open not only smaller Nike stores, in 12,000 to 20,000 square feet in size and targeting as many as eight categories, but also stores for specific sports such as running and soccer. It also plans to open Converse stores as well as shops geared toward action sports.
"We need to create a new level of consumer experience," said Charlie Denson, Nike brand president. "We are looking at premium locations around the world."
The company said its retail expansion doesn't come at the sacrifice of its retail customers. It plans to increase its House of Hoops basketball concept with Foot Locker Inc. (FL 13.97, -0.20, -1.41%) ; Nike Fieldhouse with Dick's Sporting Goods Inc. (DKS 27.01, -0.67, -2.42%) and Nike Running Lab with Finish Line Inc. (FINL 14.80, -0.24, -1.60%) .
Some analysts are bullish on the retail expansion. "While the market will probably view it as a controversial move, we think it's a strong position for Nike," Credit Suisse's Omar Saad wrote in a report previewing the meeting. "History is ripe with success stories of great brands transforming their growth and profitability trajectory by developing a self-distribution arm, including Coach, Polo Ralph Lauren, Louis Vuitton, Burberry, Hermes, Guess and Apple.
"Distributing through its own stores would allow Nike to create an exciting environment for shoppers, improve the in-store service experience, get quick feedback on hits and misses and capture the entire vertical margin."
Geographies wise, Nike plans aggressive expansion in developing markets, led by China, its second largest market after the U.S. with more than $1 billion in sales. Developing markets, which also include Brazil and India and Central and Eastern Europe, are expected to see low double-digit growth and an additional $3 billion to $3.5 billion of annual revenue by the end of 2015.
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