Nike Inc. (NYSE: ) is a major in the apparel industry. With a market value of $30.4 million, Inc. is the top-selling apparel brand worldwide. It is nearly twice the amount of Gucci second place brand, valued at $15.6 million.

Nike is a company that designs and distributes footwear, apparel and equipment for athletic sports. It has six divisions: Running, Nike Basketball, The Jordan Brand and Football.

Even though Nike is the market leader in the sector, there are short-term headwinds that could negatively affect the share price. The stock is therefore considered neutral. TipRanks shows the Nike stock charts.

How to measure competitive advantage

Nike’s competitive edge can be measured by measuring its earnings power and the cost of replicating the company. The adjusted EBIT before tax is divided by the weighted-average cost of capital. Reproduction value can also be used to measure earnings power. A company with a higher earnings power value than its reproduction value will be considered competitive.

Nike’s EBIT margin averaged 12.6% over the past five years. Based on its revenue over the last twelve months, Nike’s adjusted EBIT can be calculated as follows:

46.192 Billion x 0.126 = 5.8202 Billion

The after-tax adjusted EBIT can be calculated by using 21% marginal tax rates

5.8202 billion x (1 – 0.21) = $4.598 billion

Nike’s weighted average cost of capital is 7.8%. This is the earnings power value.

4.598/0.078 = $59.9487 Billion

Finally, its total asset value is $37.9 billion. Nike enjoys a competitive edge because it has an earnings power that is higher than its reproduction value.

The Short-Term Headwinds

Although Nike has a strong industry position and a clear competitive advantage, it will face some challenges in the months ahead. Nike faces the same supply chain challenges that affect businesses all over the world as other companies.

Management noted in their latest earnings call that it had closed down its factories in Vietnam and Indonesia over the summer. While operations have been reopened in Indonesia, Vietnam remains closed due to government directives.

Vietnam’s factories have lost 10 weeks worth of production. They plan to reopen their doors in phases starting October. For several months, however, production will not return to its full potential. Nike’s future growth will suffer as the management changes its fiscal year 2022 guidance. Nike expects to see mid-single digit growth instead of low double-digit growth.

Additionally, it comes in a poor time with the holiday season right around the corner. The quarter that ends is when retail companies make their biggest profits. Nike could lose market share if it doesn’t stock enough holiday merchandise.

Nike’s share of the market was 34.57% in Q2 2021. That means about one-third all industry sales went to Nike. It is important for Nike to maintain a sufficient supply of stock.

Wall Street Take

Looking at Wall Street, Nike currently has a Strong Buy consensus rating. This is based on the 18 Buys and three Holds that were assigned within the past three months. Nike’s average price target is $185.14, which implies a 25.9% upside potential.

Last Thoughts

Nike is a well-known brand and has experienced strong growth over the last year. But, Nike isn’t immune to current global supply chain problems. The stock market may face more challenges in the near term, as the company’s growth outlook has been cut by half. We believe that it’s better to stay on the sidelines than risk.

Disclosure: Stock Bros Research had no position at the time this article was published.

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