This document provides an analysis of Nike's credit model. It includes an introduction to Nike as a company, an analysis of its cost of capital (WACC) of 3.34%, and historical returns on investment and returns on capital. The document also discusses Nike's expected growth areas, best case scenario of a 1% improvement in return on capital, and worst case scenarios involving rising costs and lower future orders. Risks discussed include competitive pressures and supply chain issues. The summary concludes that in a market slowdown, Nike's return on capital is expected to improve by 10%.

1. PRESENTED BY- KRITI MITTAL
ROLL NO.- 18059
CREDIT MODEL ANALYSIS

2. INTRODUCTION
 Nike is an American multinational corporation that
is engaged in the design, development,
manufacturing and worldwide marketing and
sales of footwear, apparel, equipment,
accessories and services. The company is
headquartered near Beaverton, in the Portland
metropolitan area. It is one of the world's largest
suppliers of athletic shoes and apparel and a
major manufacturer of sports equipment.

3. POOL OF COMPETITORS
Beta of the concerned
company:0.76

4. Analysis
 Cost of Equity : 4.52%
 Avg Net Cost of Debt : 2.52%
 Cost Of preferred share : 0.00%
 Cost of Capital(WACC) : 3.34%

6. HISTORICAL RR & ROC
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
1 2 3
historical reinvestment rate
historical ROC

7. PAST RECORDS
 Avg Historical ROI : 50.06%
 Avg Historical ROC : 16.98%

8. RATING ANALYSIS
On 18th october, 2016, Nike Inc. sold $1.5 billion of notes, reflecting
demand for higher yields than those offered by government bonds.
Thus, we will add new debt issue to total debt of the company. An
increase in leverage reduces the weighted average cost of capital (or
WACC), because the required rate of return on debt is lower than on
equity. Interest on borrowing is also tax deductible, which further
reduces the cost of funding and enhances shareholder returns.

9.  For calculating total debt, I calculated year on
year contractual obligations apart from long term
debt for year on year basis for the coming 5
years.
 The cost of long term borrowings was used to
discount future contractual obligations so as to
calculate P.V. of long term contractual obligations.

11. EXPECTED IMPROVEMENTS
 NIKE expects revenues to grow by $6.5 billion by
fiscal year 2017. Latin America, particularly Brazil,
is expected to be a key growth driver. The
company expects Brazil to become its third-
largest market globally in time for the Olympic
Games in Rio slated for 2016. NIKE is looking at
the Running, Soccer, and Women’s Training
categories to drive growth.
 The company expects the Japanese market to
grow in the mid-single digits through fiscal year
2017.
 NIKE, Inc. (NKE) is now re-positioning itself in the
Chinese market. It’s trying to create a more
differentiated product portfolio.

12. BEST CASE- ROC IMPROVED BY
1%
 Despite having operations in 190 countries across the
world, North America continues to be the most
important of NIKE’s growth drivers. North American
sales make up about 44% of its total revenues
worldwide. And, NIKE’s projecting high single digit
top-line growth in North America through 2017.
 Brazil already has a healthy sports culture, even apart
from soccer. NIKE was a sponsor at the FIFA 2014
soccer World Cup and is also a sponsor at Rio’s
Olympic Games, slated for 2016. The company
wants to use these opportunities to enhance its image
not only in Brazil, but all over the world.
 NIKE has targeted women’s training as a growth
opportunity. A $4 billion business in 2013, the
company plans to grow its Women’s division by ~$3
billion by fiscal year 2017.

13. WORST CASE
 Despite the improvement in NIKE, Inc.’s gross profit
margins, SG&A costs have been on the rise over the past
year. Digital infrastructure, increased overheads, and
event-driven promotional expenditures are also likely to
increase SG&A.
 NIKE’s manufacturing operations are concentrated in
lower-cost countries such as China, Vietnam, and
Indonesia. Although its manufacturing is contracted out, an
increase in costs, especially on the labor front, would
adversely affect profitability targets.
 capex has risen from 2.4% in fiscal year 2015 to 3.2%
in 2017. NIKE, Inc. (NKE) expects capex to range from 3%
to 4% of sales over the next few years.
 Nike's most recent quarterly earnings fell below its
forecast. What's worse is future orders also missed the
mark, meaning things could get even more bleak from
here.

14. 1. Competitiveness, similar strategies adopted by
rivals-Although NIKE leads the market by a wide
margin, rivals could possibly emulate its premium
strategy in an attempt to eat into its market share.
Still, it would take years to build the brand that
NIKE’s got.
2. Consumer price sensitivity-Higher-priced
products also leave NIKE vulnerable to consumer
preferences. Although the company proved to
be relatively resilient in the most recent recession,
an economic downturn could reduce demand and
unit sales.
3. Supply chain risks- As mentioned earlier in the
series, all of NIKE’s manufacturing is outsourced to
third-party contractors in countries including China,
Indonesia, and Vietnam. Government legislation
regulating factories or an increase in input costs,

15. When market and industry is facing slow down,
ROC improvement will be 10%.

16. RATINGS FINALIZED

18. THANKYOU