Important disclosures appear on the last page of this report.

Krause Fund Research Fall 2015 Consumer Discretionary Recommendation: Buy Analysts

Song Gao song-gao@uiowa.edu

Company Overview Nike, Inc. focuses on the design and sales of athletic footwear, apparel, sports equipment, accessories and services. It was founded in 1967 and its world headquarter is located near Beaverton, Oregon. Nike, Inc. divides its products into eight important categories: Running, Basketball, Football (Soccer), Men’s Training, Women’s Training, Action Sports, Sportswear (our sports-inspired lifestyle products) and Golf. Nike, Inc. derives 46% of the revenue from US stores sales. Its net income for fiscal year 2015 ending May. 31 was 21.53% higher than that for previous fiscal year Stock Performance Highlights 52 week High $133.52 52 week Low $90.69 Beta Value 0.79 Average Daily Volume 4.575 m Share Highlights Market Capitalization $57.70b Shares Outstanding 8.57m Book Value per share $15.10 EPS (FY 15) $3.95 P/E Ratio 31.08 Dividend Yield 1.12% Dividend Payout Ratio 34% Company Performance Highlights ROA 13.85% ROE 29.08% Sales $31.03 b Financial Ratios Current Ratio 2.89 Debt to Equity 9.37%

Nike, Inc. (NYSE: NKE)

November 17, 2015

Current Price $122.58 Target Price $127.7

Nike Comes Back

• We recommend investors to buy Nike. We also believe that Nike will rise to our target price and refresh its 52 week high record. • Nike’s CEO Mark Parker was honored as Fortune’s Top BusinessPerson of the Year • Nike’s first quarter earnings in FY 2016 beat estimation because the increase in Chinese sales support the high earning • Nike’s new partnership with Flex Inc. to bring innovation to the manufacturing and supply chains.

One Year Stock Performance

Important disclosures appear on the last page of this report.

Real Gross Domestic Product Gross Domestic Product (GDP) is a measurement of the economic health for a nation. Basically, the GDP includes total consumptions of the products and services. GDP is an important indicator of the performance of consumer discretionary sector because about 70% of GDP derives from the personal consumption expenditures that mainly consists of services and non-durable goods.

Source: Thomson Reuters The services spending and non-durable goods spending has strong correlation with the S&P Consumer Discretionary. When the economy is growing, people will be willing to consume more personal expenditure. The companies in the consumer discretionary sector will report more earnings and sales than before. Thus, investors becomes more confident about investing these companies. From 1996 to 2008, S&P Consumer Discretionary reacted more to the expectation of changes in consumer spending next year. When consumer spending changes 1%, the S&P 500 will change almost more than 15% with same direction as consumer spending changesi. Consumer Spending& Consumer Sector Index Performance Category Correlation R-Square Durable Goods 0.69 0.47 Non-Durable Goods 0.72 0.52 Services 0.65 0.43 The historical data for the last fifty years shows that the average real GDP growth is 3.09%. Since the financial crisis, the annual real GDP growth rate is recovering back to the positive number: The growth rate in 2012 is 2.2% and is 2.4% in 2014. The GDP growth rate is in upward trend even though there are some downward adjustments in latest quarter reportsii.

Source: Haver Analytical Our team believe that the real GDP growth will rise above the historical average and reach about 3.0% for long term reaching the level of 3.3% because the unemployment rate decreases and disposable income increases. People can contribute more to production and have more free money to spend on consumption. The short-term growth rate will come to 2.5% as a result of downward adjustment of the recovering economy. Since the personal consumption expenditure constitute a great proportion of real GDP, we think that S&P consumer discretionary sector will increase more than 10%. The companies related to the non-durable goods and services in this sector may change more 15% positively. Interest Rate: Interest rate is another important driver to the consumer discretionary sector. It indicates cost of consumers’ borrowings. Individuals often borrow money to purchase the durable goods such as automobiles, electronic appliances for private expenditures. When the interest rate is high, consumers will not demand more purchasing. So the companies’ earnings decrease and so do their stock price. On the other way, the high interest rate will lead to high debt and high return. Thus, investors prefer to save money into their account rather than borrow money to invest.iii

Economic Analysis

Important disclosures appear on the last page of this report.

In recent five years, the interest rate is decreasing. It is 0.12% in the current announcement period. Our team think that the interest rate will be 0.16% for long term as the GDP grows well and the Federal will make adjustment of interest rate to match the good economy. The S&P 500 will experience downward adjustment by the change of interest rate and increase back soon because other economic factors will boost the S&P 500 for long term to compensate effect of the increase of interest rate. In short-term time, the interest rate will increase about 0.01% or will not change for the short term because the recent data indicates that unemployment rate decreases to 5% and non-farm payroll increases to 271 thousand and the Fed can increase the interest rate to match current economy level. The Consumer Discretionary sector will react to the S&P 500’s change, experiencing a slow downward adjustment and regaining back. The only uncertainty is whether the strengthen dollar will make the US companies less competitive and this case will lead the slump of the stock prices similar to the aftermath of weaken RMB. Disposable Income Disposable Income calculates the money available for consumers’ expenditures after subtracting the current tax. This factor indicates that people would like to consume more money when the number is higher.

Source: Federal Reserve Bank of St. Louis When the disposable income increases, people will have more money to spend, thus the performance of the companies will benefit from the increasing spending and S&P Index will also increase to some extent. The demand for the consuming goods will also increases following the trend. Disposable income in recent three years keeps upward trend. Currently it is 38,165 capita. Our team expect that disposable income will increase to 42,000 capita for long term. Nike Company will benefit the increasing demand for its products and its domestic sales will boost up. Nike will also gain more sales for the short term.

Currency Currency rate commonly affects the companies that have a considerable size of overseas markets. When the dollar becomes strong, the price of imported goods will decrease and the cheap price will stimulate the sales. On the other hand, the strengthened US dollar will lead increase the price of exported goods. Then the higher foreign price may decrease the exports. Nike has the large scale of the future orders using the foreign currency to trade with the suppliers outside the United States. So, when the dollars became strong, Nike will get currency interests from the future orders. Otherwise, it will lose some of its profits as Nike announced that the future orders will be affected by currency fluctuations when calculating the revenue and inventoriesiv Employment The employment situation can be measured by non-farm payroll and unemployment rate. When the employment increases, individuals will have more income to spend. Thus, the consumer discretionary sector will benefit and the apparel industry will also have better performance by the promising expectation of the increasing employment and extra income.

Source: Bureau of Labor Statstics We think that the recovery of economy make the unemployment rate drop down to the lowest point of five years. We expect that the unemployment rate will decrease to 4.5% because the continuous GDP growth will make unemployment decrease. As the unemployment decreases, people will have more income and be willing to consume. Therefore, the companies in consumer discretionary sector will have better performance.

Important disclosures appear on the last page of this report.

The demand for consumption market is driven by the economic factors such as GDP, disposable income, and employment situation. On 11/14/2015, the three Year return of Consumer Discretionary sector of S&P 500 Index is 71.40%, higher than 46.61% return of S&P 500 overall Index. In recent three years, Textile, Apparel & luxury goods industry has yielded 51.81% return and the stock price of Nike has increased by about 164%. v

Source: Fidelity Research data According to current economic data of increasing growth of GDP and lowest unemployment rate in recent five years, we believe that the consumer discretionary sector will continue to outperform the S&P total index for long term. The Apparel Industry will also continue increase its return by the increasing demand of consumers. For the short term (within one year), the whole stock market may slow down its increase because the potential increase of interest rate will cause the downward adjustment for the stock market. Then, the stock market will retrieve its return in the steady growth return. Industry Introduction: Sports Apparel& Footwear Industry consists of the companies that design, sell athletic footwear, sporting apparel and accessories. The companies in this industry purchase the finished shoes and apparels from manufacturers and resell these products to the retailers or directly to the shops. They also utilize e-commerce to build brand image to the customers. Life Cycle The Sports Apparel& Footwear Industry is in mature stage. According to the IBIS World, the industry value added is estimated to grow at 1.6% for long-term, lower than the estimation of GDP long-term growth. This

comparison indicates that the companies are developing in a stable situation. In this industry, the consolidation indicates the stable level of development.vi (ISIBWORLD) Out team thinks that the revenue growth of industry will probably maintain about 2%-2.5% for long term and fluctuate in recent two years between 2%--4% because the economy is still in recovery for the short term time. Recent Developments and Industry Trends: Demand In recent years, the demand for the footwear is based on design, price and function. After financial crisis, the change in demand for footwear has experienced a great fluctuation. From 2010 to 2013, the demand for the footwear increase about 19.93% then the speed of growth decreases. The growth of the demand is 3.7% this year, lower than the growth in previous year (4.8%). vii

Source:IBIS Even though the growth in the current year decreases, the demand is still increasing. Our team think that the demand for footwear will grow to 4% in recent two years based on the data that disposable income increases, and lowest unemployment rate in latest five years. Then the growth of demand will decrease to 2% at stable level. Overseas Expansion Since the sports apparel and footwear industry is mature in United States, the industry will seek out other opportunity to develop. The large companies in this industry are expanding their markets across Asia-Pacific area, Europe and emerging markets in developing countries in South America or Africa. Nike, Sketcher, Under Armor, Lululemon have retail stores across world.viii These large companies also have outsourcing contract with developing countries to acquire cheap materials. Nike has outsourcing contracts with suppliers and manufacturers outside the United States to decrease its cost of sales margin. ix

Capital Market Outlook

Industry Analysis

Important disclosures appear on the last page of this report.

We believe that the large companies in sports apparel will continue to utilize the outsourcing and international expansion to boost sales because the US market is mature and the revenue in US market grows at a stable level. Porter Five Forces Analysis Power of buyers The customers’ purchase power is moderate. Footwear & apparels are essential items for customers. There is no other substituted commodities. Customers who are price sensitive choose the inexpensive products. As the customers are gradually knowledgeable about the quality of shoes and apparels, they are willing to buy high quality ones and expensive ones. The price range of the footwear and apparels is from $100--$500, not as high as the price range of luxury goods. So the power of buyers is moderate. x Power of Suppliers The main suppliers in this industry is the manufacturers. Companies in this industry are cooperating with the developing countries’ manufacturers to decrease cost of materials and labor cost. For instance, Nike has outsourcing contract with suppliers in developing countries such as China, Mexico and India. The suppliers do not have negotiate power with the companies because there are many suppliers for substitution worldwide. So the power of suppliers is moderately low. Threats of New Entrants The obstacles for new companies to the entry is relatively low. The only requirements to start a new sports apparel& footwear retail store are source of the suppliers and store to operate. But survival for the new stores is difficult. The first threat is price competition. Large companies can discount their retail price to attract customers and increase sales. But small companies cannot afford the loss of discounted price. The second threat is brand images. The new companies are difficult to be recognized by most customers in a short time. When they can want to try other sales ways such as online sales, they cannot get positive effect because the customers are not familiar with the new companies, few of them would risk trying the new ways. So the threats of new entrants are very high. Threats of substitutes The threats of substitutes are very low. The apparel and footwear are necessity for customers so the customers will not replace them with other thing. They will only change the types of the products. So there is no worry about the threats of substitutes. Competition of Industry The competition of the sports apparel& footwear industry is high because large companies occupy most market shares.

Source:Statista As data are shown on the form, Nike took 69% of marketshares in this industry. So it is high competitive among the apparel& footwear retailers. Other new retailers or small retailers cannot compete with it. In this industry, the small companies will seek acquisition by the large companies to expand their sales and avoid the intense competition. For example, the converse was merged by Nike and Reebok was acquisted by Adidas. So the apparel& footwear industry keeps intensive competition. Peer Comparison& Leaders in industry The major companies in this industry can be defined as leaders. The determinants we define the best companies include market cap, revenue, profit margin, P/E ratio, and return on equity (ROE).

Source: Yahoo Finance Our team think Nike is the leader in this industry based on several items. First, Nike’s Market Cap is highest among its competitors. The sum of the other four companies’ market cap is much less than that of Nike.

Company Name

Market Cap(B) Revenue(B)

Profit Margin P/E ROE

Nike 103.85B 31.03B 11.25% 30.87 29.08% Under Armour 18.86B 3.69B 5.82% 89.40 15.39% Skechers, U.S.A 3.97B 3.00B 7.47% 17.55 20.43% Lululemon Athletica Inc 6.33B 1.90B 14.05% 24.00 24.01% Columbia Sportswear 3.45B 2.30B 7.23% 20.89 12.52%

Important disclosures appear on the last page of this report.

Second, Nike’s higher P/E ratio compared to its competitors indicates that it has higher growth and higher profit. Even though Under Armour’s PE reached to 89.40, this number is too high and suggests that Under Armour has high volatility. So the Nike is safer to invest than Under Armor. Third, Nike and Lululemon have over 10% profit margin among these companies, but lululemon’s revenue is not as much as Nike’s. Nike’s highest ROE among its peers signifies that the company utilize its equity value better to generate profit than others. So we believe that these signals about Nike’s profitability will bring the investors advantages. Catalyst for Growth/Change: •The recovery of U.S economy •New Designs of the products •Online services to attract more customers Key Investment Positives •Increasing demand for footwear •Innovative design of the products •International Expansion •Large companies’ brand recognition Key Investment Negatives •Child labor scandals •Intense Price Competition affecting profit margins Company introduction: Nike, Inc. became a legal corporate in 1967. Its main business activity is the design, development and marketing and sale of athletic footwear, apparel, equipment, accessories and other services. Nike sell its products through Nike-owned retail stores, other independent retail store such as Foot Locker, and online retailers. Nike’s all apparel and footwear are manufactured by the factories outside the United States and equipment products are produced both domestically and abroad. Nike has no significant customers since no customer occupy 10% or more of the company’s net sales in recent three fiscal years.xi Life Cycle Nike Inc. is in the mature stage of life cycle. From 2012, the revenue growth rate decreased from 19.78% to 4.88% then came back to about 10% in recent three years. xiiSo we think that the revenue growth rate come to a stable level. In order to keep its current popularity among the customers, Nike

designs new products with high quality and sell them to the customers. Nike merged Converse, Hurley, and Jordan to develop its multiple business. Product Lines and Markets Nike’s main products are divided into four categories: Footwear, Apparel, Equipment, and Other Footwear: Nike’s footwear products are designed for both athletic training and leisure. It innovates new designs annually. The Sportswear, Running, Basketball, and Football (Soccer) footwear are Nike’s top selling products. Apparel: Nike’s apparels are designed primarily for athletic training use. Sportswear, Men's Training, Running and Football (Soccer) are Nike’s focus on apparel. It also sponsors the university sports teams and professional leagues. Equipment & other: Nike sells a series of sports equipment and accessories under its brand name. It also sells different plastic products to other manufacturers. xiii

Source: Nike’s Financial Statement in FY 2015 We think that Nike will continue to put focus on the footwear sales as the revenue from the footwear accounted for more than half of the total sales. Analysis of recent earnings releases: On September 24th, Nike announced its first quarter earnings in Fiscal year 2016. The Earning per Share (EPS) is $1.34/share, beating the estimation—$1.19/share. Nike’s earning report wrote that the reason why Nike had a high earning is the huge increase in Chinese sales. The sales in China increased about 30% than previous quarter. (WSJ) Another factor is the slight increase in selling price. According to Nike’s 10-K report, the company wrote that it raised the retail price slightly to increase the gross margin and compensate high input costs caused by labor cost inflation and shifts in combination of high-cost products. xiv Product Distribution Nike distributes its products to over a thousand retail stores across the world. In US market, Nike has 339 retail stores including the Converse stores and Hurley stores. Outside of the US market, it has 592 retail stores. Furthermore, Nike has

Company Analysis

Important disclosures appear on the last page of this report.

the hedging orders at a fixed price maturing almost half of a year. Nike has 146 footwear factories located in 14 countries and about 95% of footwear production comes from Vietnam, China, and Indonesia. Nike is supported by 408 apparel factories in 39 countries. Top five contract manufacturers are responsible for 36% of the total apparel production. Nike corporates with the independent raw materials suppliers having no risk failing to meet the requirement for the production.xv Competition Nike competes with Lululemon athletica, Skechers, Under Armour, Columbia, and others in different aspects: earnings, product characteristics such as quality and design, brand popularity, and operating ways including sourcing and distribution.xvi

Source:Yahoo Finance We believe that Nike has the highest profitability among its competitors because Nike has 3.95 earnings per share, higher than other four competitors shown above.

Source:Yahoo Finance According to 10-k of each company, we found that Nike has large scale size of the production—over 500 factories and other competitors have just over 100 factories. Even though Nike have large quantity of inventories, it can still operate efficiently. We can found Nike’s inventory turnover is the second highest, but Lululemon’s revenue is much less than Nike’s. xvii

Nike gains more popularity than other competitors as it sponsors professional leagues such as NFL and NBA, over 100 university athletic teams, and about 100 national sports team. On the other hand, Nike operate longer than its direct competitors. Based on the profitability, popularity, operating efficiency, we think that Nike is more competitive than its peers.xviii Research& Development When developing the products, Nike hires the experts in the fields of biomechanics, chemistry, exercise physiology and other related fields. Nike also consults with the advisory board consisting of different athletics and sports experts to ensure the safety and quality of the products. xix Payout Policy Nike’s dividend per share increases in recent three years—from $0.81 per share to $1.08 per share. The dividend payout ratio increased from 27% to 32% during 2011-2013. Then in recent two years, the payout ratio decreases slightly. But we believe that Nike will increase its dividend payout ratio because Nike announced the program about increasing the repurchase amount and the strong earnings report have enough resource to pay dividend to the shareholders. So there are more benefit to the shareholders than before and investors will be more confident about the company.xx Catalyst for Growth Nike depends on the sales of footwear so we think that Nike will innovative design on footwear to attract more customers. We also expect that Nike’s revenue growth in recent year continue to increase because Nike expands its business internationally. In addition, better economy will stimulate the demand for footwear and consumer’s preference on brand recognitions will make the Nike competitive. Sponsorship with professional league, university athletic teams, and national sports teams make Nike popular among the consumers. Key Investment Positives

• Leading in the industry because of the high profitability, large scale of production, effective operation, and high popularity.

• Innovative Research & Design on footwear to attract more customers

• International Expansion • Various sales channel • Increasing Demand for footwear • CEO honored by Fortune Magazinexxi • Corporation with Flex on manufacturing and

supplies

Important disclosures appear on the last page of this report.

Key Investment Negatives • Intense competition • Increase Counterfeits in productsxxii • Dependence on other suppliers and manufacturers

We valued Nike by using the models including Discounted Cash Flow (DCF) model, Economic Profit (EP) model, Discounted Dividend Model (DDM), and Relative Model. After we calculated the values of four models, we recommend to buy Nike. From Nike recent earning reports and economic announcement, we are optimistic about Nike. The results are different from each other. The DCF&EP models calculated an intrinsic value of $127.27 per share, which is 3.8% higher than the price as of November 17, 2015, The DDM Model we calculated showed a value of $153.51, about 20% higher than the current price. For the relative model, we got P/E 2016 estimated relative intrinsic price of $89.12 and P/E 2017 estimated intrinsic price of $90.96.These two results have 30% discount and 28.53% discount respectively when compared to the current price.

127.67154.04

89.12 90.96

0.00

50.00

100.00

150.00

200.00

DCF DDM Relative P/E16E

Relative P/E17E

Valuation Results

General Assumptions Continuing Value (CV) When we determined the continue value growth rate, we used the long-term real GDP growth as an important factor. The GDP historical average rate is about 3%. So we assumed that the CV growth rate is 3.3% the same rate as we predict long-term GDP growth. We believe that the recovery of the economy will stimulate the demand for footwear and sports apparel. So we are optimistic about the growth. Revenue Decomposition We searched the data from Nike’s 10-K to define the items we forecast. We divided the products category into four parts: Footwear, Apparel, Equipment, and others.

• Footwear: The footwear revenue growth rate increases in recent 3 year because the demand for the footwear increases and the selling price increases slightly. The revenue of footwear accounts for 60% of total revenue. So we think that Nike’s footwear

revenue growth rate will increase in recent two years to 15%. Then the growth rate will decrease to a steady rate about 9%.

• Apparel: The apparel is the second largest Nike’s revenue stream. As Nike did not utilize too many researches& designs on this part, we assume that the growth rate will not have great change. In recent two years, the growth rate will increase because good economy increase the demand for apparel for short term.

• Equipment: The equipment only accounts for a small proportion of Nike’s total revenue. Equipment revenue decreases 2% in Fiscal Year 2015. We think that the equipment has its duration for about 2 or 3 years. So people will purchase to replace the old ones after 2 or 3 years. The growth rate in recent two forecast year can be still be negative, but it will come back to 1% after the steady growth period.

• Others: Other business include the accessories and some services. Since it takes only a small part of total revenue, we assume that the growth rate is 2%, higher than inflation rate

Cost of Goods Sold The cost of goods sold include the payment to independent suppliers and manufacturers since Nike has no brand-owned factories. Nike decreases its cost of finished good by cooperating with other independent firms. We assume that cost of goods sold margin will keep constant in recent five years because we think that Nike spends time to find another cost-saving materials or other cost-saving manufacturing process. From the steady growth period, we expect that the cost margin will decrease about 1% because Nike can find cost-saving ways to operate its business. Capital Expenditures Nike’s investing cash flow is mainly capital expenditure almost without any other investment activities. The capital expenditure focuses on purchasing property for research& design or leasing capital. From Nike’s 10-K, we believe that it will continue to increase its expenditure to make innovative design to be competitive in the market. We used the last five years’ gross PP&E average increase to forecast the future value of the gross PP&E. The remaining life time of the gross PP&E we assume is about 10 years since the 10-k report estimate 5—15 years.xxiii The depreciation is calculated by a straight-line basis. Weighted Average Cost of Capital Nike’s Weighted Average Cost of Capital is about 7.2%. It did not conclude any preferred stock in fiscal year 2015. We calculated the cost of equity by using Capital Asset Pricing Model (CAPM). Nike’s beta is 0.78 from Bloomberg terminal, indicating that Nike is relatively stable compared

Valuation Analysis

Important disclosures appear on the last page of this report.

with other companies whose betas are larger than 1 when market has changes. We choose today’s 30-year U.S. Treasury Bond (3.05%) as our risk free rate. The risk premium is selected from 30 years average premium 4.42%. We found that the cost of equity was 6.54%. We used the yield to maturity of Nike’s 30-year bond. The value of debt include short-term debt, current portion of debt, long-term debt and present valued of operating lease. The value of Equity is measured by market value of stocks. After discounting the effect of tax, we calculated the final result of Weighted Average Cost of Capital: 6.42%. Discounted Dividend Model The intrinsic value of Discounted Dividend Model is about $154.04 after adjustments. This model only uses the discounted dividend in recent forecast years and continue value from calculation of EPS, CV ROE, and CV growth. Nike did not announce any news about its increase on dividend payout so we keep the dividend payout ratio constant. We assume the CV growth rate for EPS is 3.3% because we think the profit growth rate will equal to the long-term real GDP rate from the steady growth rate. The DDM model only considers about the earnings, so we did not focus too much on this model. Relative Price to Earning Model The results of this model are much less than the current stock price. The reasons why the results is much lower than the current stock price are the low P/E ratio of selected companies and small EPS of these companies. We just choose the Columbia Sportswear and LuLulemon because their P/E ratios are not in outliers. Under Armour has a P/E ratio about 90 and Skechers’s P/E is lower than 15. Moreover, Nike’s P/E is much higher than Columbia and LuLulemon. If we use the relative P/E model with lower P/E ratio, we will lower the expectation about the Nike. Nike’s earning is higher than its peers, so it is not accurate to estimate Nike’s price by using its peers with lower EPS. Discounted Cash Flow& Economic Profit The result of Discounted Cash Flow model is a close estimation about the intrinsic value of Nike because this model considers different assumptions. We use the Net Operating Profit Less Adjusted Taxes (NOPLAT) to subtract capital expenditure to get the Free Cash Flow (FCF). The WACC estimation is better than cost of equity because it contains more information such as the consideration of debt calculation. We assume the CV growth of NOPLAT will be 4.5% because the good economy bring the stimulus to the demand for products. The CV growth rate will equal to the Real GDP rate plus the inflation rate. We are optimistic about the growth rate of economy and of Nike. Then we discounted Free Cash Flow and Continue Value to get intrinsic value of Nike: 127.7 (After Adjustment) In Economic Profit Model, we got the same final result as that of Discounted Cash Flow Model. We discounted forecast

economic profit and plus the Initial capital expenditure to get the intrinsic value. We think that these two models provided us the best estimation of Nike’s intrinsic value as the models include more adjustments about the revenue, tax shields, and capital expenditure. Beta vs. CV growth of NOPLAT Changes in beta will affect the cost of equity and CV growth of NOPLAT will affect the calculation of the continue value. When beta decreases about 0.01, the intrinsic price will increases about $3.3. As the beta increases 0.01, the intrinsic price would decreases about the $3.3. Keeping other constant, we changed the CV growth of NOPLAT by 0.05% and found about $2 change on the intrinsic price. So we think these two factors are important in the valuation because they are sensitive to the little changes. Cost of Debt vs Risk Free Rate We found that the cost of debt is not sensitive to the change since 0.03% change in cost of debt will not affect the intrinsic price too much. The risk free rate will affect the intrinsic price greatly. When the risk free rate is changed by 0.05%, the intrinsic price will change by $2.5. So risk free rate is another sensitive factor in our valuation model. Cost of Debt vs Risk Premium When the cost of debt is changed by 0.03%, the intrinsic price will not change over $1.So the cost of debt is not a significant factor. As the risk premium changes by 0.03%, the intrinsic price will change $1. We think that risk premium is just moderately sensitive and is not as sensitive as beta, although these two factors all affect beta. CV growth of NOPLAT vs Marginal Tax Rate CV growth of NOPLAT is a sensitive factor. As the CV growth of NOPLAT changes by 0.05%, the intrinsic price will change by$2. Marginal Tax Rate is not sensitive. When the marginal tax rate change by 0.2%, the intrinsic price only change by $0.2. So we do not think that marginal tax rate is a significant factor to affect result of the valuation greatly. Risk Premium vs Normal Cash When the risk premium is changed by 0.03%, the intrinsic price changes about $1. We think risk premium will not affect the intrinsic price greatly unless risk premium increases or decreases a lot.

Sensitivity Analysis

Important disclosures appear on the last page of this report.

As the normal cash percentage decreases by 0.4%, the intrinsic price only increases by $0.5. On the contrary, the normal cash percentage increases by 0.4%, the intrinsic price decreases by $0.5. So we think that the normal cash percentage is not a sensitive factor to the valuation.

Important disclosures appear on the last page of this report.

Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

Important disclosures appear on the last page of this report.

i Fisher Investments on Consumer Discretionary Page 51 ii U.S. Bureau of Economic Analysis GDP Statistics http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&903=5 iii Fisher Investments on Consumer Discretionary Page 53-55 iv Nike 2015 10-K Report Page 10

“Risk Factors, Future orders”

v Fidelity Sector Research https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml?tab=learn&sector=25 vi IBISWORLD “Industry Performance” http://clients1.ibisworld.com/reports/us/industry/currentperformance.aspx?entid=1073 vii IBISWORLD “Industry at a Glance” http://clients1.ibisworld.com/reports/us/industry/ataglance.aspx?entid=1073 viii S&P Capital “Textiles, Apparel & Luxury Goods” Industry Survey, Page 47 ix Nike 2015 10-K Report Page 22, “Manufacturing” x MarketLine United States Footwear Industry Analysis http://advantage.marketline.com/Product?pid=MLIP1633-0025&view=d0e333 xi Nike 2015 10-K Report Page 3 “General Introduction” xii Nike 2015 10-K Report Page 28

“Operating Segments”

xiii Nike 2015 10-K Report Page 76, “Revenue by Major Product line” xiv Nike 2015 10-K Report Page 20, ‘Selected Financial Data’ xv Nike 2015 10-K Report Page 4

‘Sales and Marketing’

xvi Nike 2015 10-K Report Page 6 “Competition”

xvii Nike 2015 10-K Report Page 5 Under Armour 2014 10-K Report Page 2 Lululemon 2015 10-K Report Page 5

xviii Nike’s Sponsorship List https://www.sport195.com/brands/nike-939

xix Nike 2015 10-K Report Page 5 “Product Research, Design &Development” xx Factset Terminal Nike Ratio Analysis xxi Fortune, “Nike’s Master Craftsman” http://fortune.com/2015/11/12/nike-ceo-mark-parker/ xxii Nike 2015 10-K Report Page 7 “Risk Factors” xxiii Nike 2015 10-K Report Page 57, Notes, ‘Property, Plant and Equipment’

Nike Inc.Key Assumptions of Valuation Model

Ticker Symbol NKECurrent Share Price $122.58Current Model Date 11/17/2015Fiscal Year End May. 31

Pre‐Tax Cost of Debt 3.96%Beta 0.79Risk‐Free Rate(30 Year Treasury Yield) 3.05% 11/17/201510 Year Treasury Yield 2.09%Equity Risk Premium 4.42%CV Growth of NOPLAT 3.30%CV Growth of EPS 3.30%Current Dividend Yield 1.20%Marginal Tax Rate 20.20%Effective Tax Rate 22.2%Inflation Rate(CPI Y/Y change) 0.00%CV ROIC 31.57%WACC 6.42%Normal Cash 2%

Beta127.665 0.75 0.76 0.77 0.78 0.79 0.8 0.81 0.82 0.83

3.10% 128.28 126.54 124.85 123.20 121.59 120.02 118.49 117.00 115.553.15% 129.92 128.13 126.39 124.69 123.04 121.43 119.86 118.33 116.843.20% 131.61 129.76 127.97 126.23 124.53 122.88 121.27 119.70 118.173.25% 133.35 131.46 129.61 127.82 126.07 124.38 122.72 121.11 119.54

CV growth 3.30% 135.16 133.20 131.30 129.46 127.67 125.92 124.22 122.56 120.953.35% 137.02 135.01 133.05 131.15 129.31 127.51 125.76 124.06 122.413.40% 138.95 136.88 134.86 132.91 131.01 129.16 127.36 125.61 123.913.45% 140.95 138.81 136.74 134.72 132.76 130.86 129.01 127.21 125.463.50% 143.03 140.82 138.67 136.59 134.57 132.61 130.71 128.86 127.063.55% 145.18 142.89 140.68 138.53 136.45 134.43 132.47 130.56 128.713.60% 147.41 145.05 142.76 140.55 138.40 136.31 134.29 132.32 130.41

Cost of Debt127.665 0.0384 0.0387 0.039 0.0393 0.0396 3.99 0.0402 0.0405 0.0408

2.65% 145.95 145.95 145.95 145.95 145.95 150.95 145.95 145.95 145.952.70% 143.38 143.38 143.39 143.39 143.39 150.43 143.39 143.39 143.392.75% 140.91 140.91 140.91 140.91 140.91 149.91 140.91 140.91 140.912.80% 138.51 138.51 138.51 138.52 138.52 149.40 138.52 138.52 138.522.85% 136.19 136.20 136.20 136.20 136.20 148.89 136.21 136.21 136.21

Risk Free R 2.90% 133.95 133.96 133.96 133.96 133.96 148.38 133.97 133.97 133.982.95% 131.78 131.79 131.79 131.79 131.80 147.88 131.80 131.81 131.813.00% 129.68 129.69 129.69 129.69 129.70 147.38 129.71 129.71 129.713.05% 127.65 127.65 127.66 127.66 127.67 146.88 127.67 127.68 127.683.10% 125.67 125.68 125.68 125.69 125.69 146.39 125.70 125.71 125.713.15% 123.76 123.76 123.77 123.78 123.78 145.90 123.79 123.80 123.803.20% 121.90 121.91 121.91 121.92 121.93 145.42 121.94 121.94 121.953.25% 120.10 120.11 120.11 120.12 120.12 144.94 120.14 120.14 120.15

Cost of Debt127.665 0.0384 0.0387 0.039 0.0393 0.0396 3.99 0.0402 0.0405 0.0408

4.30% 131.56 131.57 131.57 131.57 131.58 147.83 131.58 131.59 131.594.32% 130.89 130.90 130.90 130.90 130.91 147.67 130.92 130.92 130.924.34% 130.23 130.23 130.24 130.24 130.25 147.51 130.25 130.26 130.264.36% 129.58 129.58 129.58 129.59 129.59 147.35 129.60 129.60 129.614.38% 128.93 128.93 128.93 128.94 128.94 147.20 128.95 128.96 128.964.40% 128.28 128.29 128.29 128.30 128.30 147.04 128.31 128.31 128.32

Risk Premi 4.42% 127.65 127.65 127.66 127.66 127.67 146.88 127.67 127.68 127.684.44% 127.02 127.02 127.03 127.03 127.04 146.73 127.04 127.05 127.054.46% 126.39 126.40 126.40 126.41 126.41 146.57 126.42 126.43 126.434.48% 125.77 125.78 125.78 125.79 125.79 146.42 125.80 125.81 125.814.50% 125.16 125.17 125.17 125.18 125.18 146.26 125.19 125.20 125.204.52% 124.56 124.56 124.57 124.57 124.58 146.11 124.59 124.59 124.60

CV growth of NOPLAT127.665 3.10% 3.15% 3.20% 3.25% 3.30% 3.35% 3.40% 3.45% 3.50%19.00% 122.74 124.21 125.72 127.27 128.88 130.54 132.26 134.03 135.8719.20% 122.55 124.01 125.52 127.07 128.68 130.34 132.05 133.82 135.6519.40% 122.36 123.82 125.32 126.87 128.48 130.13 131.84 133.61 135.4419.60% 122.16 123.62 125.12 126.67 128.27 129.93 131.63 133.40 135.2219.80% 121.97 123.43 124.93 126.47 128.07 129.72 131.42 133.18 135.0020.00% 121.78 123.23 124.73 126.27 127.87 129.51 131.21 132.97 134.79

Marginal Ta 20.20% 121.59 123.04 124.53 126.07 127.67 129.31 131.01 132.76 134.5720.40% 121.40 122.84 124.33 125.87 127.46 129.10 130.80 132.55 134.3620.60% 121.20 122.65 124.14 125.67 127.26 128.90 130.59 132.34 134.1420.80% 121.01 122.45 123.94 125.47 127.06 128.69 130.38 132.12 133.9321.00% 120.82 122.26 123.74 125.27 126.85 128.48 130.17 131.91 133.7121.20% 120.63 122.06 123.55 125.07 126.65 128.28 129.96 131.70 133.50

Normal Cash127.665 0.4% 0.8% 1.2% 1.6% 2.0% 2.4% 2.8% 3.2% 3.6%

4.32% 132.53 132.13 131.72 131.31 130.91 130.50 130.10 129.69 129.284.34% 131.87 131.46 131.06 130.65 130.25 129.84 129.44 129.03 128.624.36% 131.21 130.80 130.40 130.00 129.59 129.19 128.78 128.38 127.974.38% 130.56 130.15 129.75 129.35 128.94 128.54 128.14 127.73 127.334.40% 129.91 129.51 129.11 128.70 128.30 127.90 127.50 127.09 126.69

Risk Premi 4.42% 129.27 128.87 128.47 128.07 127.67 127.26 126.86 126.46 126.064.44% 128.64 128.24 127.84 127.44 127.04 126.64 126.23 125.83 125.434.46% 128.01 127.61 127.21 126.81 126.41 126.01 125.61 125.21 124.814.48% 127.39 126.99 126.59 126.19 125.79 125.40 125.00 124.60 124.204.50% 126.77 126.37 125.98 125.58 125.18 124.79 124.39 123.99 123.594.52% 126.16 125.77 125.37 124.97 124.58 124.18 123.78 123.39 122.994.54% 125.56 125.16 124.77 124.37 123.98 123.58 123.19 122.79 122.40

Nike Inc.Revenue Decomposition

Fiscal Years Ending May. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021ERevenue by Category Footwear 14,635.0 16,208.0 18,318.0 20,882.5 24,014.9 27,256.9 30,255.2 33,280.7 36,275.9

Growth(%) 9% 11% 13% 14% 15% 14% 11% 10% 9%

Apparel 7,491.0 8,109.0 8,636.0 9,120.5 9,667.7 10,392.8 11,016.4 11,567.2 12,145.5

Growth(%) 18% 8% 6% 6% 6% 8% 6% 5% 5%

Equipment 1,640.0 1,670.0 1,632.0 1,596.1 1,572.2 1,556.4 1,572.0 1,587.7 1,611.5

Growth(%) 36% 2% -2% -2% -2% -1% 1% 1% 2%

Other Business 2,500.0 1,684.0 1,982.0 2,021.6 2,062.1 2,103.3 2,145.4 2,188.3 2,232.1Global Brand Divisions 117.0 125.0 115.0 120.0 120.0 120.0 120.0 120.0 120.0Other Corporate Business -68.0 3.0 -82.0 50.0 50.0 50.0 50.0 50.0 50.0Total 25,313.0 27,799.0 30,601.0 33,790.7 37,486.8 41,479.4 45,158.9 48,793.9 52,435.1

Growth(%) 4.9% 9.8% 10.1% 10.4% 10.9% 10.7% 8.9% 8.0% 7.5%

Revenue by geography segmentsNorth America 10,387.0 12,299.0 13,740.0 15,388.8 17,235.5 18,959.0 20,854.9 22,523.3 24,325.2

growth(%) 17.5% 18.4% 11.7% 12.0% 12.0% 10.0% 10.0% 8.0% 8.0%

Europe 5,415.0 6,366.0 7,126.0 7,838.6 8,622.5 9,312.3 10,057.2 10,660.7 11,300.3

growth(%) 1.3% 17.6% 11.9% 10.0% 10.0% 8.0% 8.0% 6.0% 6.0%

China 2,453.0 2,602.0 3,067.0 3,527.1 4,161.9 4,911.1 5,647.7 6,494.9 7,404.2

growth(%) -3% 6% 18% 15% 18% 18% 15% 15% 14%

Japan 791.0 771.0 755.0 747.5 754.9 762.5 770.1 785.5 801.2

growth(%) -5.3% -2.5% -2.1% -1.0% 1.0% 1.0% 1.0% 2.0% 2.0%

Emerging Markets 3,718.0 3,949.0 3,898.0 4,092.9 4,297.5 4,512.4 4,738.0 5,117.1 5,526.5

Global Brand Divisions 117.0 125.0 115.0 120.0 120.0 120.0 120.0 120.0 120.0

Corporate -68.0 3.0 -82.0 50.0 50.0 50.0 50.0 50.0 50.0

Other Business 2,500.0 1,684.0 1,982.0 2,021.6 2,062.1 2,103.3 2,145.4 2,188.3 2,232.1

Total 25,313.0 27,799.0 30,601.0 33,790.7 37,486.8 41,479.4 45,158.9 48,793.9 52,435.1growth(%) 4.9% 9.8% 10.1% 10.4% 10.9% 10.7% 8.9% 8.0% 7.5%

Nike Inc.Income Statement

Fiscal Years Ending May. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021EIncome Statement

Sales 25,313.0 27,799.0 30,601.0 33,790.7 37,486.8 41,479.4 45,158.9 48,793.9 52,435.1

COGS 14,279.0 15,353.0 16,534.0 18,257.4 20,254.5 22,411.7 24,399.8 26,363.8 28,331.1

Gross Income 11,034.0 12,446.0 14,067.0 15,533.3 17,232.4 19,067.7 20,759.1 22,430.1 24,103.9

Depreciation&Amortization of Intangibles 438.0 586.0 649.0 348.3 403.5 435.9 401.7 396.9 397.5

SG&A Expense 7,796.0 8,766.0 9,892.0 10,923.1 12,117.9 13,408.5 14,597.9 15,773.0 16,950.0

EBIT (Operating Income) 2,800.0 3,094.0 3,526.0 4,261.9 4,710.9 5,223.3 5,759.5 6,260.3 6,756.4

Interest Income 26.0 26.0 5.0 5.2 5.3 5.5 5.6 5.8 6.0

Interest Expense -23.0 -43.0 -39.0 -45.0 -43.0 -41.8 -41.6 -41.3 -41.0

Other non-operating Income(expense) 469.0 467.0 713.0 734.4 756.4 779.1 794.7 810.6 826.8

Pretax Income 3,272.0 3,544.0 4,205.0 4,956.5 5,429.7 5,966.0 6,518.2 7,035.4 7,548.1

Income Taxes(benefit)-current 901.0 862.0 1,045.0 1,239.1 1,357.4 1,491.5 1,629.6 1,758.8 1,887.0

Income Taxes(benefit)-deferred -93.0 -11.0 -113.0 -148.7 -162.9 -179.0 -195.5 -211.1 -226.4

Net Income 2,464.0 2,693.0 3,273.0 3,866.1 4,235.2 4,653.5 5,084.2 5,487.6 5,887.5

Total Shares Outstanding 894.0 870.0 857.0 846.0 836.3 827.8 820.4 814.0 808.6

Dividends per Share 0.81 0.93 1.08 1.1 1.17 1.2 1.2 1.3 1.3

EPS 2.7 3.1 3.8 4.5 5.0 5.6 6.2 6.7 7.3

Nike Inc.Balance Sheetin millions of U.S. Dollar, except per share itemsFiscal Years Ending May. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021EAssetsCash Only 3,337.00 1,993.00 2,481.00 2303.65 2406.59 2811.96 3692.97 4849.81 6329.12Total Short Term Investments 2,628.00 3,149.00 3,443.00 3514.96 3588.42 3663.42 3739.98 3818.15 3897.95Accounts Receivables, Net 3,117.00 3,434.00 3,358.00 3708.03 4113.62 4551.75 4955.51 5354.39 5753.96Inventories 3,434.00 3,947.00 4,337.00 4789.07 5312.91 5878.77 6400.25 6915.43 7431.49Prepaid Expenses 802.00 818.00 1,028.00 976.60 927.77 881.38 837.31 795.45 755.67Deferred Income Taxes 308.00 355.00 389.00 430.23 475.83 526.26 582.03 643.72 711.95Other Current Assets 0.00 0.00 940.00 940.00 940.00 940.00 940.00 940.00 940.00Total Current Assets 13,626.00 13,696.00 15,976.00 16,662.53 17,765.14 19,253.54 21,148.07 23,316.95 25,820.14

Property, Plant & Equipment - Gross 5,500.0 6,220.0 6,352.0 7,014.1 7,781.3 8,610.1 9,373.9 10,128.4 10,884.2Accumulated Depreciation 3,048.0 3,386.0 3,341.0 3,689.3 4,092.8 4,528.7 4,930.4 5,327.3 5,724.8Net Property, Plant & Equipment 2,452.0 2,834.0 3,011.0 3,324.9 3,688.5 4,081.4 4,443.4 4,801.1 5,159.4Goodwill 131.0 131.0 131.0 131.0 131.0 131.0 131.0 131.0 131.0Net Other Intangibles 382.0 282.0 281.0 281.0 261.0 261.0 240.0 240.0 220.0Deferred Tax Assets 993.0 1,651.0 2,201.0 2,311.1 2,426.6 2,547.9 2,675.3 2,809.1 2,949.6Total Assets 17,584.0 18,594.0 21,600.0 22,710.4 24,272.3 26,274.9 28,637.8 31,298.1 34,280.1

Liabilities & Shareholders' EquityST Debt & Curr. Portion LT Debt 178.0 174.0 181.0 163.2 155.8 151.8 150.8 149.8 148.8Accounts Payable 1,646.0 1,930.0 2,131.0 2,345.8 2,590.3 2,873.6 3,179.7 3,461.8 3,740.4Income Tax Payable 98.0 432.0 71.0 83.1 91.0 100.0 109.2 117.9 126.5Dividends Payable 188.0 209.0 240.0 245.8 251.6 257.4 263.3 269.1 274.9Accrued Payroll 977.0 1,110.0 1,385.0 1,529.4 1,696.7 1,877.4 2,043.9 2,208.4 2,373.2Other Current Liabilities 839.0 1,172.0 2,326.0 2,568.5 2,849.4 3,152.9 3,432.6 3,708.9 3,985.6Total Current Liabilities 3,926.0 5,027.0 6,334.0 6,935.7 7,634.8 8,413.1 9,179.5 9,915.8 10,649.4

Long-Term Debt 1,210.0 1,199.0 1,079.0 973.0 929.0 905.0 899.0 893.0 887.0Deferred Tax Liabilities 1,545.0 1,554.0 1,480.0 1,554.2 1,632.0 1,713.8 1,799.7 1,889.9 1,984.6Other Liabilities(Derivatives) 104.0 323.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Liabilities 6,785.0 8,103.0 8,893.0 9,462.9 10,195.9 11,032.0 11,878.2 12,698.7 13,521.0

Preferred Stock (Carrying Value) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Common Stock&APIC 5,187.0 5,868.0 6,776.0 6,940.1 7,104.3 7,268.4 7,432.5 7,596.7 7,760.8Repurchase Stock(included only in RE calculation) -1,674.0 -2,628.0 -2,534.0 -2,595.4 -2,656.8 -2,718.1 -2,779.5 -2,840.9 -2,902.3Dividend Declared(included only in RE Calculation) -727.0 -821.0 -931.0 -953.6 -976.1 -998.7 -1,021.2 -1,043.8 -1,066.3Forfeiture share from employees(only in RE Calculation) -4.0 -4.0 -3.0 -3.0 -3.0 -3.0 -3.0 -3.0 -3.0Retained Earnings 5,695.0 4,871.0 4,685.0 4,999.1 5,598.4 6,532.1 7,812.6 9,412.5 11,328.5Other Equity 274.0 85.0 1,246.0 1,308.3 1,373.7 1,442.4 1,514.5 1,590.2 1,669.8Total Equity 11,156.0 10,824.0 12,707.0 13,247.6 14,076.4 15,242.9 16,759.7 18,599.4 20,759.0Total Liabilities & Shareholders' Equity 17,584.0 18,594.0 21,600.0 22,710.4 24,272.3 26,274.9 28,637.8 31,298.1 34,280.1

Nike Inc.Cash Flow Statement

Fiscal Years Ending May. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021EOperating ActivitiesNet Income 2485.0 2693.0 3273.0 3866.1 4235.2 4653.5 5084.2 5487.6 5887.5Depreciation, Depletion & Amortization 438.0 586.0 649.0 348.3 403.5 435.9 401.7 396.9 397.5Other Non-cash Items 125.0 291.0 658.0 -77.1 -83.3 -90.0 -97.3 -105.3 -114.0Changes in Working CapitalReceivables 142.0 -298.0 -216.0 -350.0 -405.6 -438.1 -403.8 -398.9 -399.6Inventories -197.0 -505.0 -621.0 -452.1 -523.8 -565.9 -521.5 -515.2 -516.1Accounts Payable 58.0 284.0 201.0 214.8 244.5 283.3 306.1 282.1 278.6Income Taxes Payable 31.0 334.0 -361.0 12.1 7.9 9.0 9.3 8.7 8.6Accured Payroll -28.0 133.0 275.0 144.4 167.3 180.7 166.5 164.5 164.8Dividend Payable 23.0 21.0 31.0 5.8 5.8 5.8 5.8 5.8 5.8Prepaid Expenses 55.0 -16.0 -210.0 51.4 48.8 46.4 44.1 41.9 39.8Other working capital (Assets/Liabilities) -38.0 -502.0 51.0 242.5 280.9 303.5 279.7 276.3 276.8Net Operating Cash Flow 3027.0 3003.0 4680.0 4006.0 4381.3 4824.1 5274.8 5644.3 6029.9

Investing ActivitiesProceeds(Payments) on Fixed Assets 164.0 -877.0 -960.0 -662.1 -767.2 -828.8 -763.8 -754.5 -755.8Sale(Purchase) of Investments -1203.0 -328.0 935.0 -72.0 -73.5 -75.0 -76.6 -78.2 -79.8

Proceeds(Payments) in Other Investment Activities -28.0 -2.0 -150.0 0.0 20.0 0.0 21.0 0.0 20.0Net Investing Cash Flow -1067.0 -1207.0 -175.0 -734.1 -820.7 -903.8 -819.3 -832.7 -815.6

Financing ActivitiesCash Dividends Paid -703.0 -799.0 -899.0 -953.6 -976.1 -998.7 -1021.2 -1043.8 -1066.3Issuance(Repurchase) in Capital Stock -1361.0 -2245.0 -2020.0 -2431.2 -2492.6 -2554.0 -2615.4 -2676.8 -2738.1Change in Current Debt 15.0 75.0 -63.0 -17.8 -7.4 -4.0 -1.0 -1.0 -1.0Borrowing(change) in Long-Term Debt 937.0 -60.0 -7.0 -106.0 -44.0 -24.0 -6.0 -6.0 -6.0Borrowing(change) in other financing activities 72.0 115.0 199.0 59.3 62.4 65.7 69.1 72.7 76.5Net Financing Cash Flow -1040.0 -2914.0 -2790.0 -3449.3 -3457.7 -3515.0 -3574.5 -3654.8 -3734.9

Net Change of Cashflow 1083.0 -1117.0 1632.0 -177.4 102.9 405.4 881.0 1156.8 1479.3

Nike Inc.Common Size Income Statement

Fiscal Years Ending May. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021ESales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

COGS 56.41% 55.23% 54.03% 54.03% 54.03% 54.03% 54.03% 54.03% 54.03%

Gross Income 43.59% 44.77% 45.97% 45.97% 45.97% 45.97% 45.97% 45.97% 45.97%

Depreciation&Amortization of Intangibles 1.73% 2.11% 2.12% 1.03% 1.08% 1.05% 0.89% 0.81% 0.76%

SG&A Expense 30.80% 31.53% 32.33% 32.33% 32.33% 32.33% 32.33% 32.33% 32.33%

EBIT (Operating Income) 11.06% 11.13% 11.52% 12.61% 12.57% 12.59% 12.75% 12.83% 12.89%

Interest Income 0.10% 0.09% 0.02% 0.02% 0.01% 0.01% 0.01% 0.01% 0.01%

Interest Expense ‐0.09% ‐0.15% ‐0.13% ‐0.13% ‐0.11% ‐0.10% ‐0.09% ‐0.08% ‐0.08%

Other non-operating Income(expense) 1.85% 1.68% 2.33% 2.17% 2.02% 1.88% 1.76% 1.66% 1.58%

Pretax Income 12.93% 12.75% 13.74% 14.67% 14.48% 14.38% 14.43% 14.42% 14.40%

Income Taxes(benefit)-current 3.56% 3.10% 3.41% 3.67% 3.62% 3.60% 3.61% 3.60% 3.60%

Income Taxes(benefit)-deferred ‐0.37% ‐0.04% ‐0.37% ‐0.44% ‐0.43% ‐0.43% ‐0.43% ‐0.43% ‐0.43%

Net Income 9.73% 9.69% 10.70% 11.44% 11.30% 11.22% 11.26% 11.25% 11.23%

Nike Inc.Common Size Balance Sheet

Fiscal Years Ending May. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021ECash Only 13.18% 7.17% 8.11% 6.82% 6.42% 6.78% 8.18% 9.94% 12.07%Total Short Term Investments 10.38% 11.33% 11.25% 10.40% 9.57% 8.83% 8.28% 7.83% 7.43%Accounts Receivables, Net 12.31% 12.35% 10.97% 10.97% 10.97% 10.97% 10.97% 10.97% 10.97%Inventories 13.57% 14.20% 14.17% 14.17% 14.17% 14.17% 14.17% 14.17% 14.17%Prepaid Expenses 3.17% 2.94% 3.36% 2.89% 2.47% 2.12% 1.85% 1.63% 1.44%Deferred Income Taxes 1.22% 1.28% 1.27% 1.27% 1.27% 1.27% 1.29% 1.32% 1.36%Other Current Assets 0.00% 0.00% 3.07% 2.78% 2.51% 2.27% 2.08% 1.93% 1.79%Total Current Assets 53.83% 49.27% 52.21% 49.31% 47.39% 46.42% 46.83% 47.79% 49.24%

Property, Plant & Equipment - Gross 21.73% 22.37% 20.76% 20.76% 20.76% 20.76% 20.76% 20.76% 20.76%Accumulated Depreciation 12.04% 12.18% 10.92% 10.92% 10.92% 10.92% 10.92% 10.92% 10.92%Net Property, Plant & Equipment 9.69% 10.19% 9.84% 9.84% 9.84% 9.84% 9.84% 9.84% 9.84%Goodwill 0.52% 0.47% 0.43% 0.39% 0.35% 0.32% 0.29% 0.27% 0.25%Net Other Intangibles 1.51% 1.01% 0.92% 0.83% 0.70% 0.63% 0.53% 0.49% 0.42%Deferred Tax Assets 3.92% 5.94% 7.19% 6.84% 6.47% 6.14% 5.92% 5.76% 5.63%Total Assets 69.47% 66.89% 70.59% 67.21% 64.75% 63.34% 63.42% 64.14% 65.38%

Liabilities & Shareholders' EquityST Debt & Curr. Portion LT Debt 0.70% 0.63% 0.59% 0.48% 0.42% 0.37% 0.33% 0.31% 0.28%Accounts Payable 6.50% 6.94% 6.96% 6.94% 6.91% 6.93% 7.04% 7.09% 7.13%Income Tax Payable 0.39% 1.55% 0.23% 0.25% 0.24% 0.24% 0.24% 0.24% 0.24%Dividends Payable 0.74% 0.75% 0.78% 0.73% 0.67% 0.62% 0.58% 0.55% 0.52%Accrued Payroll 3.86% 3.99% 4.53% 4.53% 4.53% 4.53% 4.53% 4.53% 4.53%Other Current Liabilities 3.31% 4.22% 7.60% 7.60% 7.60% 7.60% 7.60% 7.60% 7.60%Total Current Liabilities 15.51% 18.08% 20.70% 20.53% 20.37% 20.28% 20.33% 20.32% 20.31%

Long-Term Debt 4.78% 4.31% 3.53% 2.88% 2.48% 2.18% 1.99% 1.83% 1.69%Deferred Tax Liabilities 6.10% 5.59% 4.84% 4.60% 4.35% 4.13% 3.99% 3.87% 3.78%Other Liabilities(Derivatives) 0.41% 1.16% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total Liabilities 26.80% 29.15% 29.06% 28.00% 27.20% 26.60% 26.30% 26.03% 25.79%

Preferred Stock (Carrying Value) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Common Stock&APIC 20.49% 21.11% 22.14% 20.54% 18.95% 17.52% 16.46% 15.57% 14.80%Repurchase Stock(included only in RE calculation) ‐6.61% ‐9.45% ‐8.28% ‐7.68% ‐7.09% ‐6.55% ‐6.15% ‐5.82% ‐5.53%Dividend Declared(included only in RE Calculation) ‐2.87% ‐2.95% ‐3.04% ‐2.82% ‐2.60% ‐2.41% ‐2.26% ‐2.14% ‐2.03%Forfeiture share from employees(only in RE Calculation) ‐0.02% ‐0.01% ‐0.01% ‐0.01% ‐0.01% ‐0.01% ‐0.01% ‐0.01% ‐0.01%Retained Earnings 22.50% 17.52% 15.31% 14.79% 14.93% 15.75% 17.30% 19.29% 21.60%Other Equity 1.08% 0.31% 4.07% 3.87% 3.66% 3.48% 3.35% 3.26% 3.18%Total Equity 44.07% 38.94% 41.52% 39.20% 37.55% 36.75% 37.11% 38.12% 39.59%Total Liabilities & Shareholders' Equity 69.47% 66.89% 70.59% 67.21% 64.75% 63.34% 63.42% 64.14% 65.38%

Nike Inc.Weighted Average Cost of Capital (WACC) EstimationFor Fiscal Year 2015 Ending May.31Risk Free Rate (30 Year Treasury Yield) 3.05%

Beta 0.79

Market Risk Premium 4.42%

Cost of Equity  6.54%

Cost of DebtBond Mature on 05/01/2043  3.96%

Short Term Debt 181$                              Long‐term Debt 1,079$                           Debt(in Millions) 1,260$                           PV of Opreating Lease(in millions) 2,496.75$                      Equity(in millions) 105,051.06$                 

WeightsWeights of Debt(including PV of Operating Lease)  3.45%Weights of Equity 96.55%

Tax Rate 22.16%

WACC 6.42%

Nike Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:     CV Growth 3.30%     CV ROIC 31.57%     WACC 6.42%     Cost of Equity 6.54%

Fiscal Years Ending May. 31 2015 2016E 2017E 2018E 2019E 2020E 2021E

DCF ModelFCF 2060 2237 2500 3003 3304 3646CV of FCF in stead growth period(CV2021)  128921Number of  Period For Discounting  0 1 2 3 4 5 6PV of FCF 1936 1975 2074 2341 2420PV of CV2021 94441

Value of Operating Assets 105187Add: Excessive Cash 1869Add: Short‐term Investment 3358Add: Other Long Term Asset 0Less: PV of Operating Lease 2497Less: ST Debt & Curr. Portion LT Debt 181Less: Long Term Debt 1079Less: Other Liabilities(Derivatives) 0Value of Equity 106658Number of Shares outstanding 857Intrinsic Value of Stock 124Adjusted Price 127.7

EP ModelBegin IC 9911EP  2193 2445 2731 3026 3306 3581CV2021 EP 114683Number of Periods For Discounting: 0 1 2 3 4 5 6PV of EP 2060 2159 2266 2359 2422PV of CV2021 EP 84011Value of Operating Assets 105187Add: Excessive Cash 1869Add: Short‐term Investment 3358Add: Other Long Term Asset 0Less: PV of Operating Lease 2497Less: ST Debt & Curr. Portion LT Debt 181Less: Long Term Debt 1079Less: Other Liabilities(Derivatives) 0Value of Equity 106658Number of Shares outstanding 857Intrinsic Value of Stock 124Adjusted Price 127.7

Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)

Operating Operating Operating OperatingLeases Leases Leases Leases

2016 447 2015 427 2014 403 2013 4082017 423 2016 399 2015 340 2014 3872018 371 2017 366 2016 304 2015 2712019 311 2018 311 2017 272 2016 2242020 268 2019 251 2018 225 2017 186Thereafter 1,154 Thereafter 1050 Thereafter 816 Thereafter 662Total Minimum Payments 2974 Total Minimum Payments 2804 Total Minimum Payments 2360 Total Minimum Payments 2138Less: Interest 477 Less: Interest 443 Less: Interest 354 Less: Interest 302PV of Minimum Payments 2497 PV of Minimum Payments 2361 PV of Minimum Payments 2006 PV of Minimum Payments 1836

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 3.96% Pre‐Tax Cost of Debt 3.96% Pre‐Tax Cost of Debt 3.96% Pre‐Tax Cost of Debt 3.96%Number Years Implied by Year 6 Payment 4.3 Number Years Implied by Year 6 Payment 4.2 Number Years Implied by Year 6 Payment 3.6 Number Years Implied by Year 6 P 3.6

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 447 430.0 1 427 410.7 1 403 387.6 1 408 392.52 423 391.4 2 399 369.2 2 340 314.6 2 387 358.13 371 330.2 3 366 325.7 3 304 270.6 3 271 241.24 311 266.3 4 311 266.3 4 272 232.9 4 224 191.85 268 220.7 5 251 206.7 5 225 185.3 5 186 153.26 & beyond 268 858.2 6 & beyond 251 782.7 6 & beyond 225 614.7 6 & beyond 186 499.3PV of Minimum Payments 2496.8 PV of Minimum Payments 2361.3 PV of Minimum Payments 2005.7 PV of Minimum Payments 1836.0

Present Value of Operating Lease Obligations (2011) Present Value of Operating Lease Obligations (2010) Present Value of Operating Lease Obligations (2009) Present Value of Operating Lease Obligations (2008)

Operating Operating Operating OperatingLeases Leases Leases Leases

2012 374 2011 334 2010 330.2 2009 312.42013 310 2012 264 2011 281.3 2010 264.42014 253 2013 220 2012 233.6 2011 228.92015 198 2014 177 2013 195.6 2012 192.12016 174 2015 148 2014 168.6 2013 163.9Thereafter 535 Thereafter 466 Thereafter 588.5 Thereafter 692.3Total Minimum Payments 1844 Total Minimum Payments 1609 Total Minimum Payments 1797.8 Total Minimum Payments 1854Less: Interest 252 Less: Interest 220 Less: Interest 261 Less: Interest 290PV of Minimum Payments 1592 PV of Minimum Payments 1389 PV of Minimum Payments 1537 PV of Minimum Payments 1564

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 3.96% Pre‐Tax Cost of Debt 3.96% Pre‐Tax Cost of Debt 3.96% Pre‐Tax Cost of Debt 3.96%Number Years Implied by Year 6 Payment 3.07 Number Years Implied by Year 6 Payment 3.15 Number Years Implied by Year 6 Payment 3.49 Number Years Implied by Year 6 P 4.22

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 374 359.8 1 334 321.3 1 330.2 317.6 1 312.4 300.52 310 286.8 2 264 244.3 2 281.3 260.3 2 264.4 244.63 253 225.2 3 220 195.8 3 233.6 207.9 3 228.9 203.74 198 169.5 4 177 151.5 4 195.6 167.5 4 192.1 164.55 174 143.3 5 148 121.9 5 168.6 138.8 5 163.9 135.06 & beyond 174 407.3 6 & beyond 148 354.3 6 & beyond 168.6 444.5 6 & beyond 163.9 515.7PV of Minimum Payments 1591.8 PV of Minimum Payments 1389.0 PV of Minimum Payments 1536.6 PV of Minimum Payments 1564.0

Nike Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending May. 31 2016E 2017E 2018E 2019E 2020E 2021E

EPS 4.54$             5.03$          5.59$             6.17$             6.72$                    7.26$            

Key Assumptions   CV growth 3.30%   CV ROE 29.92%   Cost of Equity 6.54%

Future Cash Flows     P/E Multiple (CV Year) 27.44     EPS (CV Year) 7.26$                 Future Stock Price(2020)     Dividends Per Share 1.13$             1.17$          1.21$             1.24$             1.28$                        Future Cash Flows 199.16$                   Discounted Period 1 2 3 4 5     Discounted Cash Flows 1.058$          1.028$        0.998$          0.966$           146.013$            

Intrinsic Value 150.06$       Adjust Price 154.04$       

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares):  58,100,000Average Time to Maturity (years): 6.00Expected Annual Number of Options Exercised: 9,683,333

Current Average Strike Price: 16.95$            Cost of Equity: 6.54%Current Stock Price: $122.58

2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Increase in Shares Outstanding: 9,683,333 9,683,333 9,683,333 9,683,333 9,683,333 9,683,333 9,683,333 9,683,333 9,683,333 9,683,333Average Strike Price: 16.95$             16.95$                16.95$               16.95$              16.95$              16.95$               16.95$              16.95$             16.95$               16.95$              Increase in Common Stock Account: 164,132,500   164,132,500      164,132,500     164,132,500    164,132,500    164,132,500     164,132,500    164,132,500   164,132,500     164,132,500    

Change in Treasury Stock 2,534,000,000 2,534,000,000 2,534,000,000 2,534,000,000 2,534,000,000 2,534,000,000 2,534,000,000 2,534,000,000 2,534,000,000 2,534,000,000Expected Price of Repurchased Shares: 122.58$           130.60$              139.14$             148.24$            157.94$            168.28$            179.28$            191.01$           203.51$            216.82$           Number of Shares Repurchased: 20,672,214      19,402,914        18,211,551       17,093,339      16,043,787      15,058,678       14,134,056      13,266,207      12,451,646       11,687,099      

Shares Outstanding (beginning of the year) 857,000,000 846,011,119 836,291,538 827,763,321 820,353,315 813,992,862 808,617,517 804,166,794 800,583,920 797,815,608Plus: Shares Issued Through ESOP 9,683,333 9,683,333 9,683,333 9,683,333 9,683,333 9,683,333 9,683,333 9,683,333 9,683,333 9,683,333Less: Shares Repurchased in Treasury 20,672,214      19,402,914        18,211,551       17,093,339       16,043,787      15,058,678       14,134,056       13,266,207      12,451,646       11,687,099      Shares Outstanding (end of the year) 846,011,119 836,291,538 827,763,321 820,353,315 813,992,862 808,617,517 804,166,794 800,583,920 797,815,608 795,811,842

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol NKECurrent Stock Price $122.58Risk Free Rate 3.05%Current Dividend Yield 1.20%Annualized St. Dev. of Stock Returns 23.60%

Average Average B‐S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 58,100,000 16.95 6.00 99.95$         5,807,088,061$     Total 58,100,000 16.95$         6.00 108.46$      5,807,088,061$