Collin J. Myers
Memorandum #4
Collin J. Myers BUS-458 Spring 2013
Collin J. Myers
NIKE Memorandum #4 At NIKE everything starts with the consumer. Consumer insights enable NIKE to innovate and add strength to the NIKE portfolio - footwear, apparel, category, brand and distribution.1 NIKE strives to communicate with the consumer in an effort to deliver the most innovative products on the market. NIKE has built one of the most recognizable brands in the world through its constant innovation strategy, applied not only to their products but also to all areas of business. Without innovation, NIKE would not be what it is today, making innovation NIKE’s greatest source of competitive advantage. NIKE’s strategy is to achieve long-term revenue growth by creating innovative “must have” products (NIKE Flyknit Technology & Fuel Band), building deep personal consumer connections with their brands (NIKE Digital), expanding into new spaces (Emerging Markets), and delivering compelling consumer experiences at retail and online (DTC Businesses).2 The athletic footwear, apparel, and equipment industry is keenly competitive in the United States and on a worldwide basis. The intense competition stems from the rapid changes in technology and consumer preference.3 Characteristics that constitute success in this industry are: performance and reliability of products (shoes, apparel, and equipment), new product development, price, product identity through marketing and promotion, and customer support and service.4 Due to the fast operating speed of the
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http://investors.nikeinc.com/files/Nike%20Inc.%20Q213%20Earnings%20Release%20Transcript_v001_w 20vs9.pdf 2 NIKE FY 2013 Q2 Earnings Summary 3 http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form-10K.pdf 4 http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form-10K.pdf II
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industry, technologic change must be embraced. As the active movement is on the rise, NIKE is positioned to see profits well into the future. This paper will include an analysis of financial ratios that are important to the core values of NIKE. These ratios reflect NIKE’s direction and overall purpose as a company; they will reflect how successfully NIKE is fulfilling their mission by being compared to Adidas and the performance of the S&P 500. I will then provide a future investment outlook based on the effectiveness of NIKEs‘ key financial statistics. Growth A key statistic that takes a view into the overall growth performance of NIKE is their five-year compound annual growth rate (CAGR). For fiscal years 2008-2012, NIKE boasts a CAGR of 8% [Fig. 1].5 This shows that NIKE’s investing activities have been successful and the company as a whole is growing in terms of revenue. This means that NIKE is succeeding in its mission to deliver long-term sustainable growth. The ratio downplays certain operating segments, but with a highly diversified portfolio like NIKE’s the CAGR is an adequate ratio to show growth across all segments. In comparison, during this same period (2008-2012) The S&P 500 had a CAGR of -0.17%.6
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http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/index.html#select_financials http://www.moneychimp.com/features/market_cagr.htm III
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Diluted Earnings per share is a commonly used measurement of success in the industry. With the exception of the financial crisis in 2009, NIKE has delivered a yearly increase in their diluted EPS [Fig. 2]7. Increases in NIKE’s diluted EPS derive from strong revenue growth and gross margin expansion. A positive five-year CAGR and an increase in Diluted EPS show that NIKE is performing well in sales as well as on the equity markets. Again showing that NIKE is positioning itself well for sustainable longterm growth.
Figure 2
Liquidity Due to NIKE’s recent setbacks in their Chinese markets, it is vital to look at the change in their inventory turnover. It can be seen that NIKE’s 2011 inventory turnover reflects a slight increase [Fig. 3]8. This is a result of lower Chinese sales in 2011 because NIKE failed to produce clothing that supplied the ‘fit’ demand of the Asian demographic.9 Since then NIKE has been working to refine their Chinese markets by creating special seasonal releases (Chinese New Year, etc.) and manufacturing clothes that accommodate the Asian body better.10 The normality in NIKE’s 2012 turnover is a result of the progress made in China but mostly can be attributed to the advancement in the world economy and an increase in consumer confidence.11
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http://investors.nikeinc.com/files/FY12%2010%20Year%20Financial%20History%20%20NIKEINC%20(Post%20Stock%20Split)_v001_h6tt73.pdf 8 http://investors.nikeinc.com/files/FY12%2010%20Year%20Financial%20History%20%20NIKEINC%20(Post%20Stock%20Split)_v001_h6tt73.pdf 9 http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form-10K.pdf 10 NIKE FY 2013 Q2 Earnings Summary 11 NIKE FY 2013 Q2 Earnings Summary IV
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Solvency Taking a look into NIKE’s debt to equity ratios offers insight into their financial strength. Over the past five fiscal years, NIKE has produced on average an incredibly low debt to equity ratio of .068 [Fig. 4].12 As you can see in the chart below, this well outperforms the industry average. Over the same period, Adidas produced an average debt to equity ratio of 1.2.13 This shows that NIKE is more equity financed than the industry and Adidas. Being more equity financed lowers NIKE’s exposure to the interest costs associated with using debt financing and the interest costs of being a global company. NIKE’s debt to equity represents a solid model for long-term sustainable growth and a great deal of financial leverage.
Figure 4
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http://www.stock-analysis-on.net/NYSE/Company/Nike-Inc/Ratios/Long-term-Debt-and-Solvency#Debtto-Equity 13 NIKE FY 2013 Q2 Earnings Summary V
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It can be seen in the chart below that over the past few years NIKE has become
less debt financed [Fig. 5].14 NIKE has become more equity financed as a result of high ROE and ROA delivering high levels of return and cash flows from operations. Figure 5
Profitability A large contributing factor to NIKE’s success and the athletic apparel & footwear industry is the availability of outsourcing and the use of sub contractors to manufacture their products. This is the only way that NIKE and other competitors have been able to achieve such high profit margins. NIKE’s high profit margins represent one corner of
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http://www.stock-analysis-on.net/NYSE/Company/Nike-Inc/Ratios/Long-term-Debt-and-Solvency#Debtto-Equity VI
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their foundation for success. It can be seen in [Fig. 6]15, NIKE over the past 5 years has continually outperformed the industry with its Net Profit Margins. This means that NIKE’s outsourcing strategy is the most efficient, allowing them to control costs better than their competitors. Figure 6
NIKE’s gross margin is also a very important measure of their success. NIKE strives to expand into new markets and is subject to many expenses due to this fact. Over the past three years, NIKE’s gross margin has steadily decreased [Fig. 7].16 This is associated with a rise in raw material costs, labor costs and the expansion of the brand into lower margin geographies (Emerging Markets).17 Another important contribution to the decrease in gross margin deals with NIKE’s mission to deliver the most innovative products. The launch of NIKE Digital in 2010 is a large source of R&D spending that ultimately lowers their gross margin in the short term. Despite the drop in gross margin,
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http://www.stock-analysis-on.net/NYSE/Company/Nike-Inc/Ratios/Profitability#Net-Profit-Margin http://investors.nikeinc.com/files/FY12%2010%20Year%20Financial%20History%20%20NIKEINC%20(Post%20Stock%20Split)_v001_h6tt73.pdf
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http://investors.nikeinc.com/files/NIKE,%20Inc.%20Q313%20Earnings%20Release%20Transcript_v001_ c97v0n.pdf VII
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NIKE has still been able to deliver increases in diluted EPS (discussed in growth section). Figure 7
The final two aspects of NIKE’s financial performance that truly make it stand out from Adidas are: Return on Equity (ROE) & Return on Assets (ROA). NIKE over the past 5 years held an average of 21.58% annual ROE [Fig. 8].18 Adidas over the past 5 years held an average of 11.9% annual ROE [Fig. 9].19 This shows that NIKE’s mission to innovate every aspect of their company including management effectiveness to generate income is working. Figure 8
Figure 9
During this same five-year period, NIKE held an average annual ROA of 14.16% [Fig. 8].20 Adidas held an average annual ROA of only 5.36% over the past five years.21
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http://investors.nikeinc.com/files/FY12%2010%20Year%20Financial%20History%20%20NIKEINC%20(Post%20Stock%20Split)_v001_h6tt73.pdf 19 http://www.adidas-group.com/en/investorrelations/financial_data/default.aspx 20 http://investors.nikeinc.com/files/FY12%2010%20Year%20Financial%20History%20%20NIKEINC%20(Post%20Stock%20Split)_v001_h6tt73.pdf VIII
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The difference seen in ROA is another explanation of NIKE’s strength in the market place. It also reflects NIKE’s constant drive to innovate and utilize all of its assets as efficiently as possible. Both of the ratios explained above are in line with NIKE’s mission to deliver long-term sustainable growth. Future Forecast Nike operates a well-recognized brand worldwide and provides products perceived as top quality by consumers and businesses across the globe. The stock has been on a monster run over the last few years and is now trading at all-time high prices ($60.08), supported by strong earnings and revenue growth. NIKE’s financials are quite healthy and in line with there future mission; to deliver sustainable long-term growth. It can be seen in [Fig. 10], that NIKE’s share price has outperformed the S&P 500 over the past five years.
Figure 10
Despite challenges in Europe, China and the US, NIKE has continually outperformed its competitors and the S&P 500 [Fig. 11].22 NIKE has only 20% exposure to the Western European markets compared to Adidas having nearly 35% of sales in 21 22
http://www.adidas-group.com/en/investorrelations/financial_data/default.aspx http://finance.yahoo.com/q?s=nke&ql=1 IX
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Western Europe.23 NIKE is the leading Athletic Company in North America and China. As a result, NIKE’s revenues outperform the heavily European sales based Adidas. Figure 11
NIKE has identified its areas of future growth, which lie in Digital, and refining their Chinese market. The positive side to these future goals is that NIKE is already well
established in both these markets. NIKE has been in China for decades and the image of the NIKE and Jordan brands is well respected and viewed as a premium brand. Despite having negative growth in China over the past year, NIKE has continued to
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http://www.investopedia.com/stock-analysis/032213/nike-continues-just-do-it-nke-ua-dks-luluaddyy.aspx X
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deliver a high-diluted EPS [Fig. 2]24, increase in dividends, and increased revenues [Fig 1.].25 The digital community represents the future of many industries, not just NIKE’s. NIKE has the human capital and free cash flows to make the investments in adapting digital technology into their products. As these new digital products hit the market, I have the strongest belief that profit margins will increase due to NIKE Digital’s success. NIKE also has high bargaining power due to their strong history of innovation, which will help create strategic partnerships with tech companies. Partnerships will enable NIKE to grow to the next level and continue to set the bar for their competitors. Overall, NIKE and Adidas are both wise companies to invest in because of the markets they compete in. With active lifestyles on the rise both companies are well positioned to succeed. Active lifestyles and brand communities are the future of the NIKE and Adidas. It will not be a sprint between the two companies but rather a crosscountry battle into the future. Both companies have healthy financials at this point; success will depend on adapting to the new strategic inflection points in the industry such as digital adaptation. With annual increase in revenue [Fig. 1], dividends, ROE [Fig. 8], and investment into digital technology; NIKE is a better stock to hold in the long run.
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http://investors.nikeinc.com/files/FY12%2010%20Year%20Financial%20History%20%20NIKEINC%20(Post%20Stock%20Split)_v001_h6tt73.pdf 25 http://investors.nikeinc.com/files/FY12%2010%20Year%20Financial%20History%20%20NIKEINC%20(Post%20Stock%20Split)_v001_h6tt73.pdf XI
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References
NIKE, Inc. “Ten year financial history”http://investors.nikeinc.com/files/FY12%2010%20Year%20Financial%20History%20%20NIKEINC%20(Post%20Stock%20Split)_v001_h6tt73.pdf http://www.investopedia.com/stock-analysis/032213/nike-continues-just-do-it-nke-ua-dks-lulu-addyy.aspx http://finance.yahoo.com/q?s=nke&ql=1 Adidas Group, Key Financial History http://www.adidasgroup.com/en/investorrelations/financial_data/default.aspx http://www.stock-analysis-on.net/NYSE/Company/Nike-Inc/Ratios/Profitability#Net-Profit-Margin NIKE, Inc. “FY 2013 Q3 Earnings Release Conference Call.” March 21, 2013 http://investors.nikeinc.com/files/NIKE,%20Inc.%20Q313%20Earnings%20Release%20Transcript_v001_ c97v0n.pdf NIKE FY 2013 Q2 Earnings Summary http://www.stock-analysis-on.net/NYSE/Company/Nike-Inc/Ratios/Long-term-Debt-and-Solvency#Debt-toEquity CAGR Calculator.12 http://www.moneychimp.com/features/market_cagr.htm NIKE, Inc. 2012 Annual Report http://investors.nikeinc.com/files/doc_financials/AnnualReports/2012/docs/nike-2012-form-10K.pdf
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