Nike Company Analysis - Paper Example

Nike is an American based multinational corporation that is engaged in design, development, manufacturing and sale of footwear, clothing, fashion accessories and sports apparel worldwide. According to their profile in their official corporate website, Nike, Inc. fosters a culture of invention, creating products, services and experiences for todays athletes while solving problems for the next generation. The catalyst for revolutionizing the way Nike do business is sustainable innovation, innovating solutions that benefit athletes, the company and the world.

The company was founded in January 25, 1964 as Blue Ribbon Sports by Bill Powerman and Phil Knight, and officially became Nike, Inc. on May 30, 1971. The name, Nike, is derived from the Greek goddess of victory. According to the U.S. Patent office, the first use of Nike name and the Swoosh design trademark in commerce took place on June 18, 1971.

Nike is in the footwear industry, which comprises of companies that manufacture and sell athletic footwear, apparel, equipment and other sporting equipment. This industry is dominated by Nike and Adidas, Nikes biggest competitor, with the two companies accounting for 82.8% of the market by revenues as of November 5, 2013.

Nike portfolio brands include the Nike Brand, Jordan Brand, HURLEY AND converse brands. In May 31, 2016, the company decided to focus its Nike brands offering in nine categories; running, NIKE Basketball, the Jordan Brand, football, mens training, women training, action sports, sportswear and Golf.

To manufacture its products, Nike uses a complex set of production alliances with manufacturers in South East Asia. Athletics shoe production takes place under different sub-contracting arrangements with producers in geographic places where the cost of production is low, thus enabling the company to sell its products in market competitive prices. Nikes subcontracting system allows the company a high degree of versatility in dynamic and fluid markets (Donaghu and Barff 537-552)

Nike products are sold through a large number of outlets worldwide in North America, West Europe, Central and Eastern Europe, Greater China, Japan and other emerging markets. Retailers are the major outlets, including large firms like Wal-Mart. Nike products can also be purchased online through the companys online store. The company also operates Niketown retails outlets.

Nike uses aggressive and effective promotion of its products to retain its strong brand image. The company, which is the most valuable brand among sports businesses at 31.76 billion US dollars, relies heavily on advertisement, especially those that involve celebrity endorsers such as professional athletes and sports teams. Nike also employs direct marketing activities such as directly persuading colleges teams, local sports teams and other organizations to use its products. In the fiscal year 2013, Nike spent nearly 1.09 billion US dollars in adverts in the United States alone.

To ensure growth in its sales and profits, NIKE uses value-based pricing strategy. This strategy identifies the prices the company should apply to maximize its profits while attracting the desired share of the market. In using value-based pricing strategy, Nike, Inc. considers the consumers perception of its products. This helps in determining the maximum price consumers are willing to pay when buying the company products. Thus in 2014, using the value-based pricing strategy, the company was able to increase its selling price and generated higher sales and revenue.

Nike, Inc. News

After seeing its stock perform rather dismally in 2016, with the prices of shares of Nike Inc. (NYSE:NKE) falling to around 18% due to slowing sales growth and declining margins, Nike made attempts to rectify the problem by announcing the release of NIKE Air VaporMax and Break2, a marathon challenge to beat the two-hour barrier.

NIKE Air VaporMax provides lightweight and consistent cushioning that is durable. This is a revolution from the original Nike Air Max (debuted in 1987) which was the first shoe with a large, visible air-cushioning unit. The real breakthrough in Nike Air VaporMax is that the air unit acts as a standalone. While previous versions Air units had to be insulated by a secondary rubber layer for protection and improved durability, new technology has enabled Nike designers to incorporate the Air unit and exterior layer into one VaporMax unit. This new unit can, independently, maintain its given form, with elasticity; unlike previous versions which needed to be shaped with inflexible structured areas.

The Break2 challenge aimed at beating the two hours marathon barrier. This means the marathon, which was organized by Nike, had to be completed in less than two hours, an unprecedented attempt which would require beating the current mens marathon record time of 2:02:57. To beat that record, the athletes would have to run 3% faster than the current record. According to Nike, Breaking2 provided an opportunity to explore whether the impossible is within reach, an ultimate embodiment of Nikes mission; to bring inspiration to every athlete on the planet.

In order to break the two hours marathon barrier, Nike would use three of its best marathoners. The athletes would be provided with special, individually tuned shoe; the Nike Zoom VaporFly Elite. This is a specially made shoe for this event, fitted with ZoomX midsole to provide greater comfort while improving the performance of the athlete by helping them in utilizing their energy. Although the athletes did not beat the two hour marathon barrier despite the racing condition being skewed in favor of the athletes beating it, the race was not only a marketing masterstroke, but also gave the world a glimpse of the future of athletics.

The effects of release of the Nike Air VaporMax and the Break2 marathon to the fortunes of Nike, Inc. cannot be understated. The Nike Air VaporMax sneaker can be used for both running in competition or in training, while it can also be used as a fashion accessory. This improves the range of its market. Hence this sneaker is expected to improve Nike sales, one of the reasons for dismal performance if Nike stock in 2016.

The break2 marathon was a marketing masterstroke by Nike, Inc. Since live videos of the race were posted on Facebook, Twitter and YouTube. Given the recent debutant of Nike Air VaporMax, this was a strategic way to raise awareness of Nike products. Thus it will not only help improve the sales of the company, but will also keep the market on the lookout for new Nike products as it has shown that it is committed to innovation and improving its products.

Stock Market Activity

The Nike, Inc. stock has done relatively strongly in the past ten years, suffering just two falls in prices in that time. The first one was experienced in 2008, and the other one happened in 2016. Of the two, the 2008 fall of price was greater, recorded at -20.16% compared to the 2016 fall which was recorded at -18.67%. The biggest gain was experienced in 2013, recorded at 52.40%; shooting from 7.09% recorded in 2012.

The 2008 poor performance of the stock was caused by economic downturn in the United States which may have curtailed purchases. There were also concerns among investors that the companys growth in the United States and Europe was slowing down. The companys yearly profits were also expected to take a hit due to the companys spending behind the Beijing Olympics Games and the acquisition of Umbro soccer brand. The investors were also worried about the decreasing gross margins and slowing future order sales. The companys gross margin struggled because of discounting a lot of its products in outlets to alleviate the bloated inventory (Marcuse 37).

Nike, Inc. stock performed well in 2013 because the investors were optimistic of greater market share on the account of rapid sales growth, the companys competitive position, participation in major sporting activities and the companys continued launching of innovative products.

The chart below shows how the Nike, Inc. stock performed from 2007 up to 2017.

Financial Statements Analysis

NIKE Inc.

Condensed Balance Sheet

For FY 2013, 2014 & 2015

Assets 2013 2014 2015

Current Assets $ millions $ millions $ millions

Cash and equivalents 3,337 2,220 3,852

Short term investments 2,628 2,922 2,072

Accounts receivable, net 3,117 3,434 3,358

Inventories 3,484 3,947 4,337

Deferred income taxes 308 355 389

Prepaid expenses & other current assets 756 818 1,968

TOTAL CURRENT ASSETS 13,630 13,696 15,976

Property, plant and equipment 5,500 6,220 6,395

Less accumulated depreciation 3,048 3,386 3,384

Property, plant and equipment, net 2,452 2,834 3,011

Identifiable intangible assets, net 289 282 281

Goodwill 131 131 131

Deferred income taxes and other assets 1,043 1,651 2,201

TOTAL ASSETS 17,545 18,594 21,600

LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current portion of long-term debt 57 7 107

Notes payable 98 167 74

Accounts payable 1,669 1,930 2,131

Accrued liabilities 2,036 2,491 3,951

Income taxes payable 84 432 71

Liabilities of discounted operations 18 TOTAL CURRENT LIABILITIES 3,962 5,027 6,334

Long-term debt 1,210 1,199 1,079

Deferred income taxes and other liabilities 1,292 1,544 1,480

Shareholders' equity 11,081 10,824 12,707

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 17,545 18,594 21,600

NIKE, Inc.

Condensed Statements of Income

For FY 2013, 2014 2015

2013 2014 2015

Income from continuing operations $ million $ million $ million

Revenue 25,313 27,799 30,601

Cost of sales 14,279 15,353 16,534

Gross Profit 11,034 12,446 14,067

Gross margin 43.60% 44.80% 46%

Demand creation expense 2,745 3,031 3,213

Operating overhead expense 5,051 5,735 6,679

Total selling and administrative expense 7,796 8,766 9,892

% of revenue 30.80% 31.50% 32.30%

Interest expense (income), net (3) 33 28

Other expenses(income), net (15) 103 (58

Income before taxes 3,256 3,544 4,205

Income taxes 805 851 932

Effective tax rate 24.70% 24% 22.20%

Net income from continuing operations 2,451 2,693 Net (loss) income from discontinued operations 21 NET INCOME 2,472 2,693 3,273

Earnings per share from continuing operations Basic earnings per common share 2.74 3.05 3.8

Diluted earnings per common share 2.68 2.97 3.7

Earnings per share from discontinued operations Basic earnings per common share 0.02 Diluted earnings per common share 0.02 Weighted average common share outstanding Basic 897.3 883.4 861.7

Diluted 916.4 905.8 884.4

Dividends declared per common share

0.81 0.93 1.08

NIKE Inc.

Condensed cash flow statements

For FY 2013, 2014 & 2015

2013 2014 2015

Net income 2,485 2,693 3,273

Depreciation 438 518 606

Deferred income taxes 21 -11 -113

Stock-based compensation 174 177 191

Amortization and other 75 114 43

Net foreign currency adjustments 424

Net gain on divestitures -124

Income charges (credits) not affecting cash 584 798 1,151

(Increase) decrease in accounts receivable 142 -298 -216

(Increase) decrease in inventories -197 -505 -621

(Increase) decrease in prepaid expenses and other current assets -28 -210 -144

Increase (decrease) in accounts payable, accrued liabilities and income taxes payable 41 525 1,237

Changes in certain working capital components and other assets and liabilities -42 -488 256

Cash provided by operations 3,027 3,003 4,680

Purchases of short-term investments -3,702 -5,386 -4,936

Maturities of short-term investments 1,501 3,932 3,655

Sales of short-term investments 998 1,126 2,216

Investments in reverse repurchase agreements -150

Additions to property, plant and equipment -636 -880 -963

Disposals of property, plant and equipment 14 3 3

Proceeds from divestitures 786

(Increase) decrease in other assets, net of other liabilities -28 -2

Settlement of net investment he...