Nike Corporation, Essay Example

Introduction

Nike Corporation is one of the leading manufacturer and supplier of sportswear and sports equipment which is based in the United States of America. Nike was initially known as “blue ribbon sports” and was founded in 1964 by the Philip Knight and Bill Bowerman (Business Week, 2006). In 1980, Nike captured 50% of the share in the US Athletic footwear market. It was the time when Nike started expanding its product lines and operations throughout the world. After its huge success in man’s sportswear, Nike introduced the goddess stores for the women’s sportswear. Nike is now present in 160 countries providing employment to about 30000 employees throughout the world. Nike invests heavily on its advertising campaigns and endorses its products through key figures such as LeBron James, Tiger Woods, Roger Federar, Maria Sharapova and many others. Nike has several affiliated business too which includes Cole Haan, Huley international, LLC, Nike Golf, Converse, Inc. and Umbro limited.

Today, people admire and appreciate those organizations that invest to sustain environment by fulfilling their corporate social responsibility. Nike has done conscious efforts for this purpose. It has got Giganton award for energy-saving program and several other awards for its energy initiatives. Bloomberg businessweek reports that Nike has developed the new technology to deal with SF6 problem. Tom Young (2010) reported that the Nike has reduced its emission of greenhouse gases as it cuts down the carbon footprint.

Nike has undergone several issues and controversies. The press release issued by Nike reports its president and CEO Mark Parker who is quite hopeful about Nike and its future. He stated that the Nike has been now more inspired and motivated to achieve its future targets. He focused on the fact that Nike has quite innovated products which gives it competitive advantage over others. In the investors meeting in New York, the CEO emphasized that Nike will build, improve and accelerate the power of its brand (Nike, 2011).

Financial Analysis

The official website of Nike reports that despite of world recession and several other challenges, Nike managed to earn $20.9 billion in the fiscal year 2011 (Nike, 2011).  Its global value sales have increased by about 10%. In a press release issued by the Nike, it targets the sale revenue to about 27$ billion in the year 2015. However, it has revised its sales target after improvement in the results of fiscal year 2011. It now aims to earn 28-30$ billion by 2015. It has several ambitious goals for the year 2015.

However, it is not just simple to achieve its future targets. Wall Street Journal reported the CFO of Nike, Don Blair who said that the gross margin might drop by 100 basis points for the fiscal year 2012 (Maxwell, 2011). However, the CFO is hopeful that Nike will take the advantage of its hedging strategy to further improve its financial scenario. Nike aims to take few tough steps as well. Reuters reported the CFO of Nike who said that the company will be increasing the prices while introducing several other new styles.  The company has to tackle the rising costs of oil, cotton and freight charges. Due to its increase in demand, the company has to rely on air shipping which adds to the transportation cost.Here we will discuss the financials of Nike for the past few years. All figures are in millions.The sale revenue of Nike in 2005 was $13740 million which rose to about $19176 in 2009. Due to recession, the revenue fell down in 2010 to about $19014 million. However, the Nike showed improvement in 2011 and its revenue rose to about $20862 million. If we compare the Nike stocks with S &P 500, the total return on Nike’s stock jumped to about 127% whereas S&P 500 stocks rose to 18% from 2007 to 2011.

Let’s discuss the revenue distribution of Nike portfolio.In 2007, Nike earned 38% of its revenue in the US whereas the same brand earned 49% from other countries (Businessweek, 2011). This situation changed a little in 2011. Now, Nike earned 36% through its brand within the USA whereas it earned 51% of the total revenue from other countries.The basic ratio to assess the organization is the net profit margin. The net profit margin has shown slight improvement in 2011. This is due to increase in net income as Nike tried to recover from the recession of 2009.Financial health of any company can be ascertained through the liquidity ratios. The year 2011 show the decrease in current ratio as the company increased its current liabilities. In just one year, short-term debt rose from $7.4 million to $200 million. Similarly, the accounts payable also increased in 2011. As Nike expanded its market share abroad, it incurred costs that decrease its short-term liquidity.

Now we analyze the Nike turnover through its fixed assets. The ratio of fixed asset turnover has shown improvement since 2009 and it rose to about 5.63 in 2011 (Businessweek, 2011). This is due to the fact that less number of fixed assets was invested this time as compared to previous years. The return on capital invested (ROCI) indicates the company’s efficiency to allocate its capital in various profitable investments. Nike has been successfully investing its capital for higher return. In 2009, the ROIC was 17.8% which rose to 20.7% in 2010. The year 2011 proved to be quite better for Nike as the ROCI went up to 21.7%.

In order to measure the financial leverage, organizations use ratios like equity multiplier. Nike hasn’t only increased its total assets in 2011, but it also managed to increase its equity. This is the reason that the equity multiplier recovered back from 2010 and reached to the level of 2009. Let us find out the debt-to-equity ratios for various years to assess the debt management capability of Nike.The company managed to maintain its debt to equity ratio at the level of 2009 in 2011. The company increased its liabilities in 2011 but tried to finance most of them through equity. The company’s performance can be evaluated by observing its EPS. The ratio of earnings per share (EPS) is the part of the company’s net income which is allocated to every share of common stock. The company has constantly improved its EPS for the past few years. The EPS in the year 2009 was 3.03$ which rose to about 3.86$ in 2010. However, the company further improved its earnings per share to about 4.39$ in 2011.

Competitors

In the form 10-k submitted to securities and exchange commission, Nike claimed itself as the largest athletic footwear and apparel in the world due to product development, performance and reliability of their shoes, competitive prices, customer support and impressive marketing strategies. It has several competitors including Puma, Adidas and several others. In 2006, Adidas took over Reebok forming the most competitive world-wide platform. This giant group was the serious concern for Nike. As sales of Nike decrease in 2010, but the sales of Adidas group reached to the record level. It has been successful in increasing its market share in Europe, Russia and other Asia markets. Its revenue in 2008 was 14741$ million which rose to about $16356 million in 2010. However it is still less the overall Nike revenue. The net income of Adidas group in 2008 was $875.8 million which saw the huge decline in 2009 and fell to 334.2. However, it showed some recovery in the year 2010 and rose to about 773.5$ million. If we compare the net income figures with the Nike, then we observe that the net income of Nike was $1883.4 in 2008. Due to recession, net income of Nike also sharply decreased in 2009. However, it recovered successfully and rose to about $1906.7 million which was still more than double as compared to the Adidas group. Now let’s compare the liquidity situation of both the companies. The current ratio of Adidas group was 1.6x in 2011 whereas it was 2.85 for the Nike. Nike has left Adidas far behind if we compared the return on capital of both the companies. ROCI is 9.74% for the Adidas group whereas Nike has 21.7% in 2011. The healthy financial position of Nike can be ascertained from the fact that its share value is $85.82 whereas the share value of Adidas group is $65.10.

Industry

Despite of several challenges, the global demand of athletic sportswear has been rising. Most of the people throughout the world now prefer global brands. Recession did hit but now most of the companies are trying to recover it due to increase in demand. Companies are focusing on more innovative products. They are endorsing their products through public figures. Few of the companies are also trying to cut down their cost to survive in this competition.

Discounted Dividend Model and Stock Price

Nevertheless, one question remains. Based on the discounted dividend model, is Nike stock price overvalued, undervalued, or fairly priced?  The following graph was generated using Nike dividend data, the current stock price, and the discounted dividend model.

The stock appears to be overpriced. At a constant rate, the present value of the dividend decreases over time.

Conclusion

Intense competitive isn’t just the main challenge for Nike. It has to face fluctuations in the global demand of their products. In the form 10-k, Nike recognized this fact and showed their concern over seasonality of their business which could lead to fluctuations in financial results and stock price. Nike has to face problems in changing exchange rates, increased transportation charges, general economic and weather conditions and a lot more. Nike has been trying to attract new target markets. It has now reached to children’s and women’s sportswear too. It is trying to continuously invest in innovation so that it could tackle the competition successfully.

References

Bloomberg businessweek September 26, 2006 Nike goes For the Green. The environment. Retrieved from www.businessweek.com/magazine/content/06_39/b4002108.htm

Young, Tom (2010). Nike cuts carbon footprint. The guardian. Retrieved from www.guardian.co.uk/environment/2010/jan/26/nike-cuts-carbon-footprint

Nike (2011), form 10K submitted to Securities and Exchange Commission, Retrieved from http://www.sec.gov/Archives/edgar/data/320187/000119312511194791/d10k.htm

Bloomberg businessweek. (2011, September 14). Financials of Adidas group. Retrieved from investing.businessweek.com/businessweek/research/stocks/financials/financials.asp?ticker=ADDDF:US

Murphy, Maxwell (2011). Nike CFO Gives View Of Gross Margin Pressure, Revenue Growth. Wall street Journal. Retrieved from online.wsj.com/article/BT-CO-20110628-713613.html