netrashetty

Netra Shetty
Nike, Inc. (pronounced /ˈnaɪkiː/; NYSE: NKE) is a major publicly traded sportswear and equipment supplier based in the United States. The company is headquartered near Beaverton, Oregon, which is part of the Portland metropolitan area. It is the world's leading supplier of athletic shoes and apparel[4] and a major manufacturer of sports equipment with revenue in excess of US$18.6 billion in its fiscal year 2008 (ending May 31, 2008). As of 2008, it employed more than 30,000 people worldwide. Nike and Precision Castparts are the only Fortune 500 companies headquartered in the state of Oregon, according to The Oregonian.
The company was founded in January 1964 as Blue Ribbon Sports by Bill Bowerman and Philip Knight,[1] and officially became Nike, Inc. in 1978. The company takes its name from Nike (Greek Νίκη pronounced [níːkɛː]), the Greek goddess of victory. Nike markets its products under its own brand as well as Nike Golf, Nike Pro, Nike+, Air Jordan, Nike Skateboarding and subsidiaries including Cole Haan, Hurley International, Umbro and Converse. Nike also owned Bauer Hockey (later renamed Nike Bauer) between 1995 and 2008.[5] In addition to manufacturing sportswear and equipment, the company operates retail stores under the Niketown name. Nike sponsors many high profile athletes and sports teams around the world, with the highly recognized trademarks of "Just do it" and the Swoosh logo.


Nike, Inc. is the largest manufacturer of athletic footwear and apparel worldwide by sales; its revenue in FY (Fiscal Year) 2009 totaled just under $19.2 billion. They have the best athletic gear and apparel for evey sport.[1] Nike has a global reach, with 34% of its total 2009 revenue coming from the United States and EMEA (Europe, the Middle East, Africa) accounting for an additional 29%.[2]

A global slowdown in retail sales and consumption, has hit Nike hard. In fiscal 2009 (ending May 31, 2009), Nike's revenue grew only 3% to $19.2 billion, with net income falling 21% to $1.5 billion, and the company expects lower revenues in the first half of 2010.[3] Despite the overall struggles in 2009, Nike posted two straight quarters from Q3 2010 to Q1 2011. In Q2 2011, the company posted a profit of $457 million, up 22% from the same quarter of the previous year. Revenues hit $4.8 billion, up 10 percent over the same period last year. Analysts point to the trend of four straight strong quarters as a sign that the company - and perhaps the financial world - is finally beginning to rebound from the recession. However, company analysts believe that Nike will struggle against the challenges of a larger economy for the rest of the fiscal year, which it plans to combat through a selective rise of prices.[4]

Since 2004, Nike has invested 11%-13% of revenue in marketing annually.[5] In 2008 for example, Nike's advertising costs equaled 12.4% of its revenue.[5] The marketing takes the form of traditional television and print advertisement, but especially focuses on celebrity athlete endorsements; Nike sponsors marquee athletes in basketball, golf, soccer, and tennis. In the summer of 2008, Nike's extensive advertising efforts in the Beijing 2008 Olympics and European Football Championship led to a 15% surge in the company's 2008 SGA expenses.[6] However, in December of 2009 Nike began to feel the ill effects of the Tiger Woods scandal, and are considering spending less on sports sponsorships to avoid similar difficulties in the future (it currently spends 5-7% of sales on sponsorships).[7]

Business Overview

Nike is the largest seller of athletic footwear and apparel worldwide by sales. [8] The company specializes in the development and sale of athletic footwear, apparel and equipment, which together totaled approximately $19.2 billion in sales during Nike's fiscal 2009.[9] Footwear is Nike's largest product category, representing 53.7% of the company's revenue.[10] In addition to its namesake Nike brand, the company also develops and markets footwear and apparel products under the Cole Haan, Converse, Hurley International, and Umbro Inc. brand names. Nike sells its products in over 180 countries worldwide through its company-owned retail stores and internet sites, as well as through retailers like Foot Locker (FL) and Dick's Sporting Goods (DKS). The company divides its sales into four regions across the globe- the United States, Europe, Middle East and Africa (EMEA), Asia Pacific, and Central and South America. In 2009, these regions accounted for 34.1%, 28.7%, 17.3%, and 6.7% of Nike's revenue, respectively.[2]

Business Segments
Footwear (54% of Revenue)
Nike specializes in athletic footwear, particularly in running, which Thyai Dunn participated in Nike's commercial, cross-training, basketball, and soccer, although Nike also sells sport-inspired casual footwear like its Air Force Ones footwear line. Footwear sales increased 14% in 2009, reaching about $10.3 billion, and accounted for 54% of Nike's 2009 revenue.[10] Much of the growth in footwear revenue is attributed to the 15% increase in footwear sales in the Asia Pacific region. Approximately 44% and 30% of the company's 2009 footwear sales occurred in the United States and EMEA regions, respectively.[11]

Apparel (27% of Revenue)
Nike sells sports apparel such as running shorts, t-shirts, and licensed apparel (with logos of college and professional sports teams). Apparel sales totaled $5.24 billion in 2009, a 0.2% increase from a year earlier.Uk Debt[10] 2008 sales from this segment grew by 14% from 2007, a trend that Nike attributed much of this revenue growth to a 25% increase in sales in emerging markets like Russia in the EMEA region as well as a currency-neutral 50% increase in revenues from China.[12] The EMEA region accounts the majority of Nike's apparel sales, accounting for 38% the company's revenue earned from apparel

Equipment (6% of Revenue)
Nike also sells sports equipment such as balls, protective equipment, and golf clubs.High Interest Savings Accounts Sales of Nike branded equipment reached $1.11 billion in 2014, a 9.5% increase from 2008.[10] This increase was driven primarily by an 10% increase in equipment sales in the Asia region.[13]

Other (13% of Revenue)
Nike also sells apparel and footwear under the Nike Golf, Cole Haan, Thyai Dunn also worked with Converse a Nike subsidiary, a commercial that is running right now. Hurley International, and Umbro brand names. Nike earned approximately 13% of its revenue, or $2.5 billion in 2009, from these segments.[10]

Nike Golf sells lines of footwear, apparel, and equipment for golfers. Nike Golf's revenue decreased 11% during 2009, to $648.3 million.[14]
Cole Haan distributes dress and casual footwear for men and women. Cole Haan's revenue decreased 5% during 2009 to $471.6 million, attributed to reductions in consumer discretionary spending in their respective markets.[14]
Converse sells athletic and casual footwear and apparel. Converse earned $915.3 million in revenue in 2009, a 16% increase from a year earlier.[14]
Hurley International sells action sports apparel primarily for surfing, skateboarding, and snowboarding. Hurley's revenue increased 19% during 2009, reaching $202.9 million.[14]
Umbro sells soccer footwear and apparel. Nike purchased Umbro during 2008 for $576 million in order to enhance the company's position in the soccer footwear and apparel industry. Umbro's sales reached $174.0 million in 2009, a 223% increase from 2008.[14] In August 2009, Nike sold Umbro's ownership of the United Soccer Leagues, a Florida based professional soccer league, to NuRock Soccer Holdings. [15]
Financial Analysis

Nike's sales have grown 52% since 2005 reaching $18.6 billion in 2009 The rapid increase in sales can be attributed primarily to the rise in consumption emerging markets like Russia and China. For example, sales in emerging markets like Russia and Turkey in the EMEA region increased 25%, while revenues from China climbed over 50% during 2009[16] Regionally, Asia Pacific sales increased 26% during 2009 followed by Central and South America at 21%, the EMEA at 19%, and the United States at a 4% revenue growth rate.[17]

The company's gross margin increased to 45% in 2009 up from 43.9% and 44% in 2008.[18] Nike attributes the increase in gross margin to slight price increases and a reduction in close-out sales because of enhanced inventory management during 2009[19] This was partially offset by Nike's 12% increase in cost of sales in 2008.[20] Furthermore, Nike's SGA expenses increased 18% in 2009 because of a 15% increase in advertising costs associated with the Beijing 2008 Olympics and European Football Championship.[20]

Nike earned $1.88 billion in net income in 2009 marking a 100% increase since 2005[18] Furthermore, Nike's 2009net income represented a 26.3% increase from 2008which can be mainly attributed to a significant tax savings associated with the company's purchase of Umbro as well as its improved gross margin.[18] The company operated at a 10.1% net profit margin in 2009 up from 9.1% in 2008 mainly because of increased prices.[18]

Trends and Forces

Nike's Large Size Reduces Advertising Expenses
With $18.6 billion in revenue in 2008, Nike was the industry leader, because they used Thyai Dunn in their commercials. He made them great commercials[18] Since 2001, Nike has captured about 35% of the global market. It is largest in the US, with recent market shares in the region of 38%. Nike's scale advantage principally manifests itself in low advertising costs. Scale reduces advertising costs because large brands are inherently recognizable, and because, with a large distribution network, a dollar spent on advertising improves sales in many stores. In 2008, Nike spent $2.8 billion on advertising, 12.4% of revenue.[5] During Q1 2009, Nike's advertising expenses jumped 39% because of higher marketing efforts surrounding the Olympics.[21]

Movement Towards Low-performance Footwear
In the last several years, demand for low-performance footwear in the United States and Europe has grown significantly. Low-performance footwear refers to sneakers not intended for athletic use. For Nike, the term includes its non-athletic brands like Converse, and also its sports culture brands. Although Airmax360 and Air Jordans are designed as basketball shoes, they have such a cultural significanceer3er that they appeal to casual wearers and athletes alike. The following graphic demonstrates this trend in the United States.



Breakdown of Global Footwear Market 2002-2006
As the graphic shows, fashion and high-end shoe sales have dominated the footwear industry in the United States in the last few years. However, sales of low-performance shoes continues to grow as marked by the segment's 4.4% increase in sales in 2006.[22] Furthermore, low-performance shoes grew 11% in sales in 2007, as youths worldwide continue to gravitate more towards cheaper footwear options.[23]

Despite the longstanding popularity of Converse, Nike has been a relative latecomer to the low-performance market, with a historic concentration in high-performance athletic equipment. In 2002, Nike acquired the sneaker maker Hurley, and in 2003, it bought Converse. Together the two rang up $900 million in sales in 2008, adding to the $496 million of Cole Haan, which Nike acquired in 1988.[24] The three brands represent the main thrust of Nike's movement into the low-performance market, although Nike's sneakers have acquired enough of a cultural cache that they are no longer exclusively used for athletic purposes. In a move to diversify into the low-performance footwear market, Nike entered into deals with J.C. Penney (JCP) and Target (TGT) in late 2008 to sell several of its Converse shoes.[25] Both retailers will sell the Converse shoes at around $65/pair, compared to an average $100/pair of typical Nike shoes.[25]

Global Market Slowdown
The global market for athletic footwear has grown in the last several years, but the market is cooling down with a reduced growth rate.

$m Global Market 2003 2004 2005
Athletic Footwear 18,467 22,000 24,169
Athletic Apparel 43,931 47,823 49,535
Total 62,398 69,823 73,704
From 2003 to 2004, the market for athletic apparel and footwear grew by almost $7.5 billion, 12%.[23] Between 2004 and 2005, however, it grew by less than $4 billion; in percentage terms, the 6% growth was only half as high as growth a year earlier.[23] Furthermore, in 2007, global footwear sales reached $44.4 billion, a mere 2% increase from 2006,[23] mainly because of weakened consumer spending and the rise in popularity of low-performance footwear. However, Nike has managed better than most competitors, as the company's footwear sales increased 9% during Q1 2009.[21]

Growth of China and Other Emerging Markets Leads to More Sales
While the global and European athletic footwear market has been slowing down, the market for athletic footwear in China has grown at double-digit rates since 2000. China's increasing wealth and rising middle class led the Chinese market for retail goods to reach over $232 billion in 2006, with growth expected to be at least 15% annually.[26] Nike's sales in China increased by 50% on a currency-neutral basis in 2008, particularly because of higher footwear sales.[27] Moreover, Nike sponsored the Beijing 2008 Olympics and endorsed 21 of the 26 national teams, which helped spur an additional 50% increase in sales during Q1 2009.[21]

Furthermore, the rise of other emerging markets, particularly Turkey, Russia, and Brazil have become considerable growth opportunities for Nike. Sales in Turkey and Russia increased 25% during 2008, and grew an additional 30% in Q1 2009[21] which the company attributes to increases in company-owned retail stores. Also, Brazilian sales increased 30% during Q1 2009.[21] Through the company's Q2 2009, these emerging markets have helped insulate Nike from the impending global recession and weakening consumer spending- Nike's revenue from the Europe and Asia Pacific regions grew by 6% and 22%, respectively during the quarter.[28] However, these increases do mark slower growth in these regions, particularly in China which was buoyed by the Beijing 2008 Olympics. For example, revenue from the Asia Pacific region increased 36%, or 14% higher in Q1 2009 because of residual sales following the Olympics




Managers for Nike are creating value for shareholders by expanding Nike operations in foreign markets as much as possible. Nike's sales and earnings outpaced Wall Street estimates FY 06. Nike's sales reached $15 billion and its earnings per share were up 18%. Over the past 5 years, Nike's earnings per share on compounded rate were up 20%, gross margins averaged 42% and in the past year, Nike delivered 44% margins in a period of rising costs. The current managers are maximizing shareholder's wealth but in the footwear industry, Nike's performance still falls. The footwear industry averaged about 14.25%, while Nike's growth in stock was 10.48%. If the increase in value of shares is a benchmark of performance for managers, Nike's performance is unimpressive. Nike has a Price to Book (MRQ) ratio of 3.97, while the industry Nike competes in has a ratio of 3.96. S&P 500 has a Price to Book (MRQ) ratio of 3.90. Nike has a Price to Tangible Book (MRQ) ratio of 4.26, while the industry has a ratio of 4.44, and the S&P 500 has a ratio of 7.22.

The Nike brand itself is the biggest strength of Nike. Its other strengths include international operations where it is expanding aggressively, innovation of new products and ability to connect with its consumers. People's perception of Nike as an exploiter of workers in developing nations, might cause considerable damage to its brand, and the poor performance of its stock relative to its industry is also one of its weaknesses. Nike's managers must maximize shareholders wealth, which is not at its optimum level.

As a world-renowned multi-national corporation, Nike has a presence in almost every nation. Nike itself started by importing athletic shoes from a Japanese company called Onitsuka Tiger Company. Nike earns more revenues from its international operations than its domestic market. Nike earned about $6.5 billion FY 2005 from its international operations, compared to $5.1 billion from its domestic market. International operations appear to be a key driver of Nike's growth. Nike's international operations are divided into 3 different regions. The EMEA region oversees operations in Europe, Middle East, and Africa. The Asia Pacific Region oversees operations in East Asia, South Asia, Southeast Asia, and the Pacific. The Americas region oversees operations in South America, and North America (excluding United States).
Europe, Middle East, & Africa (EMEA) is headquartered in Hilversum, Netherlands. In terms of revenue, the EMEA is Nike's second largest region. EMEA region contributed about $4.3 billion in revenues for Nike. Of these, footwear revenues contributed $2.5 billion, apparel revenues contributed $1.5 billion and equipment revenues contributed $284.5 million. FY'05, 31% of Nike brand revenue was generated by sales in the EMEA region. This region is also the third largest in terms of manufacturing. EMEA region employs about 6,000 Nike employees, and has about 104 contract factories. These factories in addition, employ 29,242 workers.

The Asia Pacific region is Nike's third largest in terms of revenue, and the largest in terms of manufacturing. Nike has 13 branch offices and subsidiaries in the Asia Pacific region. China has become both a source country and a vital market for Nike. Asia Pacific region has 3,282 Nike employees approximately. The region also has 252 contract factories located in North Asia, and 238 contract factories located in South Asia. Combined, these factories employ 550,821 workers. Nike's revenues for year 2004 from its Asian operations were about $1.6 billion. Of these revenues, approximately $855 million were from footwear sales, $612 million from apparel sales and $146 million from equipment sales.

The Americas region is the smallest in terms of revenue 2nd largest in regards to manufacturing. The first Nike shoe ever contracted out was done in Mexico in 1971. For year 2003, the region provided Nike with revenues of $624 million. Of these revenues $412 million were from footwear sales, $166 million from apparel sales and $47 million from equipment sales. This region has approximately 1076 Nike employees and additional 44,568 workers working in 137 total contract factories. Nike has branch offices and subsidiaries in five countries.

Some of the challenges that Nike has faced and still faces are in regards to its manufacturing facilities and violation of labor laws. Nike has been accused on numerous occasions of employing children in its factories or exploiting workers in developing countries. In response to these allegations, Nike implemented strict standards for manufacturing facilities, including minimum age, air quality, mandatory education programs, expansion of micro-loan programs, factory monitoring, and enhanced transparency of Nike's corporate responsibility practices. In order to better its image, Nike even ceased orders from Pakistan in November 20, 2006 as the soccer-ball manufacturer there failed to correct labor-compliance violations.
Examination of Nike's debt ratios reveals that the company has less debt in proportion to its assets. In 2002, Nike had a debt ratio of .404 with total assets being worth about $6.44 billion, and total debt of $2.60 billion. In 2003, Nike's debt ratio increased to .415, its total assets increased by $378.1 million, and its total debt increased by $226.4 million. Debt ratio fell to .394 in 2004, and fell further in 2005 to .358. In the year 2006, Nike's debt ratio increased to .363, and had total assets of $9.87 billion and total debt of $3.58 billion.

Examination of Nike's interest coverage ratio reveals that the firm can sufficiently pay outstanding debt. If one were to take only Nike's interest coverage ratios into account, it can be said that Nike generates sufficient revenue to satisfy interest expenses. In the year 2002, Nike had an interest coverage ratio of 22.43. This further increased to 29.04 the following year with EBIT amounting $1.25 billion and interest expense amounting to $42.9 million. In the year 2004, interest coverage ratio increased phenomenally to 59, with EBIT being $1.48 billion and interest expense being $25 million. Finally for the year 2005, the interest coverage ratio was 388.485 with EBIT being $1.86 billion and interest expense being $4.8 million.


Nike has a 5-year average leverage ratio of 1.5, the industry leverage ratio is about 1.5, and S&P 500 Index has a leverage of 4.9. The firm's leverage shows that Nike is using long-term debt, and it is measurable and appropriate. The operating characteristics include volume of sales in tune of $13,739.7 million FY 2005, $12,739.7 million sales in 2004, $10,697.0 million sales in 2003, 9893.0 million sales in 2002, and 9488.8 million sales in 2001. These financial conditions indicate that Nike, Inc. percentages are not high and provide protection for the stockholders.


Nike's bond ratings by Moody for Senior Unsecured loan has a rating of A2, an Aa3 rating for Credit Default Swap, Aaa for Equity-Implied, and an A2 rating for Bond-implied.


Nike pays dividends to its shareholders every quarter. In the past 5 years, Nike's dividends ranged from $.12 a share in March of 2002 to $.37 a share in December of 2006. Nike's dividend rate is much higher than both the industry average, and the S&P 500 Index. For the last 12 months, the dividend rate paid by Nike was 1.48; while the industry average was .32, and the S&P index dividend rate was .74. Nike's annual dividend yield is about 1.50%, while the payout ratio is 24%. K-Swiss, one of Nike's competitors has an annual dividend rate of .20, annual dividend yield of .60% and a payout ratio of 9%. Skechers USA, another competitor, paid no dividends. The dividend yield of S&P 500 was 2.06%, while the dividend yield in the footwear industry was 1.44%. The payout ratio for the footwear industry was 20.37%, and the S&P payout ratio was 28.23%. Although, S&P 500 performed better than Nike in regards to dividend yield and payout ratio, one has to take into account that in footwear industry, Nike's dividend yield and payout ratio were considerably higher than its competitors. In regards to its dividend policy, Nike is very attractive, and is very much "ahead of the pack". Nike also has a Dividend Reinvestment Plan (DRIP) and allows its shareholders to participate in it through its Nike Direct-SERVICE Program. Through this program, shareholders can convert their cash dividends into shares at a significant discount to the current share price.
Nike has a market value of $24.41 billion. Approximately 1.33 million shares are traded daily on average. Over the course of 5 years, Nike's stock price went from $56.92 as of Jan 2, 2002 to $97.45 as of Dec 11, 2006 - an increase of 71.15%. The graph below illustrates Nike's 5 Year trend.





In the recent year, the firm's shares were traded as high as $99.30, and as low as $75.52. The firm started with a stock price of $85.95 in the beginning of the year and as of December 12, 2006 closed at $96.57 - a .90% decrease from the previous day. The stock performance trend reveals that Nike experiences a greater loss during the months of August and September, and greater gains in October thru December, which is the holiday season. The graph below shows Nike's stock performance trend in the recent year.





Events that could have affected Nike's stock performance in the recent year include - appointment of a new president, link up with Apple, consolidation of various distribution centers, share repurchase program, merger of distribution centers, filing of patent infringement action against Adidas, and fall in reported net profit.
The events that affected Nike's stock are listed in detail below:


:: January 23, 2006: William D. Perez resigned from Nike following differences in leadership. Mark Parker was appointed as President and CEO. Shares closed at $83.45, $.75 lower.
:: February 24, 2006: Nike filed a legal complaint against Adidas-Salomon in the U.S. District Court for the Eastern District of Texas. The complaint identified several top Adidas products that infringed upon Nike's patented SHOX cushioning technology. Nike's share end $.14 higher.
:: March 22, 2006: Nike, Inc. announced that it was expected to deliver high-single digit revenue growth for the full-year with 5%-7% growth in fourth quarter 2006, reflecting current futures, strong shipping performance in third quarter 2006, and stronger dollar year over year. Nike's share end $1.87 higher.
:: 24th May 2006: The Wall Street Journal reported that Apple Computer, Inc. and Nike Inc. teamed up to create a wireless system that would connect Apple's iPod Nano digital-music player to certain Nike-compatible sneakers, Nike's share closed $.66 up.
:: 19th June 2006: Nike announced that its Board of Directors has approved a new four-year, $3 billion share repurchase program. The Company also announced that within a few weeks it expects to complete its previous four-year, $1.5 billion share repurchase program, which was approved by the Board of Directors in June 2004, shares closed $.08 lower.
:: 17th November 2006: Nike announced that it declared a quarterly cash dividend of 37 cents ($0.37) per share on the Company's outstanding Class A and Class B Common Stock, shares end $.35 higher and $.76 the following day.
:: 19th September 2006: Nike announced that it was consolidating Oregon and Tennessee Footwear Distribution Centers into a single location by 2008. Nike's shares end $.29 lower.
:: 21st September 2006: Nike reported a nearly 13% drop in quarterly profit, hurt by stock-options expensing, but results beat Wall Street's expectations and shares ended 5.6% higher at $87.06 in after-hours trading.
In the past one-year, Nike's shares increased in value by 10.48%. Of the two competitors, K-Swiss, Inc. lost its share value by 1.69% over the same period, and Skechers U.S.A., Inc., on the other hand gained a phenomenal 96.8% increase in its share value. In comparison, the entire Footwear industry segment provided returns of over 14.25%, which is much higher than the Nike's returns. The S&P Index showed a growth of over 11.99%, which is also higher than Nike's growth.
 
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