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RUNNING HEAD: NIKE, INC.
NIKE, Inc.
Cynthia Rowe
Siena Heights University
NIKE, INC.
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History and Growth
Before the well-known company of NIKE was created, two visionary men established a
revolution in athletic footwear that redefined the industry (NIKE, Inc.-History). NIKE began as
Blue Ribbon Sports in 1964 at the University of Oregon. Track star Philip Knight and his coach
Bill Bowerman experimented together with different track surfaces, re-hydration drinks and
improvement of running shoes (NIKE, Inc.-History). The company Onitsuka, in Japan
persuaded the manufacture of shoes to make Knight a distributor of Tiger running shoes to be
sold in the United States.
In 1970, Bowerman and Knight switched from distributing shoes to the design and
manufacturing of their own athletic shoes and, the NIKE Company was born. NIKE is the
world’s leading innovator in athletic footwear, apparel, equipment, and accessories. The famous
“swoosh” logo was designed in 1972, by a University of Oregon student, who then sold the logo
to the NIKE Company for $35. The “swoosh” logo is commonly ranked among the top five
company logos in the world (Hickner-History).
Celebrity endorsements flourished in the 1980s. In 1985, the first successful campaign
was for the debut of a signature shoe by NBA rookie Michael Jordan. The NIKE tagline “Just do
it”, was created in 1988, which included sports athlete Bo Jackson who promoted NIKE crosstraining shoes. These ad campaigns proved so successful that the company who had been the
market leader in the early part of the decade, slowly decreased allowing NIKE to become the
new leader by the close of the 1980s (NIKE, Inc.-History).
By the 1990’s, NIKE had taken over the athletic footwear/apparel industry and continues
to dominate today. They currently make shoes, jerseys and shorts for a wide range of sports
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including track and field, baseball, ice hockey, lacrosse, football, basketball, combat sports,
tennis, athletic golf, cross training for men and women, skateboarding, baseball, cycling,
volleyball, wrestling, cheerleading, aquatic activities, auto racing and other recreational activities
(NIKE, Inc.-History).
Strengths and Weaknesses
NIKE is a company with a multitude of strengths. NIKE operates in over 190 countries
and employs over 44,000 people worldwide. The NIKE logo and Swoosh Design are well
known trademarks of the company and are considered one of their most valuable assets. They
have been registered in over 150 jurisdictions. The company also owns many other trademarks
that are utilized in their marketing strategies (2012 Form 10-K, pg. 5).
A contributing factor to the success of NIKE is the company’s use of little to no debt in
its capital structure (NIKE INC – CL B (NKI: New York): Financial Statements –
BusinessWeek). This is due in large to the fact that almost all of the company’s products are
manufactured by independent contractors, thus reducing the need for plant and equipment.
NIKE has continued to maintain long-term revenue growth and the company strives to deliver
shareholder value by driving operational excellence (2012 Form 10-K, pg.16). This long term
growth has been accomplished by keeping the supply chain competitive, reducing the costs of
products through a continued focus on manufacturing efficiency, keeping their product designs
innovative, and utilizing price increases to effectively manage the price-to value equation for
customers (2012 Form 10-K, p. 16).
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Although NIKE, Inc. has numerous strengths and continues to grow, the company also
faces a myriad of risks, which could be classified as weaknesses. Virtually all of the footwear
sold by NIKE is produced in factories that are contracted outside of the United States. In fiscal
year 2012, non-US sales accounted for 58% of total revenues (2012 Form 10-K, pg. 2). This
accounts for more than half of the total revenues of the company. Although this could be
deemed as positive, the NIKE, Inc. faces many risks in doing business abroad, which could
include revaluation of currencies, export and import duties, anti-dumping measures, quotas,
safeguard measures, trade restriction, and restrictions on the transfer of funds. In certain parts of
the world, the company could also face the risks associated with political instability and terriosm
(2012 Form 10-K, pg. 10).
A big risk to the company is the possibility of currency exchange rates fluctuating. The
majority of NIKE products are sold outside of the United States, resulting in transactions being
conducted in various currencies. The company’s international revenues and expenses are
frequently derived from sales and operations in foreign currencies, and revenues and expenses
could be affected by currency fluctuations, including amounts recorded in foreign currencies and
translated into U.S. dollars for consolidated financial reporting. Currency exchange rate
fluctuations could also disrupt the business of the independent manufacturers that produce their
products by making their purchases of raw materials more expensive and more difficult to
finance (2012 Form 10-K, pg. 10).
Financial Ratios
NIKE is an industry leader in growth and stability. With the majority of their financial
ratios at or exceeding industry averages. Although NIKE revenues are rising, they must keep
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costs at a minimum to further the company’s profits. Fluctuations in foreign currency and tax
effect rates have a significant impact on the bottom line.
NIKE P/E ratio (25.40) indicates a better than industry (23.10) average for growth.
Because NIKE does not finance their operations through debt, the debt to equity ratio (.03) is
very low compared to industry (.15). The current ratio (3.40) also indicates that NIKE can cover
any outstanding short-term debt due to minimal financing. ROA ratio 15.20 for NIKE is above
industry standards at 14.20. Yet NIKE is slightly down on their gross margin ratio at 45.00,
Industry 47.70.
The company has improved their selling and administrative expense productivity by
focusing on investments that drive economic returns in the form of incremental revenue and
gross profit, and by leveraging existing infrastructure across their portfolio of businesses to
eliminate duplicative costs. Over the past ten years, NIKE, Inc.’s revenues have grown 9% and
earnings per share have grown 15%, on an annual compound basis. The return on invested
capital has increased from 15% to 22% and they have expanded gross margins by 4 percentage
points (2012 Form 10-K, pg. 16).
NIKE continues to grow in revenue by making calculated business decisions regarding
products and subsidiaries.
Based on the companies 2012 Annual Report, NIKE recently sold
two subsidiaries so the company could focus on their main brands such as NIKE, Jordan,
Converse, and Hurley, along with product lines that continue to thrive. These strategic financial
decisions are what help keep NIKE profitable for the future.
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Recommendations
The financial goals of NIKE include two main areas. The first area includes achieving
long-term growth and the second is to bring about shareholder value by driving operational
excellence in multiple areas. The company expands their gross margin by doing the following:
they make their supply chain a competitive advantage, they reduce product costs through a
continued focus on manufacturing efficiency, they incorporate product design and innovation,
and NIKE utilizes price increases to effectively manage the price-to-value equation for
customers (2012 Form 10-K, pg. 16).
NIKE also improves selling and administrative expense productivity by focusing on
investments that drive economic returns in the form of incremental revenue and gross profit, and
by leveraging existing infrastructure across their portfolio of businesses to eliminate duplicative
costs. They improve working capital efficiency, and deploy capital effectively. NIKE has highsingle-digit revenue growth and mid-teens earnings per share growth. They also have increased
return on invested capital and accelerated cash flows and, consistent results through effective
management of their diversified portfolio of business (2012 Form 10-K, pg. 16).
NIKE has had the outlined goals for the past ten years. During these ten years, Nike has
increased its revenues, earnings per share, return on invested capital, and gross margins. Areas
that negatively affect Nike are the rising costs for materials and labor along with tax rate
increases. Areas that help offset these negatives include: higher product selling prices, initiatives
to decrease product cost, and growing Direct to Consumer business. The majority of the success
has been attributed to a growing demand for performance products and footwear.
Nike did not choose to lower its standards to make cheaper products when the economy
took a downturn, instead NIKE chose to put money into innovative ways to make products using
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less money, which has allowed their prices to remain respectful. In some areas, NIKE chose to
increase the price of products to offset some of the weakening market. This did not turn out to be
detrimental, but played an important part in keeping the company profitable.
NIKE is a low-risk investment due to its repeated stability and growth. The
recommendation for this company is to remain on the path it is taking. Although the economy
has not been favorable to many corporations, NIKE has increased its revenues by 16% from
2011 to 2012 and cost of sales has increased by 20%. Long-term debt has decreased from 276
million to 228 million since 2011. NIKE has little debt upon which to pay interest outside of the
company. We do not recommend taking on more debt to increase the gross profit margin because
NIKE would have to pay additional interest on new debt, which would not be worth it.
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References
Hickner., Preliminary Information: Iconography, Nike’s Heritage. Retrieved from:
http://xroads.virginia.edu/~class/am483_97/projects/hincker/nikhist.html
NIKE, Inc., retrieved from: http://www.dailyfinance.com/quote/NYSE/nike/NKE/financialratios?source=itxwebtxt0000007
NIKE, Inc., -CI B (NKE: New York): Financial Statements - BusinessWeek. Retrieved from
http://investing.businessweek.com/research/stocks/financials.asp?ticker=NKE.
NIKE, Inc., Form 10-K (Annual Report). Filed 07/24/12 for the period ending 05/31/12.
Retrieved from http://www.edgar-online.com.
NIKE, Inc., (NKE: New York): History/Background. Retrieved from: www.nikeinc.com