Building an Empire
Nike (NKE), named after the ancient Greek goddess of victory, was incorporated in 1968 and has grown into the largest footwear company in the world. Its footwear products are virtually all of athletic design, but a large percentage of the product is worn for casual and leisure purposes. Top-selling categories include sportswear, running, basketball, soccer, and kids’ footwear. The company emphasizes high-quality construction and innovation. As well as owning several patents, NIKE has an exclusive, worldwide license to make and sell footwear using “Air’’ technology, a process that utilizes pressurized gas encapsulated in polyurethane. In 2003, with the purchase of Converse, NIKE broadened its potential customer base to include those that prefer a retroactive or antiestablishment look. This subsidiary designs, distributes, and licenses athletic and casual footwear under the Converse, Chuck Taylor, and All Star brand names, among others.
The company is also a major force in the athletic apparel and accessories market, including licensed college and professional team and league logos. The wholly owned Hurley International subsidiary designs and distributes a line of action sports and youth lifestyle apparel and accessories. Lines of performance equipment under the NIKE brand includes bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, and golf clubs. On February 1, 2013 and November 30, 2012, NIKE completed the divestitures of Cole Haan and Umbro, respectively.
Virtually all of NIKE’s footwear is manufactured outside of the United States by independent contractors. In fiscal 2013 (ended May 31st), 42% of the product was sourced in Vietnam, followed by 30% in China and 26% in Indonesia. The largest single factory with which NIKE had contracted accounted for only 6% of sales last year. The same is true for apparel, which is produced in the trio of countries mentioned above, plus Thailand, Sri Lanka, Pakistan, Malaysia, Turkey, Mexico, Cambodia, and 18 other nations. The flexibility of the supply chain is a competitive advantage, as labor costs are rising in China and safety issues have become a major concern elsewhere in Asia.
NIKE sells its products to retail accounts and through a mix of independent distributors, licensees, and sales representatives. The company works with retail partners to create concepts such as NIKE Yardline with Champs, House of Hoops stores with Foot Locker (FL), NIKE track Club at Finish Line, and NIKE Field House with Dick’s Sporting Goods (DKS). No one customer accounts for more than 10% of sales.
Geographic diversity is also a plus. Non-U.S. sales made up 55% of the top line in fiscal 2013. North America accounts for 41% of sales, Western Europe 16%, and Greater China 10%. Emerging markets outside of China represented 15% of sales last year and are a tremendous opportunity for growth.
NIKE markets its products through owned factory and NIKETOWN stores, as well as Converse and Hurley outlets. At the end of May, NIKE owned 303 stores in the U.S. and 450 internationally. Owned-retail business grew 23% in fiscal 2013, to 17% of the total, including a 31% gain in e-commerce. On that front, NIKE combined more than 70 brand sites into a single destination for consumers to shop.
The company’s distinctive trademarks, utilized on nearly all products, are highly identifiable around the globe and help distinguish the brand from the competition. In fact, the NIKE Swoosh Design is considered one of the company’s most prized assets, as well as it should be.
Extensive use of celebrity endorsements also drives brand awareness and sales. Prominent athletes, coaches, teams, colleges, and sports leagues have all endorsed various brands and styles, and many of these have actively engaged in NIKE sponsored sporting events and clinics.
A Strong Track Record
NIKE aims to have annual average revenue growth in the high single-digits, with share earnings advancing at a mid-teens percentage rate. It has achieved these goals over the past 10 years, despite fierce competition and a global recession and financial crisis. Over that time frame, the gross margin expanded by 260 basis points and the return on invested capital rose from 18% to 24%. This performance should be attractive to any investor, and low debt leverage is especially noteworthy for conservative accounts. Though the dividend yield leaves something to be desired, NIKE continues to return excess cash to investors through share repurchases. For fiscal 2014, the company is accelerating its investments in product innovation.
The stock joined the Dow Jones Industrial Average index, replacing Alcoa (AA), effective with the opening of trading on September 23, 2013.
At the time of this writing, the author did not have any positions in any of the companies mentioned.