Nike, Inc - Introduction and Financial Analysis

Nike, Inc - Introduction and Financial Analysis

by Sohail Iqbal | Category | May 13,2016

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Figure 1: Nike’s Revenue from 1980 to 1989

Introduction:

Nike, initially known as Blue Ribbon Sports was created in 1964 by a track athlete, Philip Knight and his coach, Bill Bowerman of University of Oregon. Both the partners pledged five hundred dollars and placed their first order of 300 shoes in the same year. The company originally acted as a distributor for a Japanese shoe maker. Both the colleagues had full time jobs and they needed someone to take care and manage the increasing requirements of Blue Ribbon Sports. Enter Jeff Johnson, a runner, whom Knight had met at Stanford. Johnson became the first full-time employee of Blue Ribbon Sports in 1965, and quickly became an important asset for the start-up company. Johnson worked on marketing for the company. He made brochures, ads, published catalogues. He established mail order system, initiated the first retail store in California and managed shipping/ receiving. He also conjured up the name Nike in 1971. Around this time, Nike was ready to design their own brand of sports shoes; it is when their relationship with the Japanese distributor was coming to an end. The year following, Nike had captured a 50% market share in the United States athletic shoe market and it went public at the end of the same year. Starting from the 1980s and continuing throughout the decade Nike made additions to its product line to encircle more sports and regions worldwide.

Growth:

Nike has made a number of acquisitions and disposals over the course of its history. The acquisitions were mainly to extend its business line and the disposals were to refocus on its core business. As of 2013, Nike owns two key subsidiaries; Converse Inc. and Hurley International. Major reasons for the growth of Nike are the dedication and hard work of its owners that they employed in the initial years. Nike has had huge plans since its birth but it was not until its marketing department had a revolutionary idea that the company excelled. Nike had revenues of $269,775, $457,742, $693,582 and $867,212 in 1980, 1981, 1982 and 1983 respectively (Figure1).

The owners decided to take the next step after four years of going public. In 1984, Nike signed Michael Jordan hoping it would result positively. The Jordan campaign did just that. It earned a record revenue level for Nike. By 1986, Nike had crossed the million dollar barrier and reached $1,069,222. (Also shown in figure 1) The decline in the revenue in 1987 shown in the figure is a cause of Nike’s decision to sell 51% of its interest in Nike-Japan to its Japanese partner. After the sale, Nike decided to give 10% of its US employees up as a cost cutting strategy.

“Just do it” slogan was introduced immediately after a brief decline, in 1988. It turned out to be an instant success. The immediate increase in revenue, as a result of this new marketing trick, can be clearly seen in figure 1. The “Just Do It” movement reconstructed Nike into a market leader. This process was quick unlike the Jordan campaign.

Financial Analysis:

Ratio Analysis:

S.No.

Ratio

Formula

2011

2012

Adidas - 2012

1

Gross Profit Margin

Gross Profit/Sales

45.58%

43.40%

47.70%

2

Net Profit Margin

Net Profit/Sales

10.22%

9.21%

3.50%

3

Return on Assets

Net Profit/Total Assets

14.22%

14.37%

4.50%

4

Current Ratio

Current Assets/Current Liabilities

2.85

2.98

1.6

5

Interest Coverage

Operating Income/Interest expense

84.65

91.39

15.9

 

Comparative Analysis

Comparative analysis has been done between the financial year ended 2011 and 2012.

Gross Profit margin:

Gross profit margin shows the percentage of revenue available to cover operating and other expenses. Gross profit margins must be observed in order to achieve any business’s primary goal; growth. Nike’s gross profit margin has deteriorated from 2010 to 2011 and from 2011 to 2012. In 2010, for every $1 of sale Nike ends up with $0.46 after subtracting the cost of goods sold which is higher than $0.45 in 2011. As mentioned earlier, the amount has decreased in 2012, to $0.43 for every dollar sale. There are many possible reasons for the deterioration of gross profit. The market can decline for a number of reasons. When the market is saturated with similar collections of items, it causes companies to share an overall decline.

Raw materials are affected by their own market fluctuations. If the price of the raw material increases, the gross profit margin declines automatically. In case of an increase in the price of raw material, changing the supplier may solve the problem. Increasing the price of the product is also a possible solution.

Net profit margin

Net profit margin is one of the key indicators used to evaluate a company's performance as this margin calculates a company's net income as a percentage of the company's sales. A low profit margin indicates a low margin of safety: higher risk that a decline in sales will erase profits and will result in a net loss. Nike’s net profit margin improved from 2010 to 2011 but then deteriorated significantly from 2011 to 2012. For every $1 of sales, Nike earns $0.1003 in 2010, the figure has increased to $0.1022 in 2011 and reduced to $0.0921 in the latest year. One of the possible factors that contribute to the fluctuation in net profit margin is an increase or decrease in the price of the units sold. Change in price affects the number of units a company sells, which in turn influences the overall profit numbers. Inventory is another major possible reason that provides to changes in a company’s net profit margin. Even though the inventory is recorded as an asset in the statement of financial position at the year end, the sale is not recorded a sale and the cost of sale until the unit has actually been sold. An economic slowdown will reduce the value of a company's inventory significantly. This devaluation of inventory will affect the company's net profit margins. On the other hand, moving inventory and increasing the company's sales will have a positive impact on net profit margin.

Return on Asset:

The return on assets, also known as return on investment, is a ratio that indicates how profitable a company is in relation to its assets. It is calculated by dividing the net income by the total assets. Nike’s return on asset ratio improved from 2010 to 2011 and from 2011 to 2012. One of the possible reasons for a positive chance in the percentage of return on assets is controlling business expenses. If a business ears more than it spends, it can improve and increase its return on asset ratio. An increased asset turnover is one of the possible reasons for a positive trend of return on asset ratio. An increase in asset turnover results in increasing sales with the same amount of assets or maintaining the amount of sales with a reduced number of assets. (Asset turnover is the amount of sales generated by an asset.)

Current ratio is an important liquidity ratio. It results from dividing current assets by current liabilities. It is an important figure because it measures the liquidity position of a company. Generally, it is understood that the higher the ratio, the higher is the liquidity.  Nike current ratio has improved from 2011 to 2012, which shows that the Company’s financial strength is improving gradually.Current ratio:

Interest Cover:

Interest coverage ratio is a tool to determine how easily a company can pay interest on outstanding debt. Nike’s interest cover has improved from 84.65 to 91.39. One of the possible reasons for improvement in interest cover is negotiating with suppliers to keep money for a longer period and monitoring accounts receivables effectively to ensure the payment is received in a timely manner.

Competitive Analysis

Competitive Analysis has been done with Adidas AG. For the financial year ended 2012.

Gross Profit margin

Nike has reported a gross profit margin of 43.4% which is lower than the reported gross profit of Adidas i.e. 47.7%. These figures indicate that Adidas is performing better than Nike. The possible reasons for a higher gross profit margin are a higher value of sales or a lower value of cost of sales. Adidas cost of sales constitute 52% of its sales while Nike’s cost of sales makes 56% of its sales. Gross profit margin alone, however does not give a true picture.

Net profit margin

Net profit margin gives a totally opposite picture. Nike has reported a higher net profit margin of 9.21% than Adidas of only 3.5%. The net profit indicates that operating activities at Nike are administered more efficiently as compared to Adidas.

Return on assets

Return on assets ratio shows how profitable is a company’s asset to generate its revenue. Nike has more than 3 times higher return on assets than Adidas. According to this ratio Nike is using its assets in a much better way as compared to Adidas.

Current ratio

In simple words, current ratio calculates if a company has enough resources to pay its liabilities over the next 12 months. The acceptable current ratio varies from industry to industry and is generally between 1.5 and 3. If the ratio falls below 1, the company might have difficulties paying its short term debts. Current ratio of Nike is way better than Adidas, which shows that the Nike’s financial health is much better than Adidas.

Interest cover

Interest cover, as mentioned earlier also, is a sign to judge how comfortably a company is able to pay its interest expense. Interest coverage of both Nike and Adidas is very attractive, whereas as compared to Adidas, Nike’s interest coverage is more attractive.

Conclusion

Nike is the top seller in athletic merchandise. It has become one of the most viable corporations in the world over the last decade and half. Adidas is Nike’s top competitor. Because of the fact that Nike has reported large revenues, companies such as Adidas and Reebok have merged in an attempt to catch up.

References:

Nike – Annual Report (2011 and 2012) retrieved from:
http://nikeinc.com/earnings/news/nike-inc-reports-fiscal-2012-fourth-quarter-and-full-year-results

Nike historical facts retrieved from:

http://nikeinc.com/

Nike – Annual reports (1980 -1989) retrieved from:
www.nikebiz.com

Adidas Annual report 2012 retrieved from:

http://www.adidas-group.com/en/

 

 

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