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Nike Investment Analysis

Overview

  1. Introduction
  2. Industry Overview
  3. Business Model
  4. Brands
  5. Revenue
  6. Main Risk Factors
  7. Balance Sheet
  8. Selected Financial Data
    8.1 Basic Ratios
    8.1.1 Market Capitalization
    8.1.2 Revenue and Revenue growth
    8.2 Ratios for Profitability
    8.2.1 Operating Cash Flow
    8.2.2 Operating Margin
    8.3 Ratios for the Stock Rating
    8.3.1 Dividend and Dividend History
    8.3.2 Dividend Yield
    8.3.3 Dividend Payout Ratio
    8.3.4 Free Cash Flow Yield
    8.3.5 Price to Earnings Ratio
    8.3.6 Price to Book Ratio
    8.4 Ratios for the Financial Stability
    8.4.1 Equity Ratio
    8.4.2 Debt to Equity Ratio
  9. Competitors
  10. Competitive Advantage
  11. Pros and Cons of an Investment
  12. Resume: Key Facts

1. Introduction

Nike is the biggest sporting goods manufacturer in the world both in terms of market capitalization (see chapter 8.1.1) and in terms of revenue (see chapter 8.1.2). Nike’s principal business activity is the “design, development, worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services”. Nike currently has approximately 76,700 employees worldwide (including retail and part-time employees).

The products from Nike are sold through Nike-owned retail stores and Nike’s digital platforms. Almost all products by Nike are manufactured by independent contractors. The footwear and apparel products are produced outside the United States and equipment products are manufactured both in the United States and abroad. The Nike Headquarters are located in the city of Beaverton, in the state of Oregon (United States).

Nike’s brand value, its enormous profit (which enables Nike to spend more on marketing and on the innovation of new products) and the endorsements by some of the best sports athletes in the world help Nike to create an enormous economic moat (see chapter 10).

Nike’s history:

In 1964, University of Oregon track athlete Philip Knight and his coach Bill Bowerman founded the company Blue Ribbon Sports. The company initially commercialized sports shoes from the Japanese brand Onitsuka Tiger (today: Asics). In 1971, they produced shoes with the name Nike for the first time. In Greek mythology, Nike is the Winged Goddess of Victory. Later, they renamed the company from Blue Ribbon Sports to Nike.

Due to the partnership with several sports athletes, Nike was able to significantly raise its brand value, which helped them to increase their revenue. In 1978, Nike started to sell its shoes in Europe. In 1984, Basketball superstar Michael Jordan was contracted to be a Nike athlete. In 2003, Nike acquired the company Converse for $305 million. Today, Nike has a market capitalization of more than $200 billion and has generated revenue of $37.403 billion in 2020.

Nike’s mission and slogan:

The mission of Nike is “to bring inspiration and innovation to every athlete in the world”. The slogan “Just Do It” is a trademark of Nike. The “Just Do It” campaign was launched in 1988 and made Nike’s share of the North American sporting goods market increase significantly.

Executives of Nike:

John J. Donahoe is the President and Chief Executive Officer (CEO) of Nike. He was appointed President and Chief Executive Officer in January 2020 and has been a director of Nike since 2014.
Phil Knight is Chairman Emeritus of Nike. He is the co-founder of the company. He was President of Nike from 1968 to 1990 and from June 2000 to 2004. Phil Knight is the largest individual shareholder of the company.

Mark G. Parker is Executive Chairman of the Board of Directors and served as President and Chief Executive Officer from 2006 to January 2020. He has been employed by Nike since 1979.

The shareholders of Nike:

Nike’s float percentage of total shares outstanding is 61.9%. 15.9% of the Nike shares belong to Swoosh, LLC. Nike founder Phil Knight has formed the limited-liability company Swoosh LLC to hold 128.5 million shares of Nike’s Class A shares to maintain the company’s direction and to make it difficult for outsiders to gain control of Nike.

Furthermore, The Vanguard Group, Inc. has 8.6% of the Nike shares and BlackRock, Inc. has 7.20% of the Nike shares. As mentioned before, Nike founder Philip H. Knight is the biggest individual shareholder of the company (3.2%).

2. Industry Overview

The sporting goods manufacturers benefit from some global trends, such as increasing health awareness in people, growing fitness and fashion trends and an increasing interest in wearing sneakers.

In the graphic below you can see the continuously growing demand for sporting goods in the United States, which is Nike’s most important consumer market (see chapter 5).

However, the athletic footwear, apparel and equipment industry is extremely competitive. In the following important aspects of competition in the sporting goods’ industry are listed, which are found in Nike’s annual report 2020:

• Product attributes such as quality, performance, reliability, design and innovation

• Consumer connection and engagement, affinity for brands and products, social media interaction; customer support and service

• Identification with athletes, influencers, coaches, teams, colleges and sports leagues endorsed by the brand

• Effective distribution of products, with attractive merchandising and presentation in retail, both in-store and on digital platforms

3. Business Model

The Nike Brand products are subdivided in six product categories:

  1. Running
  2. Nike Basketball
  3. The Jordan Brand
  4. Football (Soccer)
  5. Training
  6. Sportswear (sports-inspired lifestyle products)

Nike also markets products designed for kids and products for the following sports:
American football, baseball, cricket, golf, lacrosse, skateboarding, tennis, volleyball, walking, wrestling and other outdoor activities.
In chapter 5 the share of each product category in Nike’s total revenue is shown.

Product Research, Design and Development:

The research, design and development of products are the key factors for Nike’s success.
In the design and manufacturing process of footwear, apparel and athletic equipment, Nike focuses on technical innovation. Nike aims to produce products that help to enhance athletic performance, reduce injury and maximize comfort.

Nike has its own staff of specialists in the areas of “biomechanics, chemistry, exercise physiology, engineering, digital technologies, industrial design, sustainability and related fields” and they have research committees and advisory boards made up of “athletes, coaches, trainers, equipment managers, orthopedists, podiatrists, physicians and other experts” who consult with Nike and who review “designs, materials, concepts for product and manufacturing process improvements”.

Manufacturing:
Nike is supplied by 112 footwear factories which are located in 12 different countries and by 334 apparel factories located in 36 countries. For fiscal 2019, contract factories in Vietnam, China and Indonesia manufactured approximately 49%, 23% and 21% of total Nike brand footwear and contract factories in China, Vietnam and Thailand produced approximately 27%, 22% and 10% of total Nike brand apparel respectively.

4. Brands

The Nike portfolio includes the following brands:

• Nike Brand
• Jordan Brand
• Hurley
• Converse

Nike Brand:
The Nike brand focuses on performance athletic footwear, apparel, equipment, accessories and services across a wide range of sport categories. The Nike brand uses the Swoosh trademark, as well as other Nike brand trademarks.

Jordan Brand:
The Jordan brand focuses on athletic and casual footwear, apparel and accessories. For this brand the Jumpman trademark is used.

Hurley:
The Hurley brand focuses on action sports and on youth lifestyle apparel. For this brand, the Hurley trademark is used.

Converse:
Converse designs, distributes, licenses and sells casual sneakers, apparel and accessories. For this brand the following trademarks are used: Converse, Chuck Taylor, All Star, One Star, Star Chevron and Jack Purcell.

5. Revenue

The following will show the revenue of Nike in 2020 by region, category, distribution channel and by product line:

Revenue of Nike by region:

Source: Nike’s annual report 2020

Nike’s main market is North America (41%), followed by EMEA (26%), Greater China (19%) and Asia Pacific/Latin America (14%). Comparing Nike’s revenue by region in 2020 with the revenue of 2019, we can highlight that the market share of the Chinese market raised by 2% and the North American market decreased by 2%.

Revenue of Nike by product category:

Source: Nike’s annual report 2020

Most of Nike’s revenue is created by Nike’s product category sportswear (40.1%), followed by Running (12.5%), the Jordan Brand (11.8%), Training (8.8%), Football (Soccer) (5.1%) and Nike Basketball (4.9%).

Revenue of Nike by distribution channel:

Source: Nike’s annual report 2020

Nike’s main distribution channel in 2020 was wholesale (65%), followed by Nike direct (Digital Commerce) at 35%. In 2019, Digital Commerce represented 32% of Nike’s total revenue. The changes were driven by the Digital Commerce sales growth, temporary store closures and stores operating on reduced hours as a result of COVID-19.

Revenue of Nike by major product line:

Source: Nike’s annual report 2020

In 2020, Nike’s main product line was footwear (66%), followed by apparel (31%) and equipment (3%). Comparing the fiscal year 2020 to the fiscal year 2019, it can be highlighted that the share of footwear on Nike’s total revenue raised by 1%.

6. Main Risk Factors

Nike faces a number of risks that are difficult to predict and some of them are outside of the company’s control. Here are some of the risk factors, listed in Nike’s annual report 2020:

• Nike’s financial results have been and continue to be affected by COVID-19

• The sporting goods’ manufacturer market is highly competitive and Nike’s products face intense competition

• A failure to maintain Nike’s reputation and brand image could negatively impact Nike’s business operations and Nike’s financial results

• If Nike was unable to anticipate consumer preferences in the future, they may not be able to maintain or increase their revenue/profit

• Nike’s business is affected by seasonality, which could result in fluctuations in Nike’s operating results

• A negative impact of an athlete endorsed by Nike could damage Nike’s image

• Declining purchasing power of potential Nike customers could result in lower revenue/profit of Nike

• A failure of one of Nike’s contractors to comply with Nike’s code of conduct, local laws and other standards could harm Nike’s image and Nike’s financial results

7. Balance Sheet

In the past, Nike’s business has been affected by seasonality. As already shown in chapter 2, the demand for sporting goods has grown continuously in the past in the United States, which can be considered as Nike’s most important market. For the fiscal year 2020, Nike’s gross profit decreased by 7% compared to the fiscal year 2019. In 2020, Nike was significantly impacted by lower shipments to Nike’s wholesale customers and store closures as a result of COVID-19.

Nike currently has a long-term debt of $9.406 billion compared to $3.464 billion in 2019. In chapter 8.4.2 the debt to equity ratio of Nike will be calculated, which shows the rela-tion between debt and equity of the company. In chapter 9 Nike’s debt to equity ratio with one of its competitors will be compared.
Nike has the S&P credit rating AA-. This credit rating means that Nike is supposed to have a very strong capacity to meet its financial commitments.

During the year 2020, there was no Nike customer who accounted for 10% or more of Nike’s consolidated net revenues. This shows that Nike is not dependent on individual customers.

8. Selected Financial Data

8.1. Basic Ratios

8.1.1 Market Capitalization

Market capitalization refers to the total market value of a company’s outstanding shares. (For example, a company with 100 million shares, which are sold for $100 each, would have a market capitalization of $10 billion). Market capitalization is an important indicator for the investors, because investments in companies with a higher market capitalization tend to have a lower risk than investments in companies with a smaller market capitalization. Companies with a higher market capitalization tend to have a more solid market position compared to smaller companies and are therefore less susceptible to risk.

Market capitalization refers to the total market value of a company‘s outstanding shares. To calculate the market capitalization, you multiply its current stock price by the total number of outstanding shares. The market capitalization of Nike is currently about $202.70 billion (date: 27.10.2020).

Calculation:

Market Capitalization = Current stock price x number of outstanding shares
Nike’s stock price = $128.37 (date: 27.10.2020)
Nike’s number of outstanding shares = 1.579 billion
Nike’s market capitalization = $128.37 x $1.579 billion = $202.70 billion

Companies like Nike, which have a market value of more than $10 billion, are considered large-cap stocks. Large-cap stocks tend to have a lower risk for investors than midcap stocks (Market value between $3 billion and $10 billion) or small-cap stocks (market value of $3 billion or less).

8.1.2 Revenue and Revenue Growth

Revenue is an important indicator for investors, because it shows if the business is growing. Looking at the revenue, we need to analyze its variation in time. Below you find the revenue of Nike from 2010 to 2020 (in $ billion), which shows us that the company is growing constantly. Only in 2020 was there a decline in revenue.

20102011201220132014201520162017201820192020
18.320.123.325.327.830.632.434.436.439.137.4

Between 2010 and 2019, the revenue of Nike has grown on average about 9% per year. If Nike’s revenue continues growing about 9% per year and Nike was able to enhance its operating margin slightly, Nike could grow with an organic growth rate of about 10% per year in the future.

8.2 Profitability Ratios

The operating cash flow (OCF) and the operating margin show us the profitability of the company and will be explained in more detail in the following chapters:

8.2.1 Net Operating Cash Flow

The operating cash flow (OCF) is a measure of the amount of cash generated by a company’s core business operations. The OCF shows us the success of a company’s core business activities. Below you can find Nike’s operating cash flow from 2010 till 2020 (in $ billion). The Net Operating Cash Flow has grown steadily from 2011 till 2019. The decrease in 2020 is a result of the effects of COVID-19.

20102011201220132014201520162017201820192020
3.171.801.933.033.164.913.403.854.965.902.49

8.2.2 Operating Margin (EBIT)

A company’s operating margin can provide investors important insight into the value and profitability of a company. The operating margin is calculated as EBIT divided by revenue. The higher the operating margin, the more profitable the business and the better the market position of the company in its business segment. Nike’s operating margin in 2019 was 12.08% and in 2020 it was 7.40%

Calculation:
Operating margin = EBIT / Revenue
Nike’s EBIT in 2019 = $4.724 billion
Nike’s EBIT in 2020 = $2.770 billion
Nike’s revenue in 2019 = $39.122 billion
Nike’s revenue in 2020 = $37.420 billion
Nike’s operating margin in 2019 = $4.724 billion / $39.122 billion = 12.08%
Nike’s operating margin in 2020 = $2.770 billion / $37.420 billion = 7.40%

A high operating margin can be essential for companies during times of economic crises and instability, because it can help them to create a profit even when their sales decline due to lower demand. An operating margin of 12.08% means that, if Nike sold a share for $100, they would keep $12.08 as earnings before interest and taxes. To get a better idea of what this operating margin means for Nike, it needs to be compared to one of its competitors. The better the operating margin of Nike in comparison to its competitors, the better Nike’s market position in its business segment. In chapter 9 you can find more on this topic.

8.3 Ratios for the Stock Rating

8.3.1 Dividend and Dividend History

The dividend is the sum of money paid regularly by a company to its shareholders. Dividends are a form of cash flow to the investor, and therefore they can be considered a reflection of a company’s value.

Nike has raised its dividend constantly in the past. On average, Nike has raised its dividend by 13.52% per year (below you find Nike’s dividend in $). This means that the dividend has doubled every 6 years.

20102011201220132014201520162017201820192020
0.270.300.350.410.470.540.620.700.780.860.96

8.3.2 Dividend Yield

The dividend yield is calculated by dividing the dividend per share by the price per share. The dividend yield of Nike is currently 0.74%.

Calculation:

Dividend yield = Dividend per share / Price of the share
Nike’s dividend per share in 2020 = $0.955
Current price of the Nike share = $128.37 (date: 27.10.2020)
Nike’s dividend yield = $0.955 / $128.37 = 0.74%

The following shows the dividend yield for a Nike investment for the case that Nike will be able to continue raising its dividend with an average of about 13.52% per year. With a current investment in Nike you would get a dividend yield of 0.74%, in 6 years you would get a dividend yield of 1.48%, in 12 years a dividend yield of 2.96% and in 18 years a dividend yield of 5.92% for your initial investment, etc.

2020+6 years+12 years+18 years+24 years+30 years+36 years
0.74%1.48%2.96%5.92%11.84%23.68%47.36%

8.3.3 Dividend Payout Ratio

The dividend payout ratio is very important for investors, because on one side it shows how much of the company’s profit is given back to its shareholders and on the other side it shows if there is still a range for future dividend enhancements. The dividend payout ratio shows how much money the company pays to its shareholders in terms of dividends compared to how much stays in the company to reinvest in growth, pay off debts or add to cash reserves.

Calculation:

Dividend payout ratio = Dividend per share / Earnings p. share
Nike’s dividend per share in 2020 = $0.955
Nike’s earning per share in 2020= $1.63
Nike’s dividend payout ratio = $0.955 / $1.63 = 58.58%

Here you can see Nike’s dividend payout ratio from 2016 until 2020:

20162017201820192020
28.05%27.34%65.54%33.73%58.58%

The dividend payout ratio is calculated by dividing the dividend per share by the earnings per share. In 2019, the dividend payout ratio of Nike was 33.73%. This means that 66.27% of the company’s earnings remained in the company and could be used to reinvest in growth, pay off debts or to be added to cash reserves. Due to Nike’s lower earnings in 2020, the dividend payout ratio in 2020 was 58.58%. The dividend payout ratio is useful for evaluating a dividend’s sustainability: If a company’s payout ratio was over 100%, the company would return more money to shareholders than it would earn. In chapter 9 you will find more on this topic.

8.3.4 Free Cash Flow Yield

The cash flow is the measure of money in and out of a company’s bank accounts. The free cash flow is the amount of cash left over after a company has paid all its expenses and capital expenditures. Generally, the lower the ratio of the company, the less attractive it would be as an investment. A high free cash flow yield means that a company is generating enough cash to easily satisfy its debt and its dividend payouts. The free cash flow yield is calculated by dividing the company’s free cash flow by market capitalization. The free cash flow yield of Nike in 2019 was 2.36%. Due to the lower earnings of Nike in 2020, Nike’s free cash flow yield in 2020 was only 0.69%. In chapter 9 you can find more on this topic.

Calculation:
Free cash flow yield = Free cash flow / Current market capitalization
Nike’s free cash flow in 2019= $4.784 billion
Nike’s free cash flow in 2020 = $1.399 billion
Nike’s current market capitalization = $202.70 billion (date: 27.10.2020)
Nike’s free cash flow yield in 2019 = $4.784 billion / $202.70 billion = 2.36%
Nike’s free cash flow yield in 2020 = $1.399 billion / $202.70 billion = 0.69%

8.3.5 Price to Earnings Ratio (P/E Ratio)

The P/E ratio is an important indicator for investors. It shows the market value of a company’s stock compared to the earnings of the company. The P/E ratio is calculated by dividing the price of the share by the earnings per share: calculating with Nike’s earnings per share of $2.55 in 2019, Nike has a P/E ratio of 50.34; calculating with Nike’s earnings per share of $1.63 in 2020, Nike has a P/E ratio of 78.75. A P/E ratio of 78.75 means that the current price of the share is 78.75 times higher than the annual earnings of the company. A high price earning ratio means that the price of the stock is expensive.

Calculation:
P/E ratio = Current price of the share / Earnings per share in 2019
Nike’s current price of the share = $128.37 (date: 27.10.2020)
Nike’s earnings per share in 2019 = $2.55 per share
Nike’s earnings per share in 2020 = $1.63 per share
Nike’s P/E ratio with 2019 EPS = $128.37 / $2.55 per share= 50.34
Nike’s P/E ratio 2020 EPS = $128.37 / $1.63 per share= 78.75

The average P/E ratio of Nike from 2010 to 2019 was 27.64. This means that considering the P/E ratio, the current P/E ratio of Nike is higher than the average of the last 10 years. Considering this number, the current value of the Nike stock would be overrated. The P/E ratio can vary extremely from industry to industry and you should also compare the P/E ratio of the company with one of its competitors from the same industry. In chapter 9 you can find more on this topic.

8.3.6 Price to Book Ratio (P/B Ratio)

The price to book ratio (P/B ratio) is used to compare a firm’s market capitalization to its book value. It is calculated by dividing the company’s stock price per share by its book value per share (BVPS). Nike’s book value per share in 2019 was $5.73 and in 2020 it was $5.10. Calculating with the book value per share of 2019, Nike has a P/B ratio of 22.40, calculating with the book value of 2020, Nike has a P/B ratio of 25.17.

Calculation:

P/B Ratio = Current price of the share / Book value per share
NIKE’s current price of the share = $128.37 (date: 27.10.2020)
NIke’s book value per share in 2019 = $5.73
Nike’s book value per share in 2020 = $5.10
Nike’s P/B Ratio with book value of 2019 =$128.37 / $5.73 = 22.40
Nike’s P/B Ratio with book value of 2020 =$128.37 / $5.10 = 25.17

8.4 Ratios for the Financial Stability of the Company:

The equity ratio and the debt to equity ratio are indicators for the financial stability of a company:

8.4.1 Equity Ratio

The equity ratio is an important measurement which indicates how much of a company’s assets have been generated by issuing equity capital rather than by taking on debt. The lower the ratio, the more debt the company has used to pay for all its assets. It can be used as an indicator of how financially stable a company is. The equity ratio is calculated by dividing the total shareholder equity by the total assets.

In 2019, the equity ratio of Nike was 38.12% and in 2020 it was 25.70%.

Calculation:

Equity ratio = Total shareholder equity / Total assets
Nike’s total shareholder equity in 2019 = $9.040 billion
Nike’s total shareholder equity in 2020 = $8.055 billion
Nike’s total assets in 2019 = $23.717 billion
Nike’s total assets in 2020 = $31.342 billion
Nike’s equity ratio in 2019 = $9.040 billion / $23.717 billion = 38.12%
NIKE’s equity ratio in 2020 = $8.055 billion / $31.342 billion = 25.70%

The lower the equity ratio of a company, the more capital of the company is financed from debt and the higher the risk for the investor. The equity ratio tends to differ depending on the industry. Some industries tend to use more debt financing than other industries do.

8.4.2 Debt to Equity Ratio (D/E ratio)

The debt to equity ratio is another important indicator, showing the financial stability of a company.
The debt to equity ratio shows the proportions of debt and equity of a company. A higher ratio indicates that a company is getting more of its financing by borrowing money and the more the company’s operations rely on borrowed money, the higher their risk of bankruptcy.
To calculate the D/E ratio, a company’s total liabilities are divided by its total shareholder equity. The debt to equity ratio of Nike in 2019 was 1.62 and in 2020 it was 2.28.

A debt to equity ratio of 1.62 means that Nike uses €1.62 in debt for every $1 of equity. The debt to equity ratio can vary significantly from industry to industry. In chapter 9 you can find more on this topic.
The equity ratio and the debt to equity ratio indicate Nike to be a financially stable company. Especially in times of economic instability it is very important for companies to be financially healthy, because it reduces the probability of bankruptcy.

9. Competitors

Having a look at the worldwide sporting goods manufacturers, Adidas, Puma, Under Armour, lululemon athletica, V.F. Corporation, Anta Sports, Asics and Li Ning can be considered Nike’s biggest competitors. For the competitive analysis these companies have been chosen, because they can be considered as Nike’s biggest competitors in terms of market capitalization. Additionally, these are the companies named as Nike’s main competitors in Nike’s annual report 2020. The financial data of 2019 will be compared. Even though Nike finishes its year on 31 May 2020, not all of Nike’s competitors do the same. This is why Nike’s key figures of 2019 are compared to the key figures of its competitors of 2019. Since Adidas is by far Nike’s biggest competitor in terms of market capitalization, revenue and brand value, we will first compare Nike to Adidas.


Nike in comparison to its biggest competitor Adidas (date: 27.10.2020):

CompanyMarket Cap (billion US$)Revenue (billion US$)Op. MarginFree Cash Flow YieldDividend YieldDividend Payout RatioP/E RatioP/B RatioD/E Ratio
Nike202.7039.1212.08%2.36%0.74%33.73%50.3422.401.62
Adidas63.1927.9610.93%3.9%0.61%45.72%27.108.502.00

Nike has a higher market capitalization, higher revenue and a higher operating margin than its main competitor Adidas. The higher operating margin of Nike in comparison to Adidas shows Nike’s leading market position in this business segment. Furthermore, Nike pays a higher dividend yield and has a lower debt to equity ratio than its main competitor Adidas. Additionally, Nike has a lower dividend payout ratio. However, Adidas has a higher free cash flow yield, a lower price earning ratio and a lower price book value than Nike.

Nike in comparison to other sporting goods manufacturers (date: 27.10.2020):

In the table below you can see Nike in comparison to its competitors:

CompanyMarket Cap (billion US$)Revenue (billion US$)Op. MarginFree Cash Flow YieldDividend YieldDividend Payout RatioP/E RatioP/B RatioD/E Ratio
Nike202.7039.1212.08%2.36%0.74%33.73%50.3422.401.62
Adidas63.1927.9610.93%3.9%0.61%45.72%27.108.502.00
Puma14.056.517.47%2.45%0.28%40.00%45.016.601.31
Under Armour5.945.254.06%6.1%0%0%68.254.371.25
Anta Sports30.144.9622.47%3.3%0.84%30.00%37.769.311.00
Asics2.493.622.81%3.78%1.72%79.13%36.801.831.08
Li Ning12.692.0310.39%3.5%0.45%24.29%57.2911.240.75
lululemon athletica43.503.28821.41%1.2%0%0%91.1321.590.44
V.F. Corporation26.6510.26510.51%5.4%2.87%60.82%21.719.061.41

The table above shows that Nike is the biggest sporting goods manufacturer in the world both in terms of market capitalization and in terms of revenue.

Only Nike competitors Anta Sports (22.47%) and lululemon athletica (21.41%) have a higher operating margin than Nike (12.08%). Under Armour has the highest free cash flow yield (calculated by the free cash flow yield of 2019 divided by market capitalization). The American apparel and footwear company V.F. Corporation currently pays the highest dividend yield (2.87%) and currently has the lowest price earning ratio (21.71) (calculated by the current price of the share divided by the EPS of 2019). The Japanese sporting goods manufacturer Asics has the lowest price to book ratio (1.83). The Chinese company Li Ning currently has the lowest dividend payout ratio. Lululemon athletica has the lowest debt to equity ratio (0.44).

In the table below you can see Nike compared to other consumer goods manufacturers. You can find it in comparison to the biggest consumer goods manufacturers in terms of market capitalization. Although these companies are not direct competitors of Nike, this cross-industry comparison gives us additional insights:

Nike in comparison to other consumer goods manufacturers (date: 27.10.2020):

CompanyMarket Cap (Billion US$)Op. MarginFree Cash Flow YieldDividend YieldDividend Payout RatioP/E RatioP/B RatioD/E Ratio
Nike202.7012.08%2.36%0.74%33.73%50.3422.401.62
LVMH281.5421.35%3.65%0.93%33.68%32.866.591.59
Coca-Cola214.928.18%3.92%3.28%77.29%23.5312.193.44
PepsiCo195.8615.86%2.77%2.89%72.88%28.0714.334.31
Nestle329.9717.57%4.05%2.52%58.46%22.987.231.44
Procter & Gamble359.4823.10%3.99%2.24%61.09%28.527.711.59
Unilever163.0519.14%4.46%2.99%76.08%24.358.853.86

By comparing Nike to other consumer goods manufacturers, it can be highlighted that Nike has a lower operating margin, free cash flow yield and dividend yield than any of the consumer goods manufacturers. However, Nike has a much lower dividend payout ratio than most of the other consumer goods manufacturers (besides LVMH), which shows that there is space for future dividend enhancements.
Comparing Nike with companies out of the consumer goods business segment, we find out that Nike has the highest price earning ratio. However, we have to take into consideration that the organic growth rate of Nike is higher than the one of those companies out of the consumer goods sector listed above and a higher valuation of the Nike share is therefore reasonable.

10. Competitive Advantage

Regarding Forbes Magazine (2020), Nike is not only the most valuable sporting goods manufacturer in the world, it is also the most valuable sports brands in the world. Nike ranks 13th in Forbes Magazine (2020) in the list of the most valuable brands in the world. Adidas is the only additional sporting goods manufacturer that appears in the list of Forbes Magazine (2020) of the most valuable brands in the world. Adidas is ranked as the 51st most valuable brand worldwide by Forbes Magazine (2020). Nike’s high brand value is an extraordinary competititve advantage for Nike.

Forbes list of the most valuable brands in the world:

RankBrandBrand Value1-Yr Value ChangeBrand RevenueIndustry
1Apple$241.2 B17%$260.2 BTechnology
2Google$207.5 B24%$145.6 BTechnology
3Microsoft$162.9 B30%$125.8 BTechnology
4Amazon$135.4 B40%$260.5 BTechnology
5Facebook$70.3 B-21%$49.7 BTechnology
6Coca-Cola$64.4 B9%$25.2 BBeverages
7Disney$61.3 B18%$38.7 BLeisure
8Samsung$50.4 B-5%$209.5 BTechnology
9Louis Vuitton$47.2 B20%$15 BLuxury
10McDonald’s$46.1 B5%$100.2 BRestaurants
11Toyota$41.5 B-7%$187 BAutomotive
12Intel$39.5 B2%$72 BTechnology
13Nike$39.1 B6%$39.3 BApparel
14AT&T$37.3 B-10%$151.2 BTelecom
15Cisco$36 B4%$50.6 BTechnology
      
51Adidas$12.9 B15%$24.5 BApparel
Source: https://www.forbes.com/the-worlds-most-valuable-brands/#252f533119c0

Regarding Forbes Magazine (2020), Nike currently has a brand value of $39.1 billion, which is an increase of 6% in comparison to the previous year 2019. Adidas, which is ranked 51st, has a brand value of $12.9 billion. Adidas increased its brand value by 15% in comparison to 2019.

In the previous chapter 9 it has already been shown that Nike has a higher operating margin than almost all of its competitors. As you can see in the graphic on the following page, Nike generates a much higher EBIT in comparison to all of its competitors.

Nike’s high earnings help the company to invest more in innovation, in the development of new products and in the marketing of the world’s top athletes to increase its brand value even more and improve its market position.

The following will show Nike’s spending on marketing from 2014 to 2020:

Source: https://www.statista.com/statistics/685734/nike-ad-spend/

In the graphic above you can see that Nike has continuously increased its spending on marketing from 2014 to 2019. Only in 2020 it has reduced slightly due to the lower earnings as a result of COVID-19.

Regarding Forbes Magazine (2020), 51 out of the 100 highest paid sports athletes in the world in 2020 are currently endorsed by Nike. Adidas endorses 16 athletes out of the top 100 (including those athletes endorsed under its Reebok brand) and Under Armour endorses 6 athletes out of the 100 highest paid athletes in the world. The partnership with some of the best and most successful athletes in the world help Nike to increase its brand value and will create more revenue in the future.

Regarding Forbes Magazine (2020), 51 out of the 100 highest paid sports athletes in the world in 2020 are currently endorsed by Nike. Adidas endorses 16 athletes out of the top 100 (including those athletes endorsed under its Reebok brand) and Under Armour endorses 6 athletes out of the 100 highest paid athletes in the world. The partnership with some of the best and most successful athletes in the world help Nike to increase its brand value and will create more revenue in the future.

Examples of current or former sport athletes, who currently have partnerships with Nike (date: 27.10.2020):

SportsName of the athletePartnerLifetime Partnerships
American FootballOdell Beckham JuniorNike 
BasketballLeBron JamesNikeX
BasketballKevin DurantNike 
BasketballMichael JordanNikeX
Football (Soccer)Cristiano RonaldoNikeX
GolfTiger WoodsNike 
GolfRory McIlroyNike 
TennisRafael NadalNike 
TennisSerena WilliamsNike 
*The athletes highlighted in blue have lifetime partnerships with Nike

Regarding Forbes Magazine, Cristiano Ronaldo’s lifetime endorsement deal is reportedly similar to James LeBron’s pact and worth as much as $1 billion. Michael Jordan has a quasi-lifetime deal with Nike: he has the name and logo of the Nike-owned Jordan brand.

Cristiano Ronaldo is currently the sports athlete who has the most followers on social media in the world. He has 399.6 million followers on Twitter, Facebook and Instagram (date: 27.10.2020). With 121.8 million followers on those social media channels, LeBron James is in the fourth position of the sports athletes with most followers on social media. Having a lifetime deal with the nr. 1 and nr. 4 most followed sports athletes in the world ensures that Nike an enormous media reach and guarantees Nike to increase its revenue in the future.

The following facts help Nike to build an economic moat:

• Nike is ranked as the 13th most valuable brand in the world regarding Forbes Magazine (2020) and is by far the most valuable sports brand in the world

• Nike has a higher revenue and a higher EBIT than any of its competitors, which enables Nike to spend more on research and development as well as on marketing than any of its competitors

• 51 out of the 100 highest paid athletes in the world are currently endorsed by Nike, which helps Nike enormously to strengthen its brand and ensures they will create revenue in the future. Adidas endorses 16 athletes out of the top 100 and Under Armour endorses 6.

• Nike has lifetime endorsements with Cristiano Ronaldo, LeBron James and Michael Jordan. Via their social media channels, the athletes help Nike to achieve an enormous media reach

11 Pros and Cons

Arguments for a Nike investment:

• Nike is by far the biggest sporting goods manufacturer in the world in terms of market capitalization and in terms of revenue (see chapter 8.1.1 and 8.1.2). Companies with higher market capitalization tend to have a more solid market position compared to smaller companies and are therefore less susceptible to risk

• In Forbes Magazine (2020), Nike is ranked as the 13th most valuable brand in the world. Adidas is ranked as the 51st most valuable brand in the world, which makes Nike ranked as the most valuable sports brand in the world (see chapter 10)

• Nike has a higher operating margin than almost all of its competitors (12.08%). Only Nike’s Chinese competitor Anta Sports and lululemon athletica have a higher operating margin (see chapter 9). A high operating margin can be essential for companies during times of economic crises and instability, because it can help them to create a profit even when their sales decline

• Nike has higher revenue and a higher EBIT than any of its competitors, which enables Nike to spend more on research and development as well as on marketing than any of its competitors (see chapter 8.1.2 and chapter 10)

• 51 out of the 100 highest paid athletes in the world are currently endorsed by Nike, which helps Nike enormously to strengthen its brand and ensure earnings in the future (see chapter 10)

• Nike has an organic growth rate of about 10% per year (see chapter 8.1.2)

• If Nike continues to grow and is able to raise its dividend about 13.5% per year, Nike’s dividend could be doubled about every 6 years (see chapter 8.3.2)

• Being one of the most valuable brands in the world, having a strong market and pricing power due to its excellent market position and through the organic growth rate of about 10% per year and having partnerships with some of the best sports athletes in the world, enables Nike to create an enormous economic moat in comparison to its competitors (see chapter 10)

Arguments against a Nike investment:

• Currently, Nike has a high price earning ratio compared to some of its competitors (see chapter 9). The high price earning ratio show that the price of the Nike stock is high

• Different financial ratios show that Nike is currently overrated (see chapter 8.3.5 and 9)

12. Resume: Key Facts

• In 1964, University of Oregon track athlete Philip Knight and his coach Bill Bowerman founded the company Blue Ribbon Sports, which later on was renamed to Nike (see chapter 1)

• Nike’s principal business activity is the “design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services” (see chapter 1)

• The demand for sporting goods in the United States, Nike’s most important consumer market, has grown continuously in the past (see chapter 2)

• The research, design and development of products are key factors for Nike’s success (see chapter 3)

• The Nike portfolio includes the following brands: Nike Brand, Jordan Brand, Hurley and Converse (see chapter 4)

• Nike’s main market is North America (41%), followed by EMEA (26%), Greater China (19%) and Asia Pacific/Latin America (14%). Comparing Nike’s revenue by region in 2020 with the revenue of 2019, we can highlight that the market share of the Chinese market raised by 2% and the North American market decreased by 2% (see chapter 5)

• Nike has the S&P credit rating AA-. This credit rating means that Nike is supposed to have a very strong capacity to meet its financial commitments (see chapter 7)

• Compared to its competitors, Nike currently has the highest market capitalization and the highest revenue (see chapter 8.1.1, chapter 8.1.2 and chapter 9)

• Nike currently has a high price earning ratio in comparison to its competitors or other consumer goods manufacturers (chapter 8.3.5 and chapter 9)

• Nike’s brand value, its enormous profit (which enables Nike to spend more on marketing and in the innovation of new products) and the endorsement with some of the best sports athletes in the world, enable Nike to create an enormous economic moat (chapter 10)

Here you can download the pdf document of Nike’s Investment Analysis.

Sources:

Adidas, annual report 2019, https://report.adidas-group.com/2019/de/serviceseiten/downloads/files/adidas_geschaeftsbericht_2019.pdf

Anta Sports, annual report 2019, https://files.services/files/394/2020/0406/20200406170001_45162776_en.pdf

Asics, annual report 2019, https://assets.asics.com/page_types/4381/files/ASICS%20Annual%20Report%202019_original_original.pdf?1590396083&_ga=2.122773390.485953432.1604094451-1925487583.1604094451

Bloomberg.com (2020), https://www.bloomberg.com/quote/NKE:US

Coca-Cola, annual report 2019, https://d1io3yog0oux5.cloudfront.net/_4fee6f81473e3997add81ea416808efe/cocacolacompany/db/734/7242/annual_report/coca-cola-business-and-sustainability-report-2019+%281%29.pdf

Forbes (2020), List of the most valuable brands in the world, https://www.forbes.com/the-worlds-most-valuable-brands/#252f533119c0

Li Ning, annual report 2019, https://doc.irasia.com/listco/hk/lining/annual/ar228227-e02331.pdf
lululemon athletica, annual report 2019, https://investor.lululemon.com/static-files/8df91f4d-25a1-4e69-8b94-606f9c370440

Nestle, annual report 2019, https://www.nestle.com/sites/default/files/2020-03/2019-annual-review-en.pdf

NIKE, annual report 2019, https://s1.q4cdn.com/806093406/files/doc_financials/2019/annual/nike-2019-form-10K.pdf

NIKE, annual report 2020, https://s1.q4cdn.com/806093406/files/doc_financials/2020/ar/NKE-FY20-10K.pdf

NIKE, 10 Year Financial History, https://s1.q4cdn.com/806093406/files/doc_financials/2019/NIKE-Inc-Ten-Year-Financial-History-FY19.pdf

Opendorse, The top 100 athletes on social media, https://opendorse.com/blog/the-top-100-athletes-on-social-media-2019/

PepsiCo, annual report 2019, https://www.pepsico.com/docs/album/annual-reports/pepsico-inc-2019-annual-report.pdf?sfvrsn=ea470b5_2

Procter & Gamble, annual report 2019, https://www.pg.com/annualreport2019/index.html#
Puma, annual report 2019, https://annual-report-2019.puma.com/downloads/puma-ar-2019_annual-report.pdf

Under Armour, annual report 2019, https://about.underarmour.com/sites/default/files/2020-06/UA-2019_Annual_Report_4-14-20.pdf

Unilever, annual report 2019, https://www.unilever.com/Images/unilever-annual-report-and-accounts-2019_tcm244-547893_en.pdf

V.F. Corporation, annual report 2019, https://d1io3yog0oux5.cloudfront.net/_4e04eba6212466771a49f124d4ca5bfb/vfc/db/409/66586/annual_report/VF_FY2019_AR_Design-052919-FINAL_Digital.pdf

WSJ.com (2020), Market Data, https://www.wsj.com/market-data

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