NIKE: A Resilient Buy And Hold Investing Opportunity

 

Nike is the top-rated sportswear brands which offers good quality sports shoes and whose goal is to supply athletes with exceptional products and wearable that aids them in better sports performance. The brand was established in 1964 and flourished within a few years. The company currently has retail outlets in more than 170 countries with 79,100 employees, and it provides online service as well.

The Swoosh logo is one of the most recognized symbols in the world and the brand is associated with several sports stars like Cristiano Ronaldo, Neymar, James LeBron, Rafael Nadal. This is the reason why Nike´s business brand is a quite resilient competitive advantage. One could expect the industry to keep growing as long as people continue watching sports and practicing them, which is an essential healthy habit that has always become more and more widespread over the years. Given the sustainability of the industry, as long as Nike continues hiring the best elite athletes for marketing campaigns, it can accomplish long-term continuity as industry leader.

Once you understand the sustainability of the business at the very top and the unquestionable track record for over 50 years, you might want to check the numbers behind the business. In terms of leverage and liquidity, the company holds net cash. If you look at profitability and cash flow generation, the company has not achieve to improve profitability margins during the last year but keeps relatively stable, and strong free cash flow with barely working capital changes nor capital expenditures either. Therefore, the business can run by itself without external financing and you can acknowledge it is perfectly ready to grow via business acquisitions to strengthen its cash flow generation even further in the long term in case some good market opportunity comes in.

To sum up the most important aspects of the company, the SWOT framework could be summarizes as follows:

Strengths:

1.       Strong Brand Awareness and Brand Value: one of the most recognizable brands in the world. According to Interbrand global brand ranking report, Nike is ranked at # 10 position with a brand value of $50.2 Billion.

2.       Diverse product portfolio with Side Brands: Nike’s ability to maintain and enhance its range of successful side brands such as Converse, Jordans, Umbro, Hurley, Nike Golf, and Cole Haan have enabled it to enjoy unparalleled success for decades.

3.       Huge Customer base: Nike has millions of customer from around the world who loyally follow Nike’s trends, participate in Nike events, and even provide customer feedback.

4.       Low Manufacturing Cost: Most of Nike’s footwear is manufactured in foreign countries. In the fiscal year 2022, Vietnam produced 44%, Indonesia produced 30%, and China produced 20% of total Nike’s footwear. Other operations are in Argentina, Brazil, India, Italy, and Mexico. This strength is quite important for the business success in the long term and the company is expected to be able to maintain it even if it needs to relocate resources to other areas to maintain that favorable wage structure. Another factor that keeps costs low and profit margins high is the fact that Nike does not own any of the factories where these goods are produced. These outsourcing companies are simply given strict guidelines and protocols concerning the quality and production process for Nike products. The company has also significantly invested in various innovations and technologies that help reduce labor cost and material costs.

5.       In-house Professionals with a culture of innovation: Nike has a team of professionals that design its shoes and other athletic accessories. Nike believes that their business has flourished due to the thorough research that is conducted for each product. They are also considered drivers of innovation with regard to sports apparel and equipment. The company is well known for outspending its closest competitors in this area. In fact, it has introduced some of the most iconic developments in competitive sportswear, making it a favorite for many top athletes. One of the secrets behind the success of the company in research and development is the fact that it all sources its low-cost manufacturing process. This allows the company to focus on high-value activities such as R&D as well as branding and marketing.

6.       Superior Marketing Capabilities: Nike has excellent marketing campaigns. The brand heavily relies on demand creation expense, which includes advertisement, promotion, endorsement contracts, media print and complimentary products. In the fiscal year 2019, 2020, 2021, and 2022 Nike spent $3.7 billion, $3.6 billion, $3.1 billion and $3.8 billion respectively. The brand has successfully utilized social media and marketing campaigns to target more customers. Through the smart use of celebrity endorsements (which will be discussed next), iconic catchphrases, the Nike “swoosh” logo, and commercials such as the worldwide-famous ‘Just Do It’ campaign, as well as their ability to align the brand with positive associations such as innovation, stylishness, maximum performance, winning, self-empowerment.

7.       Iconic Celebrity Endorsements: Nike is well-known for running one of the most successful celebrity endorsement campaigns in recent history, closely associated with famous athletes and non-athletes like Michael Jordan, Rafael Nadal, Bella Hadid, Cristiano Ronaldo, and Maria Sharapova.

8.       A Successful E-commerce Platform and Getting Rid of Retailers: e-commerce section has seen steady growth over the past few years. Direct-to-consumer sales represented almost 40% of the total sales in 2021 Their short-term goal is to achieve 60% direct-to-customer sales by the year 2025, further cutting out the need for retail outlets and allowing them to increase their profit margins further and have greater control over product prices. Regarding the retailers cut, Nike has made headlines over the past few years for gradually cutting ties with its major retailers, which include department stores, brick-and-mortar stores, and sporting goods specialists. The company does not operate a significant chain of dedicated retail outlets and therefore has mainly used third-party businesses to market its products to customers. By promoting direct-to-consumer sales, they have greater control over customer experience, pricing, profit margins, and brand image. They have achieved this by increasing their e-commerce presence, as well as launching a suite of apps that allow customers to purchase their goods directly from the brand.

9.       High Market Share: Nike is a market leader in footwear industry. Nike has captured approximately 39% of the global athletic footwear market and 13% of global athletic apparel market.

10.   The Company Is Slowly Cultivating the Image of a Luxury Brand: a series of popular collaborations with high-fashion brand names — such as Louis Vuitton, Sacai, and Jacquemus — has carefully cultivated the image of a high-end luxury brand. his is becoming evident in the prices the brand charges for some of its designer products, such as the $8000 Nike Air Force One Vlone, $18,000 Nike Air Jordan 4 Retro Eminem “Encore,” and the Solid Gold Ovo Air Jordan owned by hip-hop artist Drake which was purchased for a mind-boggling $2 million.

11.   Black Community Support: The brand has excellent marketing campaigns and recently released “Don’t Do It” ad campaign in support of Black communities against racism. They are also associated with several non-profit organizations.

12.   Aimed For Sustainability: Nike has taken steps to ensure that its company embodies these values, and one of these steps was to promote the use of recycled and sustainable materials in its products. Nike aims to save costs by reuse materials and components from waste streams and recycled products. The company is committed to reducing its environmental impact by using fewer resources, energy, and water, and emitting fewer greenhouse gases and toxic chemicals. For example, the company introduced a new collection that was aimed at reducing its carbon footprint by 75% when compared to the other products. Moreover, the company has also started encouraging customers to recycle used apparel as well as return old footwear to the company for refurbishment. Nike’s CEO Mark Parker has addressed that they will continue to acknowledge the environmental issues in the communities.

 

Weaknesses:

1.       Relative dependency on the American market: this may not necessarily be a bad thing, but it leaves the company vulnerable to market shocks or economic downturns within the U.S. market given more than 40% of its total sales come from US. However, most global consumer businesses that sell good quality goods hold around 40% of its customer base in US.

2.       Reduced Quality Control: while Nike is certainly a brand that pays close attention to this fact and is well-known for the quality of their product, even they are not immune to this flaw. Outsourcing can also increase the risk of the market being flooded with counterfeit Nike products. This is probably the biggest challenge the company might be able to end with, but introducing anti-counterfeiting technology and methods could be the ultimate solution.

3.       Inventory management issues: in 2023, the company has admitted that, despite strong demand, it will follow a policy of “aggressive markdowns” to clear inventories, likely impacting margins for the fiscal year. Failure to accurately forecast consumer demand carries the risk of excess inventories or inventory shortages, resulting in decreased operating margins and reduced cash flows. However, operating results and cash flow generation clearly show resilience against this kind of difficulties.

4.       Decreasing profitability margins: profit margins have steadily declined over the past few years while those of similar competitors such as Adidas have been increasing. However, the previous “aggressive markdowns” and decreasing margins might be part of Nike´s strategy to gain market share in the long term and strengthening its positioning. Besides, in the opportunity´s section you will see the future strategy the company has planned to follow to increase margins sharply now it has achieved the leadership position in the industry.

5.       Poor labor conditions in several foreign countries: these issues include forced labor, child labor, low wages, and horrific working conditions that were deemed “unsafe”. Nike, Inc. has been accused of using sweatshops and worker abuse to produce footwear and apparel in East Asia. It has been shamed in public for its labor practices to the point where it badly tarnished the company’s image and hurt sales. In a more recent case, Nike has also been accused of breaching OECD Guidelines regarding the treatment of workers in its global supply chain following the Covid pandemic. The case alleged that since the onset of the Covid pandemic in March 2020, garment workers in Nike’s supply chain have experienced layoffs and terminations, arbitrary pay cuts, unpaid wages for hours worked, and gender discrimination at an unprecedented scale. They are also suffering from controversies, like sexual harassment and lawsuits.

 

Opportunities:

1.       Efficient Integration of suppliers and manufacturers: The supply and production of Nike’s products depend on independent manufacturers. The brand can either acquire a few of these or make some of its own for a more efficient and streamlined supply chain.

2.       Cutting ties with big retailers: Nike has decided to cut ties with some of the biggest multi-brand retailers and wholesale partners. According to the report, Nike will no longer work with wholesale retailers such as Zapoo’s, Dillard’s, Fred Meyer, Bob’s Stores, etc. The step is taken for better product positioning and greater customer experience.

3.       Exiting From Wholesale Distribution: Recently, Nike announced it’s going to be exiting the wholesale distribution market in the U.S. The company plans to only market its products at Nike stores, app, and websites. According to Nike, the move away from distributors is going to help them double their profit margins. Moreover, Nike will also have the opportunity to spearhead the customer shopping experience as well as control prices to increase margins even futher.

4.       Consumer Direct Strategy: Nike has accelerated the consumer-direct strategy, which means shifting its focus to digital business and subsequently closing physical stores. In fiscal year 2022, 42% of its Nike revenue comes from online sales. Clearly, the pandemic is shaping up how Nike interacts with its customers.

5.       Business growth through emerging markets: most developing countries will increase in terms of GDP per capita through a rise of the high-income middle class in emerging markets and their population will be able to afford Nike shoes in the long term. Good examples and targets are India, China, and Brazil. which are gradually flourishing. This future growth will also reduce their over-reliance on their North American market.

6.       Growing athleisure market: Post-pandemic, athleisure has quickly become popular because it appeals to several broad trends, such as the global shift toward consumers wearing more casual attire, the desire for comfortable clothing, and the increase in athletic activity among health-conscious consumers who need performance clothing for these activities. Recent polling data from CivicScience found that Gen-Z, which represents most athleisure consumers, turned to Nike as its brand of choice. Nike, with its global presence and dominant position in Athleisure, is well-positioned to leverage this growth.

7.       Women´s sportwear: ven though the company is dominant in the sportswear industry, they are far from the market leader when it comes to women’s sportswear. This is a potentially untapped market that could create billions of dollars worth of revenue.

8.       Innovative products: for example, products like wearable technology like smartwatches that monitors physical activities, are the first step in building innovative technology products. Combining technology with athletic wear can prove to be beneficial as it is an aspect of the fashion industry that still hasn’t been explored much. However, this is not the best segment to expand into because there are stronger competitors with further experience in technologies such as Apple, Google, or Samsung. Women´s sportwear is a much safer bet to capitalize on.

9.       Acquired Artificial Intelligence Start-up: With its vast financial resources, Nike can acquire small or medium companies or startups. It recently acquired predictive analytics platform – Celect to expand its online sales capabilities and predict customer’s shopping behavior.

 

Threats:

1.       Increased competitive pressure: Although Nike is the dominating player in the athletic industry, competition, and new emerging brands are still potential threats to the company. With higher competition ratio, Nike has to spend more money on marketing and advertising. In fact, Companies like Under Armour, Adidas and Lululemon are spending more on marketing and advertising campaigns, increasing the pressure on Nike. Some of these companies, such as Adidas, command a significant market share and pull in revenue that is indeed threatening Nike’s continued dominance of the industry. Another threatening issue is the fact that Adidas has been consistently growing at a faster pace than Nike over the past few years. Adidas has grown at an impressive 17.6% since 2015, while Nike has only managed to achieve a growth rate of 6.8% in that same time. Adidas has also taken a page from the Nike playbook by investing heavily in attracting some big-name celebrities such as David Beckham, Novak Djokovic, and Pharrell.

2.       Supply chain risks: Nike manages a global and vast supply chain that includes suppliers from around the world. Managing this supply chain is complex and challenging with potential risks and challenges that are sometimes beyond Nike’s control. Nike relies on a concentrated source base of contract manufacturers to supply a significant portion of footwear products. It is supplied by 120 finished goods footwear contract factories located in 11 countries, out of which four footwear manufacturers accounted for over 10% of footwear production, each aggregating to ~58% of NIKE Brand footwear production. If any of these primary footwear manufacturers failed to make timely shipments or did not meet quality standards or failed to deliver in accordance with Nike’s plans, it could have a materially adverse effect on the company’s operations. Another challenge is the logistics and transportation. Nike’s products are sold in markets all over the world which requires the goods to be transported across many different borders. This can come with potential risks like an escalation in freight costs, shipping delays, natural disasters, and unfavorable transportation conditions.

3.       Trade Tensions: With China and the US as its biggest markets, a large chunk of Nike’s sales will be threatened if the trade tensions between the two giants escalate. China, is the largest buyer of Nike products in Asia and one of the most significant markets outside the U.S.

4.       Litigation risk from patent disputes: Regardless of whether a company is wrong or right, patent disputes are hotly and fiercely contested in the public domain and expose some dirty secrets about sides in the dispute. Nike and Adidas have been engaged in a fierce patent disputes over Primeknit and Flyknit shoes in U.S. and German courts. Besides, Nike is subject to a complex array of laws and regulations and litigation, and other legal and regulatory proceedings, which could have an adverse effect on its business, financial condition, and results of operations. If the company’s employees, agents, suppliers, and other partners fail to comply with any of the laws or regulations, it could lead to fines, sanctions, or other penalties that could negatively affect our reputation, business, financial condition, and results of operations. Furthermore, laws, regulations, and policies and the interpretation of such can conflict among jurisdictions, and compliance in one jurisdiction may result in legal or reputational risks in another jurisdiction. Nike is involved in various types of claims, lawsuits, regulatory proceedings, and government investigations relating to its business, products, and the actions of its employees and representatives, including contractual and employment relationships, product liability, antitrust, trademark rights, and a variety of other matters.

5.       Counterfeit risk: The company deals globally and the risk of counterfeit products has become higher. As Nike is the most valuable brand in the industry, it is logical a big number of merchandisers and retailers offer counterfeit Nike products at lower prices. The low-priced products are made from low-quality materials but still have the Nike label. This can tarnish the image of the brand as the customers might feel that Nike has started producing low quality products.

6.       Currency risk: Since the brand operates globally, it is affected by fluctuating foreign exchange rates against U.S dollars, which is the currency Nike reports its financial earnings.

7.       Recession risk: Regardless of the industry, all companies are susceptible to the negative effects of a global recession.