Nike: just do it? – Investor column
- Founded in 1964, Nike has grown into a $ 210 billion retail giant
- The focus is now on the pursuit of higher margins through a direct-to-consumer strategy
- Strong and extensive financial history
- Unparalleled scale and diversification
- Search for higher margins using the DTC approach
- The favorite of fund managers
- Highly competitive retail market
- Potential disadvantages of the two-class share structure
Paintings, sculptures, jewelry and watches. Anything you might expect to fetch a large amount of money from at auction. A pair of old sneakers, less. Yet history was written last month when Sotheby’s knocked the hammer down on the prototype sneakers developed by Kanye West. The shoes changed hands in a private sale for a record $ 1.8million (£ 1.3million).
Worn by West at the 2008 Grammy Awards, the shoes are the result of a collaboration between the rapper and the American distribution giant. Nike (United States: NKE).
On the one hand, their massive prize money reflected the following West won, the iconic status given to popular streetwear trends, and the increasingly blurred line between sporting goods and high fashion. But on the other hand, it also marked another milestone for an Oregon-based company that started small in 1964.
Strong track record
Nike, originally known as Blue Ribbon Sports, was founded by track coach Bill Bowerman and his friend Phil Knight. In its early days, it imported and sold Japanese-made running shoes.
Sprint forward nearly six decades and today the group has a portfolio of popular brands of athletic footwear, clothing, equipment and accessories. Listed in New York, Nike has a market value of over $ 200 billion including its “class A” shares which are not held by the public.
The company sells its products through Nike-owned stores, digital platforms, and through various third-party retailers. It is the world’s largest supplier of sportswear and footwear. Indeed, reflecting its geographic distribution, just under two-fifths of income comes from its domestic American market. As of May, Nike employed around 75,400 people worldwide.
Through scale and diversification, the group’s revenues crossed the $ 30 billion mark in its 2015 fiscal year and topped $ 39 billion in 2019 before declining due to the year’s pandemic. last.
Not immune to Covid-19
Nike has not been immune to the devastation caused by Covid-19. Many of its stores have had to close for months on end under “stay at home” mandates.
But the crisis has treated some retailers more nicely than others. Those with an international reach and extensive online presence have fared far better than their smaller competitors. Nike is a prime example of these benefits.
Indeed, the group seized the opportunity of closing stores to strengthen its e-commerce revenues and accelerate its existing “direct to consumer” (DTC) strategy.
Cutting out middlemen looking for higher margins should, in theory, give Nike more in-depth customer insight, improving its ability to grow sales. It helps that new boss John Donahoe, who joined early last year, is a seasoned tech executive from Silicon Valley.
In addition to digital and DTC sales, Nike points to other major growth opportunities to come, including womenswear and continued expansion overseas. And investors seem to support this vision. Nike shares have risen by more than half in the past 12 months alone. As evidenced by our Ideas Farm tables, stock is also a favorite fund among international and sustainable funds.
On the offense
Nike began making direct connections with consumers in early 2017, when it launched its “ Triple Double ” strategy (a pun on an impressive basketball achievement). The group channeled these ambitions through its so-called “Consumer Direct Offense” (CDO), a “new corporate alignment that enables Nike to better serve the consumer personally, on a large scale.”
Nike’s membership model is the basis of this approach. Consumers can sign up to access company training and run club apps, get quick access to new Nike products, and other benefits and rewards.
The “offense” has progressed well. So good, in fact, that Nike launched a new leg of the DTC journey called “Consumer Direct Acceleration” (CDA) last summer.
“Covid-19 has offered a stress test of our Consumer Direct Offense strategy,” Donahoe wrote in a letter to shareholders alongside the group’s fourth quarter results in July.
Nike had set a goal in 2018 for digital sales to represent 30% of its overall business by 2023. Having reached that goal more than two years ahead of the plan, management has reset its expectations – now anticipating a 50% digital penetration.
DTC shifting bearing fruit
The digital and DTC transition could have important implications for Nike’s distribution network. The change seems to make financial sense; a finding confirmed by its latest figures published on March 18.
Third-quarter revenue rose 3% to $ 10.4 billion as virus-induced supply chain challenges (i.e. port congestion) in the United States were offset by growth of 20% of “ Nike Direct ” sales to $ 4 billion. Nike Direct is for products sold directly to consumers through retail stores and websites owned by Nike.
This improvement was supported by a 50% increase in digital sales owned by Nike. Noting that “its ability to sustainably develop digital in the long term is rooted in our member relationships,” Nike said its “members are more engaged than ever” – with a more than 60% increase in the number of users. monthly.
In turn, the higher margin rate associated with digital sales contributed to the overall gross margin expansion by 1.3 percentage points to 45.6%.
However, despite its increasingly web-centric narrative, Nike still believes in the future of physical stores. “[W]We see a really important need and role for a strategic physical presence, both our own and our partners, ”Donahoe said in March. By working with a smaller number of third-party retailers – and sharing membership data with them – Nike aspires to deliver a “seamless” and personalized experience to customers across online platforms and real-world stores.
Such multi-channel operations are arguably essential for Nike to maintain its scale and dominance in an increasingly competitive market, where it must face long-standing rivals such as Adidas (GER: ADS) as well as more recent labels like Lululemon (United States: LULU). Both brands are also focusing on DTC engagement.
Nike’s “direct” business requires substantial ongoing investment. Owned stores require a fixed investment in equipment, while those designed to integrate with Nike’s digital platforms require even greater cash injections.
The company also spends large amounts of money each year on “demand creation” through advertising and promotions, including promotional expenses. That figure stood at 9.6% of revenue in 2020, although costs have recently fallen due to fewer events and store restrictions.
Yet such commitments have not hampered shareholder returns. Nike has increased its dividend for 19 consecutive years and plans to resume its share buyback program in the fourth quarter of 2021 after a suspension due to a pandemic. Additionally, the brand’s appeal is evident in the nearly 36% return on invested capital achieved in 2019, although that percentage has fallen to closer to 26% due to the pandemic.
Investors can also be reassured by data which suggests family businesses have historically performed well during times of market stress. Founder Knight was CEO of Nike until 2004 and is now “Chairman Emeritus,” while his son Travis is a director.
That said, the majority of Nike’s “ Class A ” non-public shares are held by Knight’s company “ Swoosh LLC ” and some might be hesitant about the level of control exercised by Class A shareholders, who may ( among other advantages) elect three quarters. of the directors of Nike. Nike admits that such provisions could discourage or prevent a takeover that investors may believe is in their best interests.
Other potential risks include trade tensions between international governments and fears that Nike’s progressive marketing campaigns focused on social justice may not be reflected in its internal culture – which Financial Times explored earlier this year.
So the hope is that Donahoe will make it a priority for Nike to provide a positive and inclusive work environment.
A 35 times price / earnings multiple (PE) is slightly ahead of Adidas but behind Lululemon and Under Armor (US: UAA). That doesn’t sound too steep, given Nike’s leadership in the market and the growth program rooted in DTC, which should continue to support growth backed by a high ROI.
|NIKE, Inc. Class B (NKE-US)|
|ORDER PRICE:||13 326ȼ||MARKET VALUE:||210 billion dollars *|
|TO TOUCH:||13,299 to 13,353ȼ||HIGH 12 MONTHS:||14,795ȼ||LOW:||8 411ȼ|
|TERM DIVIDEND RETURN:||0.9%||ADVANCED PE RATIO:||35|
|NET ASSET VALUE:||756ȼ||NET DEBT:||2.7%|
|Year to May 31||Revenue (in billions of dollars)||Profit before taxes (in billions of dollars) *||Earnings per share (ȼ) *||Dividend per share (ȼ)|
|2022 **||50.3||6.21||385||114 ***|
|* Market value includes “ class A ” shares which are not public|
|** JPMorgan forecast, adjusted PTP and EPS figures|
|*** FY2022 dividend based on FactSet consensus forecast|