Financial Analysis of Nike

Financial Analysis of Nike

Nike Corporation (NKE: NYSE) is a global leader in the research and development, design and global marketing of a series of apparel, accessory, equipment and footwear products. The company is globally recognized for its excellence in marketing with the Nike brand being considered one of the top ten globally every year in consumer surveys where unaided awareness is the basis of analysis (Kwon, Kim, Mondello, 2008). Nike has one of the most extensive supply chains of any global apparel manufacturer, with a series of supplier quality audits and compliance standards including Corporate Social Responsibility (CSR) initiatives and programs are enforced across the thousands of companies it sources from (Doorey, 2011). Today Nike operates in 170 different nations, dividing their overall operations into six divisions including China, Central and Eastern Europe, North America, Western Europe and Emerging Markets. Nike has over two dozen product lines it sells with the four dominant product groups being apparel, equipment, footwear and ancillary products (Nike Investor Relations, 2011). In the latest full fiscal year the company generated $20.8B in revenues, earing $9.8B in gross profits. Pretax Income increased from $2.5B in 2010 to $2.8B in 2011, with Inventory Turnover and Average Collection Periods showing solid gains. Profitability ratios were borderline however with only slight improvement in Operating Margin Before and After Depreciation and Returns on Assets (ROA). For a ratio analysis fiscal years 2006 to 2011, please see Appendix A: Nike Financial Analysis, for a full financial analysis of the company.

Firm, Industry, and Environment

The U.S. footwear manufacturing industry is consolidating rapidly and is expected to have a brief period of slow growth before further long-term consolidation continues. Nike currently has a 40% market share of this industry, which is estimated to be $1.7B in size according to IBIS Research, a research firm Nike management teams often use as the basis of their decision making (Nike Investor Relations, 2011). According to IBIS, the U.S. footwear manufacturing market has experienced a negative compound annual growth rate from 2006 to 2011 of 4.4%, stabilizing to a negative 1.8% from 2011 to 2016 (Nike Investor Relations, 2011). There are today 698 different companies competing in this industry generating a combined profit of $112M (Nike Investor Relations, 2011). Nike, across all product categories, generated a $2.8B Pretax Income at the close of their FY2011. This comparison of industry profitability to Nike's overall profitability underscore how effective the integrated manufacturing, branding and service aspects of this company are in delivering long-term shareholder and customer value (Ramaswamy, 2008).

Based on an analysis of the competitive dynamics in this market and the continued global consolidation of shoe and apparel manufacturing, several key success factors emerge as critical to long-term profitability. When Nike is evaluated on these criterion their leadership in the global athletic apparel and footwear becomes clear. These key success factors include brand name equity and global leadership; ability to quickly alter goods and services to match the specific needs of market conditions and requirements; have a deep expertise in managing government policies and defining their implications on the performance of the company; and being able to define and execute quickly on economics of scope and scale in their supply chains. All of these are the core competencies of Nike, as can be seen from their high level of brand equity (Kwon, Kim, Mondello, 2008) and extensive supply chain expertise including CSR initiatives globally (Doorey, 2011). Nike senior management continually monitors all of these factors and often creates a series of graphical analyses that show the direction of the industry, which is how IBIS Research created Figure 1, Industry Analysis of American Footwear Manufacturing, 2011. This figure illustrates the consolidation of the industry and growth rates relative to GDP.

Figure 1, Industry Analysis of American Footwear Manufacturing, 2010

Source: (IBIS Research, Nike Investor Relations, 2011)

Evaluation of Financial Statements

Using the latest series of financial statement from Nike to complete this analysis, the company's strengths, weaknesses, opportunities and threats emerge from the financial analyses completed over several years of financial data. Also included in this analysis is a comparison of competitors for their respective latest fiscal periods using 31 different ratios to complete the analysis. To view the Nike Annual Ratio Analysis for FY2006 -- 2011, Nike Annual Income Statement Comparison for FY2007 to FY2011 and the comparative annual ratio analysis, please see Appendix A, Nike Financial Analysis.

The company's ability to quickly translate innovation of new product development into economically produced apparel and shoes is evident in the stabilized Return on Assets (ROA) of 14.2% in the current period, increasing from 13.2% in FY 2010 and 11.2% in FY2009. Nike continues to excel at managing their supply chains and using advanced demand management and supply chain optimization technologies to drive higher levels of inventory performance (Nike Investor Relations, 2011). This is evident in the Inventory Turnover Ratio shown in Appendix A and its continual improvement against historical averages of the company. Nike is in the upper quartile of companies in their industry on Inventory Turnover ratio with the exception of the Madden brand. Please se the Nike Comparative Annual Ratio Report for the data this finding is based on. Where Nike's greatest strengths from a competitive standpoint are is the Working Capital Per Share attained in the latest fiscal period of 15.682, leading all competitors on this metric. Nike also leads the industry today in Days to Sell Inventory, with 77 days being their median level. This also leads the industry, which illustrates how effectively this company is managing its global distribution and retail networks, websites and secondary distribution channels.

Nike's weaknesses include the relatively flat levels of Return on Equity (ROE) at 21.6% and a relatively high Average Collection Day level of 49 days, which is slower than many of its competitors. Nike also has high relative costs of pension liabilities and continued costs of litigation protecting its brand globally (Nike Investor Relations, 2011).