Nike Corporation: Financial Analysis and SWOT Review

Company and Industry Overview

Nike Corporation is the global leader in the development, design, and production of athletic footwear and apparel, and is widely regarded as one of the founders of the athletic footwear industry. The company is primarily engaged in the design, development, and worldwide marketing of footwear, apparel, equipment, and accessory products, operating in 120 nations. While Nike designs its footwear, apparel, and athletic equipment for specific athletic use, a large percentage of its products are worn for casual or leisure purposes. Nike also designs running, basketball, children's, cross-training, and women's footwear, and markets shoes designed for outdoor activities including tennis, golf, soccer, basketball, bicycling, volleyball, wrestling, cheerleading, aquatic activities, hiking, and other athletic and recreational uses.

In addition to its significant in-house branding effort, the company also operates through wholly-owned subsidiaries including Cole Haan Holdings, Bauer Nike Hockey, Hurley International, and Converse. Nike sells dress and casual footwear, apparel, and accessories for men and women under the brand names Cole Haan, g Series, and Bragano through its wholly-owned subsidiary, Cole Haan Holdings. Bauer Nike Hockey manufactures and distributes ice skates, skate blades, in-line roller skates, protective gear, hockey sticks and jerseys, licensed apparel, and accessories under the Bauer and Nike brand names. Hurley International designs and distributes a line of action sports apparel for surfing, skateboarding, snowboarding, and youth lifestyle apparel and footwear under the Hurley brand name. Converse designs and distributes athletic and casual footwear, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, and Jack Purcell brand names.

In terms of manufacturing and distribution, Nike has opted to outsource the production of the majority of its footwear and apparel products to independent contractors outside the U.S., while athletic equipment products are produced both domestically and in foreign factories. Nike views distribution as critical to its business and owns and operates domestic distribution centers for footwear in Wilsonville, Oregon; Memphis, Tennessee; and Greenland, New Hampshire. The company offers its products to retail accounts through a mix of independent distributors, licensees, and subsidiaries in the 120 countries in which it operates, in addition to 22 offices in the U.S. used for sales and support (ValueEngine, 2006).

Nike SWOT Analysis

Defining the most relevant trends impacting Nike is best organized by grouping them into strengths, weaknesses, opportunities, and threats — a framework commonly referred to as a SWOT analysis.

Strong, instantly recognizable market position and brand name. Nike holds the leadership position in the global footwear and apparel market from both a sales and branding standpoint. As the world's number one shoemaker, and as of the close of 2005 holding approximately 40% market share in the footwear industry, the company is also the world's largest manufacturer of athletic apparel. Supporting this leading market share is a vast network of 28,000 retail accounts in the U.S. and distribution in more than 120 countries. The company's extensive and coveted celebrity brand endorsements and the Nike Swoosh logo are among the most widely recognized in the world.

Robust and consistent financial performance. Nike has been reporting strong financial growth since 2000, with consistently strong performance as illustrated by the detailed tables included in this report.

Hard-to-replicate manufacturing strategy. Nike relies on production partners and outsourcers throughout several of the world's developing nations. Nike's footwear products are primarily produced outside the U.S., with subcontractors in China, Indonesia, Vietnam, and Thailand manufacturing the majority of its products. The company also manufactures products in Argentina, Brazil, India, Mexico, and South Africa for sale in those local markets. Apparel products are produced in Bangladesh, China, Greece, Honduras, India, Indonesia, Malaysia, Mexico, Pakistan, Sri Lanka, Taiwan, Thailand, and Turkey. By manufacturing in developing countries, Nike achieves significant cost savings through lower wages and production costs. Notably, no single vendor accounts for more than 7% of Nike's total materials purchases, which diversifies supply-chain risk. The company's strong manufacturing and distribution operations enable it to maintain low operating costs.

Globally diversified business operations. Nike has diversified its business to include sports apparel and equipment across many years of operation, aggressively reducing its once-sizeable dependence on footwear to encompass equipment and apparel as well. The company offers specialized sports gear for golf, hockey, skateboarding, and cycling, among other categories. Operating through four subsidiaries — Cole Haan Holdings, Bauer Nike Hockey, Hurley International, and Converse — this diversified structure enables Nike to spread risk across its various divisions and cater to the full breadth of the sporting goods industry.

Claims of human rights abuses. Nike continues to face significant criticism and negative publicity as a result of human rights concerns. The company has been criticized for the mistreatment of employees at its manufacturing units in Indonesia, Pakistan, Cambodia, and Mexico. Several documentaries and news segments have highlighted alleged human rights abuses in Nike's manufacturing processes, and the company has worked extensively to counter claims of unfair wage practices.

Culturally insensitive advertising campaigns. Nike has been accused on several occasions of being insensitive to the cultural norms of the countries in which it manufactures, sells, and operates. In December 2004, China banned a Nike television advertisement showing LeBron James battling a cartoon kung fu master, deeming it an insult to national dignity. In November 2004, a series of Nike advertisements in Singapore designed to resemble graffiti drew anger in that country. Nike tennis advertisements were also pulled in Australia after being deemed insensitive by child protection groups, and several additional advertisements were withdrawn in 2000 for offending people with spinal cord injuries. Such missteps can negatively impact the effectiveness of Nike's marketing expenditure. Meanwhile, Chinese competitors are eager to replicate Nike's marketing strategy; Nike was spending $37 million in China in 2006 alone (Wall Street Journal, 2006).

Positive outlook for the sports footwear and apparel market. According to the National Sporting Goods Association (NSGA), U.S. retail sales of sporting goods reached $48.9 billion in 2004 and were expected to grow to $53 billion by 2006, reflecting the healthy demand trajectory for the sector.

Growing global popularity of branded products. Nike has successfully penetrated and grown its global market share in the active sportswear and athletic footwear sectors. According to the NSGA, more than 75% of the active sportswear market is dominated by branded items, and almost 80% of athletic footwear is sold under brand names — a favorable environment for Nike's brand-led strategy.

Growing popularity of customized and build-to-order products. Nike is finding in product customization the means to counter pricing pressure from mass merchandisers such as Walmart. Customizing products is a growing trend in the U.S. market, enabling companies to tailor offerings to the exact needs of young shoppers by giving them the power to personalize their purchases. In March 2005, Nike introduced the "Just Do It Yourself" campaign, relaunching its NikeID.com website where customers design their own shoes — choosing everything from the color of the Swoosh to personalizing the tongue of the shoe with a word or phrase. This strategy of customization increases both sales and profit per pair of shoes produced.

Successful acquisitions and partnerships. In late 2004, Nike acquired Official Starter Properties and Official Starter, the sole owners and licensors of the Starter, Team Starter, and Asphalt brand names, as well as the master licensee of the Shaq and Dunkman brands — a line of athletic apparel, footwear, and accessory products for the value retail channel. These acquisitions are providing Nike with a broadened product strategy and an enhanced ability to compete globally.

Competing technology and product innovations. Nike faces significant competition from Adidas and Reebok, both of which have released technologically advanced footwear products. Adidas launched the Adidas 1, a shoe that automatically readjusts its cushioning to the customer's foot based on size, pace, terrain, and fatigue level, using a sensor, microprocessor, and motorized cable system. Reebok's Pump technology uses a self-regulating and inflating system that custom-forms to the consumer's foot. Nike has more recently responded with its Apple iPod integration, which allows runners to track distance and performance (Knight-Ridder, 2006).

Rapid changes in customer preferences. Nike and all sports footwear and apparel companies are continually challenged by shifting customer preferences and rapidly changing socioeconomic conditions. Nike has made significant investments in Voice of the Customer programs to monitor and anticipate these trends.

Growing threat from low-cost Chinese footwear products. The strengthening Chinese footwear industry is flooding European Union markets with Nike-like products and knock-offs (Citigroup, 2006).

Rising and unpredictable raw material prices. Nike's procurement operations focus on securing the best possible costs for raw materials including synthetic rubber, plastic compounds, leather, and metal hardware. Rising oil prices — at approximately $75 per barrel at the time of this report — are driving up the cost of synthetic rubber and plastic-based inputs, posing a significant ongoing threat to Nike's cost structure.

Evaluation and Analysis

In evaluating Nike, several themes emerge from the financial and strategic data. Nike's challenges in EMEA (Europe, Middle East, and Africa) — reflected in its pricing strategies and elevated inventory levels in that region — are notable. However, the company's consistent growth in gross contribution margin, both in absolute and percentage terms, alongside the continual improvement in Return on Assets relative to industry peers, all point to Nike's ability to compete effectively using low-cost manufacturing and distributed global supply chains. Despite sluggishness in Europe, Nike continues to find significant growth globally.

The financial analysis also shows that Nike has achieved meaningful control of Sales, General, and Administrative (SG&A) expenses over the last five years. This discipline positions the company well to penetrate China and challenge its primary competitors in that market. The slight rise in inventories is cause for some concern, though the company's strength in selling through its many retail outlets and distribution agreements will most likely alleviate any overhang in these inventory positions.

Nike's branded product sales grew approximately 12% over the prior year, with brands such as Jordan leading revenue generation in 2005 and into 2006. This brand momentum is contributing to growth in some of the world's highest-growth regions, including Russia, Turkey, and South Africa (Prudential, 2006). China's sales were also up 50% over the previous year, and Nike's realignment of supply chains to deliver greater competitive pricing and delivery speed in China became a central focus in 2006. The ongoing challenges to growth include managing debt levels, keeping SG&A growth rates flat, and aggressively growing through branded product development and supply chain realignment for emerging geographies.