Nike prevails in tougher economic times, gets set to join the Dow Jones gauge
NIKE’S addition to the Dow Jones Industrial Average is a testament to the company’s ability to shrug off hard times and transcend its US origins, making its swoosh logo known from Beijing to Buenos Aires. The world’s largest maker of sporting goods will join the 30-member gauge when the market opens on September 23 along with Goldman Sachs and Visa. They are replacing Bank of America, Hewlett-Packard and Alcoa.
Nike has transformed itself from a shoe company founded for $1,000 in 1965 by a former runner named Phil Knight and his coach, into an global behemoth with 48,000 employees and sales of $25bn. While Nike is struggling to reignite growth in China and to offset rising labour costs, it has caught up with Adidas in football, pushed into wearable technology and got sports figures from basketball star Kobe Bryant to football player Cristiano Ronaldo to sell its wares around the world.
“I often describe them as a marketing company that makes shoes,” said SportsOneSource analyst Matt Powell, who has followed the company for more than a decade.
Nike, based in Beaverton, Ore- gon, reached record high on Tuesday in New York, gaining 2.2% to $66.82. The shares have advanced 30% this year, compared with an 18% gain for the Standard & Poor’s 500 index.
By this time, many enterprises of Nike’s size and age are mature businesses; their best days are behind them. Yet CEO Mark Parker, who started out as a shoe designer before becoming CEO in 2006, sells Nike to investors as a growth company. While the financial crisis crushed sales in 2009, Nike has turned in 10% compound annual sales growth in the past three years, and it expects those gains to continue and for sales to reach as much as $30bn in 2015.
Nike has had some missteps
While Nike is struggling to reignite growth in China and offset rising labour costs, it has caught up with Adidas in football
along the way. Revenue is declining in China, once one of the company’s fastest-growing markets, after Nike expanded too quickly.
The company is now discounting items to clean out excess inventory. Nike has blamed the reversal in China on changing consumer tastes after failing to notice that local shoppers, like their US counterparts, had come to expect a more tailored fit.
Such fashion misses are not unheard of in the US, where apparel sales have flagged lately as shoppers focus on cars and housing-related merchandise.
“The majority of athletic footwear is bought for fashion purposes and that’s the big risk here,” said analyst with Edward Jones & Co Brian Yarbrough, who has a hold rating on the company’s shares. “With basketball and running, things come and go.”
Rising labour costs in Asia are also weighing on profit. Gross margin, the percentage of sales left after costs of goods sold, has declined for eight of the past 10 quarters. Nike has responded by raising prices, which it can pull off because of its enduring brand strength.
Nike’s growth is largely twopronged: pushing into a new sport or taking share from competitors in an established business. Since it is a force in every major sport, there are few opportunities for branching out into new categories that will have a substantial effect on sales, so Nike mainly focuses on expanding an existing unit. How Nike caught up in football, after flailing in the 1990s, is a good example.
Adidas, based in Herzogenaurach, Germany, had dominated the market since the 1950s with other European brands such as Puma. Nike did not really get serious about building a legitimate football business until the 2000s, when it started spending lavishly on endorsement deals, including $440m on a 13-year agreement with Manchester United that began in 2002. Since then, Nike has essentially drawn even with Adidas in football with sales reaching $1.9bn in the last financial year.
Besides providing Nike with a third leg for its running and basketball businesses, football gave Nike legitimacy as an athletic brand outside the US that in turn lifted the rest of its merchandise, Mr Powell said. Now the company generates about 60% of revenue outside its home market.
“They tried to become a true international brand for a number of years and couldn’t get it going until they fully committed to being a soccer brand,” said SportsOneSource’s Mr Powell.
“That’s when their international business took off.”
The widespread adoption of casual attire has also lifted Nike, which sells everything from hoodies to tank tops. Running shoes in particular have been a post-recession panacea. While the company sells performance shoes for serious runners, many of its bestsellers are worn day to day.
For many men, sneakers are a form of retail therapy. Last year, running shoe sales surged 16% to $4.3bn. “They’re in a class by themselves,” Mr Powell said.