These two acquisitions and more like them are providing Nike with a broadened product strategy and the ability to better compete globally.
Threats
Launch of new technology marketing strategies and products by competitors
Nike faces significant competition from its two closest competitors, Adidas and Reebok, which recently released technologically superior footwear products. In Adidas continues to be the more active of the competitors, releasing Adidas 1, which is innovative in that it re-adjusts the shoe to the customer's foot depending on their size, pace, terrain and fatigue level. The Adidas 1 uses a sensor, a microprocessor and a motorized cable system to automatically adjust the shoes cushioning. Reebok's Pump shoe concept uses a self-regulating and inflating technology and provides an automatic custom forms to the consumers foot. Nike has just recently become competitively matched to these companies with their Apple iPod integration, where iPod users can get a measurement of how far they have run, According to Knight-Ridder (2006).
Rapid changes in customer preferences
Nike and all sports footwear and apparel companies are continually challenged with responding to customer preferences and the rapidly changing socioeconomic conditions prevailing in the economy.
Nike has made significant investments in their Voice of the Customer Programs to stay on top of these trends and anticipate them.
Growing Threat from low cost Chinese footwear products
The increasingly growing strength of Chinese footwear products are now flooding the European Union (EU) countries with Nike-like products and knock-offs, Citigroup (2006).
Rising and often unpredictable raw material prices
Nike's supply chain and its procurement operations focus on getting the best possible costs for raw materials including synthetic rubber, plastic compounds, leather, and metal hardware. As a result of rising oil prices, the price of synthetic rubber and plastic-based products Nike uses is continually increasing due to oil being $75 a barrel. The high dependence on oil-based products is a major threat for Nike.
Analysis of Findings
Five-Year Balance Sheet Comparison
Nike Corporation Balance Sheet Comparison
Cash & equivalents
Short-term investments
Accounts receivable, gross
Allowance for doubtful accounts
Accounts receivable, net
Finished goods
Work-in-progress
Raw materials
Inventories
Deferred income taxes
Prepaid expenses & other current assets
Total current assets
Land
Buildings
Machinery & equipment
Leasehold improvements
Construction in process
Gross property, plant & equipment
Less: accumulated depreciation
Property, plant & equipment, net
Identifiable intangible assets, net
Goodwill
Identifiable intangible assets & goodwill
Deferred income taxes & other assets
Total assets
Current portion of long-term debt
Notes payable
Accounts payable
Accrued compensation & benefits
Accrued fair value of derivatives
Accrued tax
Accrued endorser compensation
Accrued dividends payable
Accrued advertising & marketing
Other accrued expenses
Accrued liabilities
Income taxes payable
Total current liabilities
Corporate bond payable
Japanese yen note
Medium-term notes
Other long-term debt
Total long-term debt
Less current maturities
Long-term debt
Deferred income taxes & other liabilities
Redeemable preferred stock
Class A convertible common stock
Class B common stock
Capital in excess of stated value
Unearned stock compensation
Cumul translation adjustment & other income
Net deferred gain (loss) on hedge derivatives
Accumulated other comprehensive income (loss)
Retained earnings
Total shareholders' equity
Five Year Income Statement Analysis
Nike Corporation Annual Income Statement Comparison
As Reported Annual Income Statement
Revenues
Cost of sales
Gross margin
Selling & administrative expense
Interest expense, net
Other income (expense), net
Restructuring charge
Total costs & expenses
Income before income taxes - United States
Income before income taxes - Foreign
Income (loss) before income taxes
Total current provision for income taxes
Total deferred prov (benef) for income taxes
Income taxes
Income (loss) before accounting changes
Net income (loss)
Five Year Geographic Revenue Analysis
Nike Corporation Geographic Analysis
Revenues
Report Date
Americas
Asia Pacific
EMEA
Five Year Cash Flow Analysis
Nike Corporation Cash Flow Analysis
As Reported Annual Cash Flow
Net income (loss)
Cumulative effect of accounting change
Depreciation
Deferred income taxes
Amortization
Amort & oth income charges not affecting cash
Income tax benef fr exercise of stock options
Accounts receivable
Inventories
Prepaids & other current assets
Accounts pay, accruals & income tax pay
Net cash flows from operating activities
Purchase of short-term investments
Maturities of short-term investments
Additions to property, plant & equipment
Disposals of property, plant & equipment
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Acquisition of subs-net assets acquired
Net cash flows from investing activities
Proceeds from long-term debt issuance
Evaluation and Analysis
In evaluating Nike, their challenges in EMEA (Europe) and their corresponding pricing strategies and inventory levels there, and consistency of growing gross contribution margin, both in absolute and percentage terms, in addition to the continual growth of Return on Assets relative to industry participants all point to Nike's ability to compete effectively using low-cost manufacturing and distributed supply chains globally. Despite the slowness in Europe however, Nike continues to find significant growth globally.
The financial analysis in this report also shows Nike, over the last five years, has accomplished significant Sales, General & Administration (SGA) expense controls, and as a result is well-poised to penetrate China and challenge its primary competitors in their host country. The slight rise in inventories is cause for concern, yet the company's strength in selling through its many outlets and distribution agreements will most likely alleviate any over-hang of these inventory positions.
Nike also is finding their branded product sales are up 12% over previous years and the focus on creating brands such as Jordan, which has lead revenue generation in 2005 and throughout the beginning of 2006, are what is also contributing to the highest growth regions of the world. These include Russia, Turkey, and South Africa, according to Prudential (2006). China's sales are also up 50% over the previous year, and the recent new product introductions and re-aligning of supply chains to deliver even greater competitive pricing and delivery in China is a central focus of the company in 2006. The challenges to growth however continue to be managing debt, keeping SG&A in its flat-lined growth rate, and aggressively growing through branded products and re-aligning of manufacturing and supply chains for emerging geographies.
Conclusions/Recommendations
Nike is well positioned to attain double-digit growth in revenues through 2007. The biggest challenges for the company center on localization strategies in countries which to this point have had sluggish sales. The financial discipline the company illustrates in its U.S. operations highlights the many efforts the company is making to keep SG&A expenses in line with their own stated forecasts of this key financial performance metric. The conclusion is that the growth of Nike relative to competitors needs to come from better internal execution than in massive price cuts and radical marketing.
Recommendations for Nike are as follows:
Continue to align production and supply chains in regions throughout the world with the specific market demands of each developing nation. This certainly applies to market penetration strategies in China and Russia, and needs to also apply to the South African markets as well.
Get designers from Europe and China developing specific shoes for these markets, and define product introductions to align with the specific athletic events of each nation. Soccer shoes in Russia, France, and Italy around the World Cup would be an example of this type of accelerated product development.
Develop athletic equipment selling channels throughout China.
References
Citigroup (2006) - Nike Corporation Investment Profile. June 28, 2006. Citigroup Investment Research.
Knight Ridder Tribune News (2006) - Going to wireless workouts. Stacey Hirsch. Washington, DC July 9, 2006
Prudential (2006) - Footwear Industry Analysis. March 14, 2006. Dunn & Wong. Prudential Equity Research. New York, NY
ValueEngine (2006)- Nike Corporation Research Report. June 1, 2006. ValueEngine Research Services.
Wall Street Journal (2006) - A Big Shot In China: To fight Nike a Bejing sneaker giant aims to turn NBA journeyman Damon Jones into a star. Kang & Fowler, Wall Street Journal. June 24, 2006.
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