Corporate Finance

Nike Inc is a multinational company that is involved in developing, designing, marketing and selling of apparel, accessories and footwear. The company is the leading manufacturer of apparel and athletic wears in the world. It specializes in manufacturing equipments related to all sporting events around the world. The annual results for the years ended 31st may 2012 indicated that the company made $24.12 billion in terms of revenue. The company’s goodwill is estimated to be $10.71 billion. This makes it the most valuable brand in the world among companies in the same industry.

The company has more than 44,100 employees worldwide. The company has four valuable subsidiaries, Umbro, Hurley International, Converse Inc, Cole Haan. Umbro is the latest acquisition at an estimated cost of $ 600 million. Currently, the company intends to sell two of its subsidiaries; it is also running a program of buying back its class B stock worth $5 billion. The program will be complete by 2013 after which it will roll out another program to buy back $8 billion value in class B stock. The company has currently been able to buy back $10billion of class B stock.

The company has a wide range of products which include sports equipment (shoes, shorts, jerseys and base layers for all kinds of sports. The company is popular in supplying urban fashion clothing and its market targets both the hip hop and youth culture. Nick Inc has embraced the changing times due to information technology. As such the company has teamed up with Apple so as to provide a product that is able to analyze a runner’s performance and give statistics relating to the performance of the runner. The company has a diversified advertising strategy; it is also involved in various sponsorship deals with a number of athletes and the best sports clubs. Through this sponsorship deals, the company is able to promote its products by advertising about the technology and design they are using. The company is also involved in various corporate social responsibility events; most recently it was listed as a member in the campaign to fight against mother to child HIV transmission. This paper aims to analyze Nike Inc for a period of five years, for this purpose Adidas a competitor of Nike will be used in the analysis. Adidas is also a multinational company which manufactures sports accessories and clothing. It is ranked second in the manufacture sports ware in the world.

Background Information

Nike Inc. was founded on January 25, 1964, and it was originally called Blue Ribbon Sports (the company was renamed “Nike Inc.” in 1978, but thoughts of changing its name to “Nike” began in 1971). At present, Nike is the most important manufacturer of athletic shoes and apparel in the world, and currently it has over 30,000 retail stores that sell its products (17,000 are located in the United States, while the remaining 13,000 are located all around the world). It is precisely because of this, that Nike’s market share (in the sports shoes and apparel world market) is 40%. At a glance, it may seem incredible that after just 45 years, Nike Inc. is regarded as the most prominent producer of sports goods (shoes, accessories, and apparel) in the whole world; companies with much more antiquity in the market, such as Adidas and Puma, have fallen short of Nike, and have been forced to follow in its footsteps.

Phillip Knight was the master mind behind the birth of Nike Inc., but he was not alone; Bill Bowerman, his former track coach, was also a decisive element in bringing about the revolutionary change that the company brought with it upon entering the market. Why are we saying that Nike Inc. revolutionized the market? First, they did so by introducing a new shoe model, the one, which had never been seen by anyone anywhere before; this, of course, caught the public’s attention and got the company started in its long path to success. The second decisive factor in bringing about the company’s success, however, had nothing to do with the goods produced, but rather with how they were branded and sold to the customers all over the globe. Nike Inc. introduced a new business model in the shoe industry; one that no other company thought of implementing before; due to this, the company obtained a great advantage over its competitors (so great that even today, years after the competitors adopted similar business models and strategies, Nike is still ahead of all of them), an advantage that continues to yield revenue and growth. In this short paper a brief recount of the major factors that contributed to Nike’s success over the last decades will be delivered; not only the factors that brought about its growth and dominance in the market will be discussed, but also the opportunities for growth that are still available to this unstoppable force that is known around the world as Nike Inc.

Market Equity

Market equity represents the number and value of all the equity capital of the different shareholders of the company. In the calculation of market value of equity a company will value all the outstanding value of the shares. The shares are valued using the current stock price in the stock market for a trading company. This value does not does not consider the growth potential of companies and as such then it differs with the calculations of book value of equity. The calculations of the value of equity using the stock market prices and the outstanding share is prone to daily fluctuations of the market stock given the changes in demand and supply of the stock. Market value of equity used instead of market capitalization. The market value of equity assists the investor to measure the size of the company and also compare the company with other listed companies as way to diversify risks.

When comparing Nike Inc in comparison to Adidas over the period of five years it is important to note that Nicks year ends at 31st may while that of Adidas ends at 31st December. This means that the end year financial results of Nike have already been reported while those of Adidas are yet to been reported. Nike reported total revenue of $18,627 million in 2008, $19,176.10 million in 2009, $19,014million in 2010, $20,862.01million in 2011 and $24,128.10 million in 2012. During the same period of time Adidas had gross revenue of $10,299.10 million in 2007, $10, 799.01million in 2008, $10,381.01 million in 2009, $11,990.01 million in 2010 and $13,344.01 million in 2011. This initial analysis through the total revenue of this two companies show the magnitude of Nike as a leading manufacturer. Nike’s gross profits for the period were $8,387.45 million in 2008, $8,604.41 million in 2009, $8,800.40 million in 2010, $9,500.01 million in 2011 and 10,471.01 million in 2012. Adidas gross profits were $4,882.01 million in 2007, $5,256.12 million in 2008, $4,712.1 million in 2009, $5,730.01 million in 2010 and $6344.01 million in 2011. In comparing the two companies, the gross profit of Nike steadily increases while that of Adidas shows a decline in 2009. This may be due to the recession experienced in the world during this time.

The income after tax for Nike was $1,883.4 million in 2008,$1,486.4 million in 2009, $1,906.70 million in 2010, $2,133.01 million in2011 and 2,223.01 million in 2012. Comparing with that of Adidas $555.01 million in 2007, $644.01 million in 2008, $245.01 million in 2009, $568.01 million in 2010 and $670 million in 2011. Nike is a large tax payer from the level of revenues it earns, when compared to Adidas on average the company pays twice the amount that Adidas will contribute. After adjustment of extraordinary items for Nike Inc still remains the same for all the years, however in each of the years Adidas adjust its income after tax for extraordinary items. Given that basic weighted average shares were $495.60, $484.9, $485.5, $475.5, and $ 460.01 million dollars in each year from 2008 to 2012 respectively. The basic earnings per share when excluding the extraordinary items it will give 3.8 in 2008, 3.07 in 2009, 3.93 in 2010, 4.49 in 2011 and 4.83 in 2012. The dividends earned by common stock holders were 432.8, 457.2, 514.8, 569.0, 639.0 million dollars for each of the five years from 2008-2012 respectively. The company thus gave a dividend payout ratio of 0.88, 0.98, 1.06, 1.2, and 1.39 from the year 2008 to 2012 respectively. The dividend payout ratio given the number of common stockholders was 0.5, 0.5, 0.35, and 0.8 from 2007 to 2010. The company did not give out dividends in the year 2011. Nike Inc assets have been increasing by a small margin in the last five years in 2008 the value was $14, 565.02 million while in 2012 the value was $15,171.01 million.

Of importance to note is that, the company is very liquid; most of the assets are current assets with cash and cash equivalents holding the largest value. The value of the brand has remained constant at $202 million, for the last four years, the value however reduced to $131.0 million this can be attributed to the level of completion in the market in the year. In comparison to Adidas the value of assets has been rising from $10,928.01 million in 2007 to $11,889.01 million in 2011. Adidas is not as liquid as NIKE Inc with a balance between current assets and fixed assets. The value of goodwill is high compared to NIKE Incl. considering the huge difference a conclusion can be made that the company has undervalued its goodwill. NIKE Inc still prefers current liabilities compared to long term liabilities. The company has a high level of current liabilities as compared to a small portion of total long term liabilities and deferred income tax. In addition to the above comparisons, NIKE is rated as the world’s leading supplier of sportswear while Adidas is the second largest manufacturer of sportswear in the world. Nike and Adidas have a marketing strategy that involves sponsoring top athletes as they advertise their products. However, Nike has been a market leader because it embraces technology in a greater way. Each of the companies has unique logos that have defined them for all the years.

Efficient Market Hypothesis

Efficient market hypothesis is a theory that presumes that the market conditions are efficient and gives all the information that is available through the market. The stock price always incorporates relevant information and as such the stocks trade at their correct value. Investor can never make wrong decisions under such conditions and will always buy stock at the correct prices not higher or lower (Madura, 2012). Such a market makes the work of stock experts unnecessary; investors will use the information in the market. There is a wide range of criticisms to this theory considering that investors have used the fundamental and technical analysis for a given period to predict the over and undervalued stocks.

The changes result from the information in the market. The demand of the stock has had a wide range of variation during the last five years.

Nike Inc. is a company, which targets any and every individual that practices a sport, exercises, or simply wishes to begin one of the two. At this point it is important to note that the company didn’t target any sector of the public in particular, but rather tried to segment its different product lines according to the tastes, wants, and needs of specific public sectors (in an attempt to attract and supply the largest portion of the public as it possibly can). It is precisely because of this that over the years such brands as Air Jordan, Nike Golf, Nike Pro, and Nike+ have emerged; other brands that the company possesses, such as Hurley and Converse, also vouch to the company’s determination to target the vastest portion of the public it possibly can.