27 Nike, Inc. — 2010 PDF

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27 Nike, Inc. — 2010

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Randy Harris Cal ifornia State Univers ity, Stanislaus NKE www.nike.com In September 2009, Michael Jordan was inducted into the NBA Hall of Fame. Ironically, that was the same time that Jordan became the first athlete to be worth over $1 billion; and it was the same time that his Nike brand, Jordan, topped $1 billion in annual revenue. That event came 23 years after the company Nike reached $1 billion in revenue for the first time. Nike is all about marketing. Nike’s other men, Tiger Woods and LeBron James, are expected to be the next athletes to be worth $1 billion. Tiger should reach this milestone in 2010. The rise of Jordan as a marketing icon is an amazing story. The kid from the University of North Carolina, who had never worn Nikes before he signed his contract, made buying Air Jordans an annual ritual. And now, years after he played his last game, the business continues to grow. At more than $1 billion in sales, the Jordan brand now makes up roughly 5 percent of Nike’s overall revenues. Regarding Jordan’s importance to Nike, consider the following two facts provided by SportsOneSource, a sports market retail tracking firm: 1.

2.

The Jordan brand has a 10.8 percent share of the overall U.S. shoe market, which makes it the second biggest brand in the country and more than twice the size of Adidas’ share. Three out of every four pairs of basketball shoes sold in this country are Jordan, while 86.5 percent of all basketball shoes sold over $100 are Jordan.

The Nike’s fiscal 2009 year ended May 31, 2009. As indicated in the company’s income statement provided in Exhibit 1, Nike’s 2009 revenues increased 2.9 percent to $19.1 billion; their net income decreased 21 percent to $1.48 billion.

History Based in Beaverton, Oregon, Nike is the world’s largest designer, marketer, and distributor of athletic footwear and athletic apparel. The company also designs, markets, and distributes sports-related apparel, equipment, and accessories. Led by the company’s flagship Nike brand footwear, as well as Nike Golf, the company also owns a number of subsidiaries, such as Cole Haan, Converse, Hurley International, and Umbro Ltd. Nike was founded in 1964 as Blue Ribbon Sports by Bill Bowerman, a University of Oregon track and field coach, and Phil Knight, a talented middle-distance runner. Knight, who had recently completed an MBA at Stanford University, had written a paper where he proposed that quality running shoes could be manufactured in Japan that would compete with the more established German brands. Knight originally sold their shoes out of the trunk of his green Plymouth Valiant at track meets, and the company opened its first store in Santa Monica, California, in 1966. The company introduced its Nike brand of shoes in 1972, just in time for the U.S. Track & Field trials, which were held in Eugene, Oregon, that year. The Nike name, which took its name from the Greek goddess of victory, had its famous “swoosh” logo designed by Carolyn Davidson, a graphic design student at Portland State University. The company

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EXHIBIT 1

Nike’s Recent Income Statements (all numbers in thousands)

PERIOD ENDING

Total Revenue Cost of Revenue Gross Profit Operating Expenses Research Development Selling General and Administrative Non Recurring Others Total Operating Expenses Operating Income or Loss Income from Continuing Operations Total Other Income/Expenses Net Earnings Before Interest and Taxes Interest Expense Income Before Tax Income Tax Expense Minority Interest Net Income from Continuing Ops Non-recurring Events Discontinued Operations Extraordinary Items Effect of Accounting Changes Other Items Net Income

31-May-09

31-May-08

31-May-07

$19,176,100 10,571,700 8,604,400

$18,627,000 10,239,600 8,387,400

$16,325,900 9,165,400 7,160,500

— 6,149,600 596,300 — — 1,858,500

— 5,953,700 — — — 2,433,700

— 5,028,700 — — — 2,131,800

98,000 1,956,500 — 1,956,500 469,800 — 1,486,700

69,200 2,502,900 — 2,502,900 619,500 — 1,883,400

68,100 2,199,900 — 2,199,900 708,400 — 1,491,500

— — — — $1,486,700

— — — — $1,883,400

— — — — $1,491,500

Source: Nike’s 2009 Form 10 K.

officially renamed itself Nike in 1978. By 1980, the company had reached a 50 percent market share in the U.S. athletic shoe market and had become a publicly traded company. Missteps in the 1980s, particularly miscalculating the aerobics boom of that time period, found Nike trailing the rest of the athletic footwear industry. Changes at the company by Phil Knight, particularly the introduction of a Michael Jordan–endorsed basketball shoe in 1985, propelled Nike back to the top of the industry by 1988. The company also began to diversify at that time with the purchase of Cole Haan shoes, a casual and dress shoe company. From this point, Nike would go on to acquire other brands, such as Bauer (acquired 1995), Hurley (acquired 2002), Converse (acquired 2003), Starter (acquired 2004, divested 2007), and eventually Umbro Ltd. in 2008.

Internal Issues Vision, Mission, and Strategic Goals The vision of Nike is to “bring inspiration and innovation to every athlete in the world.” Bill Bowerman, the co-founder, defined an athlete by saying, “If you have a body, you are an athlete.” Bowerman saw endless possibilities for human potential in sports. Nike’s mission is to carry on Bowerman’s legacy of innovative thinking, develop products that help athletes of every level of ability reach their full potential, and to create business opportunities that set Nike apart from the competition and provide value for their shareholders.

CASE 27 • NIKE, INC. — 2010

The company has set a strategic goal of $23 billion in revenues by the end of fiscal 2011. Commenting on this ambitious target, Parker states, “When I stepped into the CEO role . . . the leadership team reaffirmed a simple concept that I knew was true from my nearly 30 years of experience here—Nike is a growth company.” Parker saw the company’s strategy as based on three principles: pursuing the greatest growth opportunities, leveraging Nike resources and capabilities, and serving customers with premium products and experiences.

Company Operations Nike’s Beaverton, Oregon, world headquarters is a 176-acre facility that encompasses 17 buildings, and houses almost 6,000 employees. Nike has a smaller facility in Hilversum, the Netherlands, that serves as the headquarters for the company’s Europe, Middle East, and Africa (EMEA) region. Inside the United States, Nike has three significant distribution and customer service facilities. Two are located in Memphis, Tennessee, one of which is leased, and one facility located in Wilsonville, Oregon, which is also leased. Nike subsidiary Cole Haan also operates a distribution facility in Greenland, New Hampshire. Outside the United States, Nike owns and operates two main distribution facilities, one located in Tomisatomachi, Japan, and the other in Laakdal, Belgium. Almost all of Nike’s footwear is manufactured outside the United States by independent contractors. In fiscal 2008, contract manufacturers in China, Vietnam, Indonesia, and Thailand manufactured 99 percent of Nike’s footwear worldwide. No individual manufacturer accounted for more than 6 percent of total Nike footwear production. Nike brand apparel is produced in a similar manner, through independent contractors located outside the United States, in countries such as China, Thailand, Indonesia, and Malaysia, among others. The largest apparel factory accounted for approximately 8 percent of total Nike apparel production. Raw materials for Nike products are typically sourced in the countries where production takes place, purchased in bulk, and are typically not difficult to obtain. Nike estimates that they sell products to more than 25,000 retail accounts in the United States. Nike products are found in a wide variety of retail locations, including footwear stores, sporting goods stores, athletic specialty stores, department stores, and skate, tennis, and golf shops. The company also uses independent sales representatives to sell specialty products for golf, skating, and outdoors. The company’s Internet Web site, www.nikebiz.com, allows customers to design and purchase Nike products directly from the company. As indicated in Exhibit 2, the company also operates 338 retail

EXHIBIT 2

Nike’s U.S. Retail Stores

U.S. Retail Stores

Nike factory stores (which carry primarily overstock and close-out merchandise) Nike stores (including one Nike Women store) Niketowns (designed to showcase Nike products) Nike employee-only stores Cole Haan stores (including factory stores) Converse factory stores Hurley stores (including factory and employee stores) Total

Number

140 16 11 3 111 43 14 338

Note: Nike’s apparel and equipment products are shipped from our Memphis, Tennessee, and Foothill Ranch, California, distribution centers. Cole Haan products are distributed primarily from Greenland, New Hampshire. Converse products are shipped primarily from Ontario, California, and Hurley products are distributed from Irvine, California. Source: Nike’s 2009 Form 10K.

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outlets in the United States, including 140 Nike factory stores that sell overstock and closeout merchandise. Nike’s U.S. sales accounted for 43 percent of total company revenues in fiscal 2008. Outside the United States, Nike sells to more than 27,000 retail accounts, including Nike-owned stores and a mix of independent distributors and licensees around the world. The company has international branch offices and subsidiaries in 52 countries around the world and operates 336 retail outlets outside the United States. These Nike-owned retail facilities outside the United States include 184 Nike factory stores, 61 Nike stores, 4 Niketowns, 12 Nike employee-only stores, 74 Cole Haan stores, and 1 Hurley store, as indicated in Exhibit 3. Nike’s non-U.S. sales accounted for 66 percent of total company revenues in fiscal 2008, up from 62 percent in 2007, as indicated in Exhibit 4. Exhibit 5 reveals Nike’s income before taxes by region. Nike has five wholly owned subsidiaries: Cole Haan, Converse, Hurley International, Nike Golf, and Umbro Ltd. Cole Haan, headquartered in Yarmouth, Maine, designs and distributes dress and casual footwear under the Cole Haan and Bragano brand names. Converse, headquartered in Yarmouth, Massachusetts, designs and distributes athletic and casual footwear under the Converse, Chuck Taylor, and All Star brand names, among others. Hurley International, based in Costa Mesa, California, designs and distributes a line of sports apparel for surfing, skating, and snowboarding under the Hurley trademark. Finally, Umbro Ltd., based in Manchester, England, designs and distributes athletic and casual footwear, apparel, and equipment for soccer under the Umbro trademark. Sales from these five subsidiaries was $2.4 billion in fiscal 2008, as indicated in Exhibit 6.

EXHIBIT 3

Nike’s Retail Outlets Outside the U.S.

International Markets Non-U.S. Retail Stores

Number

Nike factory stores Nike stores Niketowns Nike employee-only stores Cole Haan stores Hurley stores Total

184 61 4 12 74 1 336

Source: Nike’s 2009 Form 10K.

EXHIBIT 4

Nike’s Revenues by Region Fiscal 2009

Fiscal 2008

FY09 vs. FY08

Fiscal 2007

FY08 vs. FY07

(in millions)

U.S. Region EMEA Region Asia Pacific Region Americas Region Total Nike Brand Revenues Other Total Nike, Inc. Revenues Source: Nike’s 2009 Form 10K.

$ 6,542.9 5,512.2 3,322.0 1,284.7 16,661.8 2,514.3 $ 19,176.1

$ 6,414.5 5,629.2 2,887.6 1,164.7 16,096.0 2,531.0 $ 18,627.0

2% -2% 15% 10% 4% -1% 3%

$ 6,131.7 4,764.1 2,295.7 966.7 14,158.2 2,167.7 $ 16,325.9

5% 18% 26% 20% 14% 17% 14%

CASE 27 • NIKE, INC. — 2010

EXHIBIT 5

265

Nike’s Income Before Taxes by Region Fiscal 2009

Fiscal 2008

FY09 vs. FY08

Fiscal 2007

FY08 vs. FY07

$ 1,386.0 1,050.0 515.4 199.3 299.7 (1,250.) $ 2,199.

1% 22% 35% 22% 22% -19% 14%

(in millions)

U.S. Region EMEA Region Asia Pacific Region Americas Region Other Corporate Expense Total Pre-tax Income

$ 1,337.0 1,316.0 853.4 274.1 (196.7) (1,629.) $ 1,956.

$ 1,402.0 1,281.0 694.2 242.3 364.9 (1,482.) $ 2,502.

-5% 3% 23% 13% -154% -10% -22%

Source: Nike’s 2009 Form 10K.

EXHIBIT 6

Nike’s Revenues from Subsidiaries Fiscal 2009

Fiscal 2008

FY09 vs. FY08

Fiscal 2007

FY08 vs. FY07

$ 563.8 646.3 468.6 150.6 — 166.1 67.7

29% 12% 6% 14% — 22% -48%

(in millions)

Revenues Converse Nike Golf Cole Haan Hurley Umbro Bauer Exeter Other Total

$ 915.3 648.3 471.6 202.9 174.0 — —

$ 729.0 725.2 496.2 171.1 53.9 201.9 35.1

$2,412.10

$2,412.4

26% -11% -5% 19% 223% -100% -100%

Nike Products Nike designs, markets, and sells products in three main categories: footwear, apparel, and equipment. In footwear, Nike sells products that are designed primarily for athletic usage, although a significant percentage of Nike customers wear them for leisure or as a fashion accessory. Nike places a great deal of emphasis on the design of the footwear as well as high-quality construction. Footwear designed for running, training, basketball, soccer, and urban wear are among the top-selling categories for the company. In fiscal 2009, footwear accounted for 69.5 percent of Nike’s total U.S. sales, as indicated in Exhibit 7. Nike’s sports-related apparel is designed to complement the company’s athletic footwear products, and it is often sold through the same location and/or distribution channel. Typical apparel products include shirts with licensed college or professional team logos, athletic bags and accessories, running shorts, and baseball caps, all emblazoned with the ubiquitous Nike “swoosh.” Apparel accounted for 25.4 percent of Nike U.S. sales in fiscal 2009, as indicated in Exhibit 7. Sports equipment rounds out the Nike portfolio at 24.5 percent of U.S. sales. Sports equipment, typically sold under the Nike brand name, includes items such as bags, socks, sports balls, eyewear, golf clubs, and bats and gloves.

$2,063.10

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EXHIBIT 7

Nike’s Revenues and Pre-Tax Income by Product within Regions

U.S. Region Fiscal 2009

Fiscal 2008

FY09 vs. FY08

Fiscal 2007

FY08 vs. FY07

(in millions)

Revenues Footwear Apparel Equipment Total Revenues Pre-tax Income

$ 4,550.1 1,664.2 327.7 $ 6,542.0 $ 1,337.0

$ 4,326.2 1,745.2 342.6 $ 6,414.0 $ 1,402.0

5% -5% -4% 2% -5%

$ 4,067.0 1,716.0 348.4 $ 6,131.4 $ 1,386.4

6% 2% -2% 5% 1%

Fiscal 2009

Fiscal 2008

FY09 vs. FY08

Fiscal 2007

FY08 vs. FY07

$ 2,608.0 1,757.1 398.9 $ 4,764.0 $ 1,050.0

19% 19% 9% 18% 22%

Fiscal 2007

FY08 vs. FY07

EMEA Region

(in millions)

Revenues Footwear Apparel Equipment Total Revenues Pre-tax Income

$ 3,136.4 1,970.3 405.3 $ 5,512.0 $ 1,316.0

$ 3,112.0 2,083.9 433.1 $ 5,629.0 $ 1,281.0

Fiscal 2009

Fiscal 2008

1% -5% -6% -2% 3%

Asia Pacific Region FY09 vs. FY08 (in millions)

Revenues Footwear Apparel Equipment Total Revenues Pre-tax Income

$ 1,727.4 1,322.0 272.6 $ 3,322.0 $ 853.4

$ 1,499.0 1,140.0 248.1 $ 2,887.1 $ 694.2

15% 16% 10% 15% 23%

$ 1,159.0 909.3 227.2 $ 2,295.5 $ 515.4

29% 25% 9% 26% 35%

Fiscal 2009

Fiscal 2008

FY09 vs. FY08

Fiscal 2007

FY08 vs. FY07

Americas Region

(in millions)

Revenues Footwear Apparel Equipment Total Revenues Pre-tax Income Source: Nike’s 2009 Form 10K.

$ 892.1 287.8 104.8 $ 1,284.7 $ 274.1

$ 792.7 265.4 106.6 $ 1,164.7 $ 242.3

13% 8% -2% 10% 13%

$ 679.0 193.8 93.2 $ 966.0 $ 199.0

17% 37% 14% 20% 22%

CASE 27 • NIKE, INC. — 2010

Nike Customers and Price Points Because Nike competes primarily in athletic footwear, apparel, and related sporting equipment, its sales are heavily concentrated in the youth and young adult market. In particular, Nike sales are heavily skewed toward the 12- to 24-year-old age bracket. Younger consumers are also less price sensitive in this age bracket and generally spend more on casual and athletic footwear than older consumers. After the age of 40, the typical consumer is not willing to pay more than $35 to $40 per pair for athletic footwear. Nike is the dominant competitor for athletic footwear priced above $60 per pair, holding better than a 50 percent market share for athletic footwear priced $85 per pair or higher.

Key Executives The chairman of the board for Nike is Phil H. Knight, age 70, one of the cofounders of the company. Knight has been with the company since its beginning in the 1960s. He holds an MBA from Stanford University and has been a certified public accountant as well an assistant professor of business administration at Portland State University. As indicated in Exhibit 8, the chief executive officer (CEO) of Nike is Mark G. Parker, age 52. Parker has been with the company since 1979 and was appointed CEO in January 2006. Prior to being named CEO, Parker had been president of the Nike brand from 2001 to 2006. The president of the Nike brand is Charles D. Denson, age 52. Denson has also been employed by the company since 1979 and had been an assistant manager of Nike’s first retail store in Portland, Oregon. Denson was credited with pioneering Nike’s expansion into China, India, and Brazil. The chief financial officer (CFO) for Nike is Donald W. Blair, age 50. Blair arrived at Nike in November 1999. Prior to joining Nike, he held several positions at Pepsico, Inc., and had been a certified public accountant with Deloitte, Haskins and Sells. Nike characterizes its organization as a collaborative matrix organization. Executives often report in several areas, such as by region of the world, by product or by global function. Exhibit 8 presents an organizational chart for the company and the key executive officers. Exhibit 9 presents Nike’s balance sheets from fiscal 2006 to 2009. Note the company has very little long-term debt.

EXHIBIT 8

Nike Organizational Chart, 2009 Phillip H. Knight Chairman of the Board

Mark G. Parker CEO and President

Gary M. De Stefano President of Global Operations

Hansvan Alebeek Vice President, Global operations & Technology

Source: Nikebiz.com.

Donald W. Blair Vice President and CFO

David J. Ayre Vice President Global Human Resoursces

Ronald D. McCray Vice President Chief Administrative officer

Bernard F. Pliska Vice President Corporate Controller

Trevor Edwards Vice President Global Brand & Category Management

Charles D. Denson President Nike Brand

John Slusher Vice President Global Sports Marketing

Lewis L. Bird I...