A new series covering companies in the Compound 8 to 80 Portfolio…
1) Why is Nike an 8 to 80 Brand?
“Just Do It.”
Arguably the most recognizable slogan from one of the most recognizable companies. With customers in every generation, from 8 to 80, Nike is the leading global apparel brand in the world.
2) What are its growth and financial trends?
Nike last reported earnings on March 18, 2020.
Revenues came in short of expectations at $10.36 billion (vs. $11.02 expected), up 2.50% over the prior year.
Nike sales are expected to grow considerably in the post-covid recovery, with over 10% estimated growth in 2021 and 2022.
Net Income of $1.45 billion during the quarter beat estimates by a wide margin and were up 71% year-over-year. Nike has recovered much faster than expected from the covid-induced downturn in Q2 (net loss of $790 million).
Key to that recovery was Nike’s huge prior investment in Digital. With an 59% growth rate during the quarter, online sales are now over 30% of Nike’s total sales (their pre-covid goal was to hit this mark by 2023) and are expect to be more than 50% of total sales in the coming years.
In terms of geography, sales in China grew 51% YoY in the latest quarter, a sharp contrast with North America’s 10% decline due to “supply chain challenges” (source).
3) The Climb
The story of Nike is one of perseverance and grit with many near-death experiences.
In my all-time favorite business memoir (Shoe Dog, highly recommend), Phil Knight chronicles the struggles he had during the early years.
Nike wasn’t always Nike, and they didn’t always make their own sneakers.
Knight originally called the company “Blue Ribbon Sports,” selling imported shoes from a Japanese company Onitsuka (who sold the popular Tiger brand).
He made his first order on a trip to Japan at the age of 24 with no actual company in place. His former college track coach (Bill Bowerman) would later partner with him, providing much-needed mentorship and encouragement.
In their first year in business (1964), Blue Ribbon did only $8,000 in sales, with Knight selling shoes at track meets out of the back of his car. Knight worked as an accountant to support himself.
As the business grew, Knight hired a band of misfit employees who were fanatical about running and Blue Ribbon. His hands-off philosophy (“don’t tell people how to do things – tell them what to do and let them surprise you with the results”) proved highly effective, and the company’s growth doubled each year.
This was before the age of venture capital, though, and Blue Ribbon was constantly fighting with banks as their need for larger and larger credit lines (for larger orders) emerged.
At any moment, their bank could pull the rug on the company, which is exactly what happened at one point. They were saved by Knight’s relationship with a Japanese trading company, who came in with additional capital to bridge the funding gap.
In 1971, Blue Ribbon changed its name to Nike (Greek Goddess of Victory) after it came to employee Jeff Johnson in a dream. The famous swoosh logo was designed by a design student who was paid $35 for her work.
After a tumultuous end to their relationship with Onitsuka in that same year, Nike began manufacturing and selling their own shoes with Bowerman’s design prowess proving critical.
I don’t want to give any more of the story away for those who haven’t read the book, but the rest as they say is history.
Nike went public in December 1980 at a market valuation of well under $1 billion and sales of $300,000. Its market cap crossed above $230 billion in 2020 with sales of over $38 billion.
4) What are major risks to future growth?
Nike has a number of large competitors (Adidas, Asics, Puma, Under Armour, New Balance) in an apparel space that is notoriously fickle. Fashion trends can change quickly, and while Nike has significant brand loyalty, that is not immutable.
To retain its competitive advantage, Nike will have to continue to innovate on the product side and execute on their thus-far successful transition to a digital company.
From a stock perspective, valuation is the primary concern, as is the case with many high growth companies that thrived during the pandemic.
Trading at nearly 6x sales, current expectations for future growth are extremely high, making Nike vulnerable should it fail to meet or beat these lofty expectations.
5) Howard’s Take…
“Nike continues to impress in an era of the Instagram fashion ‘direct to consumer’ (DTC). Every time I log into Instagram I am peppered with leisure and athletic shoe competitors to Nike, but I continue to buy Nike’s.
Nike’s relationships with the athletes at scale is just too big an advantage in the mass market. The trust and emotion that people have for Nike has not wavered through COVID and Nike’s digital strategy has been excellent for a company their size. Kids love personalizing their shoes on Nike.com as well. Nike’s own stores will continue to be an advantage once COVID ends and people hit the streets again.” – Howard Lindzon
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