Nike Financial Analysis

Nike Financial Analysis

Nike is a company that has thoroughly embedded itself into the psyche of people around the world. It's a company that started with humble origins from selling footwear in the basement to becoming the behemoth in the athletic industry. Bill Bowerman, University of Oregon track & field coach, and Phil Knight, middle-distance runner under Bowerman co-founded Nike. Nike was first established as Blue Ribbon Sports in 1964 as a partnership and the name Nike was officially adopted on May 30, 1978. The infamous Nike Logo - Swoosh, was created for a fee of $35 by Carolyn Davidson, a graphics design student. In 1980, Nike becomes a publicly traded company with the completion of its Initial Public Offering of 2,377,000 shares of Class B Common Stock on New York Stock Exchange with the stock symbol NKE. Today, Nike employs over 27,000 people across the globe, and has net revenue in excess of $13 billion.

The purpose of this paper is to provide investors with comprehensive information on Nike, its financial health and activities, its strength and weaknesses, and whether Nike creates value to its shareholders. This paper will analyze Nike's capital structure, scope of international operations, recent stock performance, and dividend policy. We will examine how Nike's international operations are conducted, its criticisms and strengths. Nike's debt ratios, dividend payout ratios, dividend yield, and interest coverage ratios over the previous 5 years will be discussed and compared with industry benchmarks. Its bond ratings and the relation between the operating characteristics and its leverage will also be analyzed.

Managers for Nike are creating value for shareholders by expanding Nike operations in foreign markets as much as possible. Nike's sales and earnings outpaced Wall Street estimates FY 06. Nike's sales reached $15 billion and its earnings per share were up 18%. Over the past 5 years, Nike's earnings per share on compounded rate were up 20%, gross margins averaged 42% and in the past year, Nike delivered 44% margins in a period of rising costs. The current managers are maximizing shareholder's wealth but in the footwear industry, Nike's performance still falls. The footwear industry averaged about 14.25%, while Nike's growth in stock was 10.48%. If the increase in value of shares is a benchmark of performance for managers, Nike's performance is unimpressive. Nike has a Price to Book (MRQ) ratio of 3.97, while the industry Nike competes in has a ratio of 3.96. S&P 500 has a Price to Book (MRQ) ratio of 3.90. Nike has a Price to Tangible Book (MRQ) ratio of 4.26, while the industry has a ratio of 4.44, and the S&P 500 has a ratio of 7.22.

The Nike brand itself is the biggest strength of Nike. Its other strengths include international operations where it is expanding aggressively, innovation of new products and ability to connect with its consumers. People's perception of Nike as an exploiter of workers in developing nations, might cause considerable damage to its brand, and the poor performance of its stock relative to its industry is also one of its weaknesses. Nike's managers must maximize shareholders wealth, which is not at its optimum level.

As a world-renowned multi-national corporation, Nike has a presence in almost every nation. Nike itself started by importing athletic shoes from a Japanese company called Onitsuka Tiger Company. Nike earns more revenues from its international operations than its domestic market. Nike earned about $6.5 billion FY 2005 from its international operations, compared to $5.1 billion from its domestic market. International operations appear to be a key driver of Nike's growth. Nike's international operations are divided into 3 different regions. The EMEA region oversees operations in Europe, Middle East, and Africa. The Asia Pacific Region oversees operations in East Asia, South Asia, Southeast Asia, and the Pacific. The Americas region oversees operations in South America, and North America (excluding United States).

Europe, Middle East, & Africa (EMEA) is headquartered in Hilversum, Netherlands. In terms of revenue, the EMEA is Nike's second largest region. EMEA region contributed about $4.3 billion in revenues for Nike. Of these, footwear revenues contributed $2.5 billion, apparel revenues contributed $1.5 billion and equipment revenues contributed $284.5 million. FY'05, 31% of Nike brand revenue was generated by sales in the EMEA region. This region is also the third largest in terms of manufacturing. EMEA region employs about 6,000 Nike employees, and has about 104 contract factories. These factories in addition, employ 29,242 workers.

The Asia Pacific region is Nike's third largest in terms of revenue, and the largest in terms of manufacturing. Nike has 13 branch offices and subsidiaries