Nike, Inc.: Cost of Capital

Analysis of Whether Northpoint Group Should Invest in Nike’s Stock

Introduction

        Kimi Ford, a portfolio manager at NorthPoint Group, is trying to determine whether or not her firm should invest in Nike’s stock. Nike’s share price has declined significantly since the first of the year. Furthermore, Kimi has asked her assistant to analyze the stock and determine if Nike would be a good investment.

NorthPoint Group Background

NorthPoint Group is a mutual fund management firm that is invested mostly in Fortune 500 companies, with an emphasis on value investing. NorthPoint’s top holdings include ExxonMobil, General Motors, McDonald’s, 3M, and other large-cap, old-economy stocks.NorthPoint has managed to perform exceptionally well although the market had declined. In 2000, NorthPoint earned 20.7% although the S&P 500 fell 10.1%. Furthermore, as of June 2001, end of year results stood at 6.4% versus -7.3% for the S&P 500.

Nike Background:

        Nike was originally founded in 1964 as Blue Ribbon Sports.  The name of “Nike” did not come about until 1971. It originally operated as a distributor for the Japanese shoemaker Onitsuka Tiger, now known as Asics.  Bill Bowerman - a track-and-field coach - and Phil Knight were the two who originally founded the company and wanted to call it Dimension 6; it was not until the first employee, Jeff Johnson, come up with the idea of calling it Nike, after the Greek goddess of victory.  Unlike many other companies, Nike was founded with only $1200 dollars in the bank.

        The first Nike shoes were made inside of waffle iron.  It was not until one day at breakfast with his wife that Bowerman had his first eureka moment for the footwear.  It sparked the first idea for the sole of the trainers to have a grooved pattern for athletes to grip the running track.  The idea was first patented in 1974 and it spawned the “Nike Waffle Trainer”.  

        The Nike “swoosh” is one of the most recognized symbols in the world.  The swoosh was designed by Portland State University student Carolyn Davidson for just $35 dollars.  It was not until a later date that Carolyn was given stock in the company that is now worth more than $640,000.  This company is very brand oriented and so are the customers.  When customers see the Nike swoosh they instantly know it is a good product and the customers have become very brand loyal to this product.

        Not only is the symbol largely recognized but it has also been paired with the infamous “Just Do It” slogan.  Not only has this slogan become a very big part of the mission for the company but it also stands behind why their brand is one of the most popular brands out there.  People want to be inspired and do want to give up easily or go down without a fight.  Gary Gilmore was the the whole inspiration behind the slogan.  He was the famous serial killer who said “let’s do it” just before he was executed by a firing squad in 1977 and the first “Just Do It” campaign was launched in 1988.

        Nike is also very well known for having some of the biggest endorsement deals with athletes as well.  This is a brand that is very well recognized so only the best athletes are candidates for representation.  One of the biggest endorsement deals that Nike has to date is with NBA superstar, Michael Jordan.  Although he has not played basketball professionally since 2003, he still reportedly earns $60 million annually in royalties from Nike.

        This company is worldwide and very successful at it.  The world’s largest Nike store is not even located in its United States homeland but rather on London’s Oxford Street.  It costed $10.5 million (european currency) to construct the store.  The store spans three levels and roughly 42,000 square feet and was designed around the theme of a town square.

Industry Analysis & Competitors

        Nike belongs to the footwear industry. The company’s major competitors are Reebok, Adidas, Asics, and other leading brands such as New balance and Fila. Nike is the industry leader owning nearly 32% of the market share.  While Asics has 18% of the market share, Reebok with 10% market share, and Adidas with 25% market share.

Alternative Solutions

The two alternative solutions pertaining to this case are fairly simple. Either NorthPoint Group should Invest in Nike's stock or the firm should not not invest in Nike’s stock.

Decision Criteria

        In order to decide whether to invest in Nike’s stock, Northpoint Company needs to analyze Nike Inc. in detail. SWOT analysis and WACC (Cost of Capital) are key methods in making this decision. In addition, a suitable forecast is also helpful to analyze Nike Inc.

SWOT Analysis

Strength: Good Quality & a Clear Target Market

        Nike is known for having products of good quality. Most customers who wear Nike shoes do not actually participate in athletics. They want comfortable and good looking shoes, which is what Nike produces. In addition, Nike has a clear target market. The main customer group for Nike consists of teenagers who like sports, who strive to be like their favorite athletes, and are keen on fashion trends.

Weakness: Single Core Competence & High Price

        Even though Nike has many different product categories, the main source of Nike’s sales is shoes. Other categories such as Nike clothes, equipment, and sunglasses didn’t sell as well as Nike shoes. In another aspect, Nike’s products are all highly priced. This is a challenge for people who have a low family income.

Opportunity: New Categories

        Nike has many new categories including women’s clothing, sunglasses, and jewelry which all help create good opportunities for them. Most customers feel as if Nike is also a fashion brand. Innovation is a main focus for Nike because every new category might bring a good profit for them.

Threat: Merge of Reebok & Economic Conditions

        The merge of Reebok and Nike occurred in 2005. Reebok is the third largest sports company in the world. Nike invested around 3.1 billion euros to merge with Reebok which played a role in Nike’s sales revenue decreasing from 12.3 billion euros to 3.0 billion euros. In addition, economic slumps had a harsh impact on Nike as well. Chinese currency depreciated last year in  2015 and made less people buy highly priced Nike products.

Forecast

        The revenue and net income gross margin of Nike shows a stable growth trend from 2004 to 2008. This shows that Nike is capable of generating higher sales revenue in the business market. Furthermore, historical Nike stock price  shows that Nike company has a generally increased over time. It even had a 900% price change in 2015, compared with the stock price in 2002. Although it fluctuated from 1997 to 2002 it has maintained positive growth since the year of 1987.