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Nike: Analysis of Strengths, Weaknesses, Opportunities, Threats

March 24, 2015 | About:

By: Jason Dalavagas

The business outlook at Nike (NKE) is bright. Overall demand trends have been favorable in most regions, for both athletic footwear and apparel. The drivers of the good results include basketball, lifestyle running, and men and women’s apparel. Geographically, we look for strong demand from North America and China. However, unfavorable foreign exchange rates, particularly the strengthening of the U.S. dollar, have been pressuring results in recent months. We believe this trend will continue throughout the year.

Investors interested in the stock will see that its price has risen steadily over the past few years, and just recently reached an all-time high. The equity is also a safe pick, with an A++ Financial Strength rating and relatively low levels of debt. It also offers a dividend, although the yield is below the Value Line median. The question is whether the company can continue to expand its market share, domestically and internationally, and boost its sales and earnings, or will the ride start to slow down in the coming quarters. We will address these issues by performing an easy-to-follow SWOT analysis of the company, evaluating its Strengths, Weaknesses, Opportunities, and Threats.

The Business

Nike, along with its subsidiaries, designs, develops, markets, and sells athletic footwear, apparel, equipment, accessories, and services. The company is the largest seller of athletic footwear and apparel in the world. It focuses its Nike Brand product offerings on eight key categories: Running, Basketball (including the Jordon brand), Football (Soccer), Men’s Training, Women’s Training, Action Sports, Sportswear, and Golf. It also markets products designed for children, along with other recreational uses, including cricket, lacrosse, walking, and wrestling. As of May 31, 2014, Nike had roughly 56,500 employees worldwide. The company was founded in 1964 and is headquartered in Beaverton, Oregon.

Nike sells its products through retail accounts, Nike-owned retail stores, internet websites, and independent distributors and licensees throughout the world. Nearly all of Nike’s footwear and apparel products are produced outside the United States, while equipment goods, including bags, socks, sport balls, eyewear, timepieces, bats, and golf clubs, are produced both domestically and abroad.

Strengths

Strong Global Brand: Nike is the most valuable sports brand in the world. Its “Swoosh” logo is instantly recognizable around the globe. Its long partnership with legendary basketball player Michael Jordan has driven strong sales of the company’s basketball sneakers, including the retro business, which makes up about half of the Jordan shoe business. In fact, one of every two basketball shoes in the U.S. last year carried that Jordan brand. Nike’s ability to maintain and enhance its iconic brands has allowed it to enjoy continued success for decades.

Low Cost Manufacturing: Virtually all of Nike’s footwear is manufactured outside of the United States by independent contract manufacturers who operate multiple factories. In fiscal 2014, Vietnam, China, and Indonesia manufactured roughly 43%, 28%, and 25% of total Nike Branded footwear. It also has operations in Argentina, Brazil, India, and Mexico. The low cost of producing products in these countries continues to boost the bottom line.

Strong Research and Development: Nike takes its research, design, and development efforts very seriously, and it believes this is one of the key factors for its success. Technical innovation in both the design and manufacturing process of its footwear, apparel, and athletic equipment has helped the company continue to produce better products, which have enhanced athletic performance and reduced injuries. The company has its own staff of specialists in the areas of biomechanics, chemistry, exercise physiology, and related fields, and also uses advisory boards made up of athletes, coaches, trainers, orthopedists, and other experts who consult with Nike about designs, materials, and concepts for products and improvements.

Weaknesses

Ongoing Perception of Poor Labor Practices: It wasn’t long ago that Nike was facing intense criticism of its labor practices and work conditions. However, over the past 20 years, it has undertaken efforts to improve conditions for its roughly one million contract workers. While conditions have improved, many of its factories in developing countries still do not meet Nike’s own standards. The company itself has acknowledged that the low wages for some of its workers remains a concern. Safety issues at certain locations are also an issue. If some type of disaster were to occur at one of its facilities, this would no doubt hurt the company’s image.

High Prices: Due to its strong brand, Nike can typically command a premium on the products it sells, which in turn supports higher margins and profitability. However, the cost of its footwear is higher than most of its competitors, which make its products out of reach for many customers around the globe, particularly in emerging markets. There is also the risk of declining demand when an economy falls into recession, as consumers have lower discretionary spending for non-essential items.

Opportunities

Emerging Markets: While Nike already has a presence in many emerging markets, we believe that there is still significant growth potential there. Rapidly growing economies like China, along with other emerging markets like India and Brazil, have the potential to drive future earnings growth. While China accounted for roughly 9% of 2014 revenues, the company believes this figure will rise as it continues to enhance its brand image there. It is also realigning its product portfolio to better appeal to Chinese customers’ tastes and preferences. All told, we think Nike should be able to increase its share of the global footwear market by continuing to grow its base in these regions, which have been reporting higher growth rates than developed markets for the past few years.

Innovative Products: Given Nike’s focus on R&D, as mentioned in the strengths section of this analysis, the company is typically on the forefront on product innovation. While products like FuelBand, a wearable technology that monitors physical activity, may not have been as successful as hoped, Nike still has its eye on the next “big thing”. The company’s brand strength, coupled with its focus on R&D, should allow it to remain at the forefront of new technologies in the footwear and wearable technology space.

Threats

Competition: The athletic footwear, apparel, and equipment industry is highly competitive, both in the United States and around the globe. There are several significant athletic and leisure footwear companies and sports equipment firms that produce similar products. Some of the primary ones are Puma and adidas. Other large companies have diversified their product lines to include athletic and leisure footwear, sports and lifestyle apparel, and equipment, including Under Armour (UA) and lululemon (LULU). The rapid changes in technology and consumer preferences constitute significant risk factors for Nike. Too, demand for Nike’s products depends on the relative popularity of various sports and fitness activities, as well as changing design trends, so any major shifts in these trends could temper business results. If competitors have more success attracting customers with more appealing footwear or apparel, this would also hurt business prospects.

Currency Volatility: Since the majority of Nike’s sales are generated outside of the United States, the company is exposed to significant currency fluctuations. The recent strengthening of the U.S. dollar has hurt reported results, due to the foreign amounts being translated into U.S. dollars for reporting purposes. While the company does have certain hedges in place, they are designed to lessen the impact of unfavorable exchange rates, not fully eliminate the risk. The dollar is expected to continue to strengthen in the coming months, so this will remain a concern for the near term.

Conclusion

Nike remains the dominant force in the global footwear market. The company continues to report solid demand in both developed and developing markets. Further penetration of its products in emerging markets could lead to strong growth for years to come. The company’s commitment to R&D and integration of emerging technologies into its products could also open up new opportunities for growth. All told, we think Nike’s strengths and opportunities outweigh its weaknesses and threats. Subscribers interested in learning more about Nike should check out our full-page report in The Value Line Investment Survey.

At the time of this article’s writing, the author did not have a position in any of the companies mentioned.

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