Stock of the Day - February 19, 2009 - NKE

Nike Inc. (NKE)

Nike (NKE), the world’s largest athletic shoe and clothing maker, is one of the most well known companies around the globe.  Nike Inc. also owns famous shoe and apparel brands such as Converse, Umbro, Cole-Haan, and Hurley.  The company embodies stability and strength, and it has remained relatively strong even in this global economic downturn.  I believe Nike is an extremely solid long-term investment that will reward you for being patient and loyal. 

Nike’s share price is currently trading at $42.81, very close to its 52-week low and around 30% lower than its 52-week high of $70.60. This drop in share price is understandable, as much of its apparel and footwear is considered expensive and its products are classified more as discretionary items rather than necessities.  But, Nike is still doing much better than its competitors.  Adidas, the world’s second largest sporting goods maker, has experienced around a 60% dip in stock price.  The fact that Nike has stayed relatively strong compared to its competition says a lot about the company, as it proves that Nike’s brand image and influence amongst its customers is very powerful.

One of the most intriguing aspects of Nike is the company’s worldwide reach, as the company operates in over 180 countries.  While the U.S. is Nike’s biggest market, only one-third of the company’ revenues come from the States.  China, which provides Nike with over $1 billion in revenue, is the shoemakers second biggest market, and the company’s stake in China is growing rapidly.  Nike recently announced that it will build a logistics center in China, and this new center will help direct the flow of Nike shoes and apparel in the heavily populated country.  With aggressive growth in China and other opportunities in up-and-coming countries like Russia and Brazil, Nike is poised to experience solid growth for a very long time.  Not only does a global reach give Nike growth potential, but it also protects it from a single country’s poor economy.  For example, if China’s economy began to go sour, Nike would have the ability to focus its business on other countries with stronger economies. 

Not only is Nike intriguing due to its worldwide reach, but the company also seems like a good investment due to its focus on cutting costs and becoming even more profitable in this economic environment.  Nike recently announced that it would cut 4% of its workforce in 2009. While this might sound like a bad thing, Nike is doing it for the right reasons – to cut costs and improve its profitability.  In addition to cutting jobs in 2009, Nike has pledged to cut some advertising and marketing costs.  Currently, Nike spends 32 cents of every sales dollar on selling and marketing, and the company’s North American marketing budget is around four times the size of what Adidas spends.  With such a strong brand across the globe, Nike has realized that it can spend less on marketing and still maintain its pristine and powerful brand image.  While the company plans to continue sponsoring and spending on its marquee athletes like Kobe Bryant, it will cut sponsorship spending on lesser known athletes that might not bring customers to the brand.  Nike understands that slowing down sponsorship and endorsement spending can be done without hurting its dominant position, and that slowing down marketing costs will help boost company profits. 

In the end, there is no doubt that Nike is a first-class company that will be successful and dominant for many years to come.  The company has a good combination of stability and growth, and its $2.72 billion in cash compared to $794 million in debt makes it a very financially healthy company as well.  Because Nike sells mostly discretionary items in a global recession, the short-term performance of the stock will probably continue to hover in the low-to-mid 40’s.  But, if you are investing for the long term, there aren’t too many companies that are as enticing as Nike.  If you are planning on buying Nike, just buy some shares and hold on to them forever. 

 

Niki Pezeshki

College Trillionaire