Nike Incorporated Company - Essay Example

? Report on Nike Inc. Table of Contents   Page Nike Company Information 3 2. Analysis of Nike Financial Reports 4 2 Analysis of the Income ment 4 2.2 Analysis of the Balance Sheet 5 a) Return on Capital Employed 5 b) Low usage of debt funds 7 c) Working Capital Management 7 2.3 Analysis of the Cash Flow Statement 8 3. Conclusion 9 4. List of Works Cited 10     1. Nike Inc. Company Information Nike Inc. is headquartered in Beaverton, Oregon and is the world’s largest seller of athletic footwear and athletic apparel with revenue in 2012 of $ 24 billion. The company was founded in 1962 and changed its name in 1972 to Nike, the Greek goddess for victory. The company adopted its “Swoosh” logo in 1971. Dramatic growth of the company started with the signing of Michael Jordan and the launch of the Air Jordan brand in 1985. The company revenues have grown at 8.2% CAGR in the last 10 years while the profits have grown at 23.1% CAGR (Gibbs, 2012). Athletic footwear made up 64% of Nike’s products business in 2012 and sports apparel 30%. Branded equipment made up the remaining 6%. The global footwear industry is projected to grow from $ 185 billion in 2011 to $ 211 billion in 2018. Athletic footwear is expected to be about one-third of this market (PR Web, 2012). The sports apparel market is expected to grow in the same period from $ 122 billion to $ 190 billion (TREFIS, 2010). Nike’s market share in both markets is expected to grow over the next five years as shown in the charts below which should make Nike an even stronger market leader in its industry (Guenette, 2013). 2. Analysis of Nike Financial Reports The three key financial reports to be examined are the Income Statement, the Balance Sheet and the Cash Flow statement. A summary of these three statements made from the company’s 10-K filing for the fiscal year ended 31 May 2012 has been included in this report. 2.1 Analysis of the Income Statement A summary of the Income Statement is shown below (Nike Annual Report, 2012, p 41). Income Statement ( in $ million)   2012 2011 2010 Revenues 24,128 20,862 19,014 Cost of Sales 13,657 11,354 10,214 Gross Profit 10,471 9,508 8,800 Gross Margin % 43.4% 45.6% 46.3% Marketing Expense 2,711 2,448 2,356 Other overheads 4,720 4,245 3,970 Total SG & A 7,431 6,693 6,326 SGA / Revenue % 30.8% 32.1% 33.3% Interest expense 3 4 6 Other expenses/ (income) 54 (33) (49) Income before Tax 2,983 2,844 2,517 Tax expense 760 711 610 Net Income 2,223 2,133 1,907 Net Income / Revenue % 9.2% 10.2% 10.0% The company revenues have grown 16% in 2012 over 2011 which were 10% higher than the previous year (Nike Annual Report, 2012, pp 18-20). This growth shows that Nike is gaining market share as the total markets are only growing at around 2% a year. Nike’s main competitor Adidas had revenues of € 11.88 million ($ 15.6 billion) in 2012, a growth of 11.7% over 2011 (Adidas Annual Report, 2012, p 190). The Gross Margin has decreased by about 300 basis points over the two years to 43.4% and this has been attributed by the company management to increases in input costs, higher import taxes in some countries and discounts on close-out sales (Nike Annual Report, 2012, p 21). Adidas has had significantly higher gross margins at 47.7% in 2012 and 47.5% in 2011 (Adidas Annual Report, 2012, p 190). The decline in gross margin for Nike has been offset by reduced SG&A costs and the net income in 2012 has only declined 80 basis points compared to 2010. For Adidas the SG&A costs are much higher than Nike at 41.3% in 2012 and 41.8% in 2011 resulting in a net income of 5.3 % in 2012 9 (excluding € 265 million Goodwill write-off) compared to 4.6 % in 2011. 2.2 Analysis of the Balance Sheet The Nike balance sheet as of 31 May is given only for two years 2011 and 2012 in their Annual Report and is summarized below. a) Return on Capital Employed (ROCE) The Capital Employed in Nike’s operations is the total of the non-current assets in the balance sheet and the working capital made up of inventories and accounts receivables less accounts payable. This calculation for the two years 2011 and 2012 is shown below and is very robust at 24.8% for 2012 and 26.4% for 2011. Return on Capital Employed ( $ million) 2012 2011 Total non-current assets 3,934 3,701 Inventories 3,350 2,715 Accounts receivables 3,280 3,138 Accounts payable (1,588) (1,469) Total capital employed 8,976 8,085 Net Income 2,223 2,133 ROCE 24.8% 26.4% Balance Sheet as on 31 May (in $ million)     2012 2011 Current Assets     Cash and Cash Equivalents 2,317 1,955 Short term investments 1,440 2,583 Accounts Receivables 3,280 3,138 Inventories 3,350 2,715 Deferred Income Taxes 274 312 Prepaid Expenses & others 870 594 Total Current Assets 11,531 11,297 Non-current Assets     Property, Plant & Equipment 2,279 2,115 Intangible assets 535 487 Goodwill 201 205 Deferred Income Taxes & Other 919 894 Total non-current assets 3,934 3,701 Total assets 15,465 14,998 Current Liabilities     Current portion of long term debt 49 200 Notes payable 108 187 Accounts Payable 1,588 1,469 Accrued Liabilities 2,053 1,985 Income tax payable 67 117 Total Current Liabilities 3,865 3,958 Non-current Liabilities     Long term debt 228 276 Deferred income tax & other liabilities 991 921  Total non-current liabilities 1,219 1,197 Shareholders' Equity 10,381 9,843 b) Low usage of debt funds Nike operates with very little long term debt on its balance sheet. The figure for 2012 is only $ 228 million. The company however has $ 1,440 million in short term investments and the interest earnings from these make the net interest costs for Nike an insignificant $ 3 million in 2012. This suggests that the working capital is entirely funded from internal cash generation which is an after-tax source of capital. Nike has paid $ 760 million in tax for 2012 and the amounts in the previous two years are also high. Use of borrowed capital would have reduced this tax outflow and Nike should be able to invest its own surplus cash to earn a return higher than the interest it would pay on its loans. Nike has a revolving credit facility of $ 1 billion but that has not been utilized during 2012 (Nike Annual Report, 2012, p31). Adidas has € 1,207 million in long term debt and € 280 million in short term borrowings (Adidas Annual Report, 2012, p 189). c) Working capital management A comparison of Nike’s key working capital parameters with those of Adidas are shown in the chart below. Adidas pays its suppliers much later than Nike. Both companies rely heavily on contract manufacturers in low cost countries like Viet Nam, China and Indonesia and the cost of this working capital for the supplier has to get reflected in his costs. Adidas holds higher inventories than Nike but is able to collect from its retailers faster than Nike. Nike vs. Adidas Working Capital Management in 2012   Nike ( in $ million) Adidas ( in € million) Revenues 24,128 14,883 Cost of Sales 13,657 7,780 Accounts receivables 3,280 1,688 No. of days of sales 50 41 Inventories 3,350 2,486 No. of days of production 90 117 Accounts payables 1,588 1,790 No. of days of purchases 42 84 However, given the long supply chains for this industry and the global distribution channels for these products, working capital management in both companies appears very effective. The Inventory turnover ratio which is defined as Cost of Goods ? Average Inventory (Irfanulla, 2013) for Nike in 2012 is 13,657 / 0.5 x (3280+3138) = 4.25. Working Capital Productivity which is defined as (Accounting Tools, 2013), Annual Revenues ? (Cash + Inventories + Receivables – Payables) also shows that working capital is extremely well managed. Nike - Working Capital Productivity 2012 2011 Revenues 24,128 20,862 Cash and equivalents 2,317 1,955 Inventories 3,350 2,715 Receivables 3,280 3,138 Payables 1,588 1,469 Working Capital productivity 3.28 3.29 2.3 Analysis of the Cash Flow Statement The Cash Flow Statement summarized below. Cash flow from operations has fallen from $ 3,164 million in 2010 to $ 1,812 million in 2011 and $ 1,899 million in 2012. This is primarily due to increase in inventories and receivables in the two years in-line with the growth in revenues. The annual additions to property, plant and equipment also reflect the scaling up of operations for the larger revenues. A major part of the cash flow for additions to property, plant and equipment is from depreciation provisions. The Free Cash Flow (Cash Flow from operations less capital expenditure) for Nike in 2012 is $ 1,304 million and it was a similar $ 1,381 in 2011. One major outflow is towards repurchase of common stock, $ 1,859 million in 2011 and $ 1,814 million in 2012. This is reported to be part of a 4-year $ 5 billion share repurchase program approved by the Nike Board of directors. These repurchases have helped the Nike Inc. shares to outperform the S&P 500 and other stock market indices (Nike Annual Report, 2012, pp 15, 16). Cash Flow Statement ( in $ million) 2012 2011 2010 Net income 2,223 2,133 1,907 Depreciation 373 335 324 Deferred income taxes (60) (76) 8 Stock based compensation 130 105 159 Amortization & other 32 23 72 (Increase)/ Decrease in Receivables (323) (273) 182 (Increase)/ Decrease in Inventories (805) (551) 285 (Increase)/ Decrease in other current assets and prepaid exp (141) (35) (70) (Increase)/ Decrease in a/c payables 470 151 297 Cash from operations 1,899 1,812 3,164 Cash flow from short term investments 1,124 (537) (937) Net additions to property, plant & eqpt (595) (431) (325) Other (15) (53) (6) Cash flow from investments 514 (1,021) (1,268) Reduction in long term debt / notes (268) 33 (237) Proceeds from stock options etc 583 409 422 Repurchase of common stock (1,814) (1,859) (741) Dividends (619) (555) (505) Cash flow from financing activities (2,118) (1,972) (1,061) 3. Conclusion The strength of the financial reports of Nike reflects the company’s dominant global position in the athletic footwear and sports apparel businesses. The Return on Capital Employed is very robust at around 25% and the projected market growth for both of these product lines suggests continued revenue growth and profitability for company. The company is cash rich even after substantial share buy-back in the last 3 years and the company shares can be expected to continue outperforming the stock market in the near future * * * * 4. List of Works Cited: 1. Accounting Tools, (2013). “Working Capital Productivity”, Accounting Tools, 2013. Retrieved from http://www.accountingtools.com. 2. Adidas Annual Report, (20120. “Pushing Boundaries, Adidas Group Annual Report for the year ended 31 Dec 2012”. Retrieved from http://www.adidas-group.com 3. Gibbs, T., (2012). “Horizontal Growth is key to Customer Value Creation”, The Motley Fool, 23 Feb 2012. Retrieved from http://www.themotleyfool.com 4. Guenette, R., (2013). “Is this company a Touchdown or an Interception?” The Motley Fool, 3 Ian 2013. Retrieved from http://www.themotleyfool.com 5. Irfanulla, J., (2103). “Inventory turnover ratio”, Accounting Explained, 2013. Retrieved from http://www.accountingexplanied.com. 6. Nike Annual Report, (2012). “Form 10-K Annual Report for the Fiscal Year ended May 31, 2012”. Retrieved from http://www.nike.com. 7. PR Web, (2012). “Global Athletic Footwear Market analyzed by Transparency Market Research”, 26 Oct 2012. Retrieved from http://www.prweb.com. 8. TREFIS, (2010). “Nike could grab 6% of Global Sports Apparel Market”, TREFIS, 21 Sept 2010. Retrieved from http://www.nasdaq.com. Read More