NIKE, INC. Financial Report and New Market Analysis. BRAZIL The New International Market. Table of Contents

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1 and New Market Analysis BRAZIL The New International Market Table of Contents SECTION I - Introduction Background and History Current Product Line and Brand Identity Markets Financial Statements Financial Performance-Past five years ( ) Revenue Earnings per Share Return on Invested Capital Stock Performance Financial Statements-Past five years ( ) Consolidated Income Statement Consolidated Balance Sheet Consolidated Statement of Cash Flow Consolidated Statement of Shareholder Equity I Financial Stability Current Financial Position Income and Earnings Growth / Taxes / Dividends Financial Stability SECTION IV Evaluation for Expanding to Brazil Business Operations Country Operations SECTION V Financial Forecast Financial Pro Forma Sales and Growth Rate Value Transfer of Assets SECTION VI Conclusion Financial Forecast International Market Issues and Laws Impact on Market Page 1 of 36

2 SECTION I INTRODUCTION Nike is a global footwear manufacturer and a market leader, incorporated in 1968 under the laws of the state of Oregon. At the time of incorporation, Nike was chiefly involved in the manufacture of sports footwear. Over the years, Nike expanded its operation and business and according to the 2014 annual report, Nike s principal business is the design, development, and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories, and services (Nike Inc., 2014). From this business description, Nike clearly engages in a wide scope of activities. This is probably one of the factors that have contributed to its position as the world s largest of athletic footwear and apparel manufacturer (Nike Inc., 2014). Perhaps another factor contributing to this status is its adoption of technology-based innovation. Nike indicates that one of the channels through which it sells its products is its websites, a marketing venture it refers to as Direct to Consumer (DTC) operations. Indeed, Nike has carved out a niche for itself as the brand to watch in the sports world. Nike s annual report is now analyzed to understand how and why Nike has managed to attain this achievement. Nike has a wide revenue base. While it is headquartered in the United States, its operations are global, and the company has activities. It offers a wide range of products from which it develops its product mix. According to its annual report, there are eight key categories of Nike s product offerings. These are running, basketball, football (Soccer), women s training, men s training, sportswear, action sports and golf (Nike Inc., 2014). Nike sells its products in a number of markets and geographical segments. Nike reports the following operating segments: North America, Western Europe, Central and Eastern Europe, Japan, Greater China and Emerging Markets. Page 2 of 36

3 SECTION I INTRODUCTION Nike carries out its operations under a number of different brand names. There is the NIKE Brand name, under which the company sells a line of performance equipment including socks, sport balls, bags, eyewear, digital devices and bats. Then, there are other brand names which are operated as wholly owned subsidiaries. Under Nike IHM, the company sells a variety of plastic products. Hurley, another wholly-owned subsidiary brand engages in the design and distribution of youth and sports lifestyle apparel (Nike, 2014). Nike also operates the Brand Jordan, which predominantly focuses on Basketball footwear, apparel and accessories. Moreover, Converse operations, whose results are reported independently, are another of Nike s segments. Converse is involved in the design, distribution and license of casual sneakers and apparel under a number of trademarks such as Converse, All-Star, Star Chevron, and One Star, among others. From the above analysis, it is evident that Nike engages in a vast variety of business activities. This is what makes Nike an industry leader in the sporting world. In the rankings for the World s most valuable sports brand in the year 2013, Nike emerged as the top brand, with a brand value of $17.3 billion (Forbes, 2013). This marked retention of the position on Nike s part. Nike managed to beat other apparel manufacturers such as Adidas, the number three ranked, and Under Armour, the number five ranked. To retain this position, Nike also beat other brands such as ESPN, arguably the world s largest sports channel, which came in second, with a brand value of $15.0 billion (Forbes, 2013). This performance is an indication of the profitability of Nike, which has also been named the most innovative company in 2013 by Fast Company magazine. Page 3 of 36

4 FINANCIAL STABILITY 2011

5 2012 Page 5 of 36

6 2012 (continued) Page 6 of 36

7 2012 (continued) Page 7 of 36

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9 2012 (continued) Page 9 of 36

10 2013 Page 10 of 36

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14 2013 (continued) Page 14 of 36

15 2014 Page 15 of 36

16 2014 Page 16 of 36

17 2014 (Continued) Page 17 of 36

18 2014 (Continued) Page 18 of 36

19 2014 (Continued) Page 19 of 36

20 2015 Page 20 of 36

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23 2015 Page 23 of 36

24 2015 Page 24 of 36

25 2015 Page 25 of 36

26 I FINANCIAL STABILITY Financial data is an important element for any entity, which provides essential information about the strength and efficacy of the company s operations. Financial data is an outcome of the accounting process and is presented in the form of financial statements. Organizational stakeholders, including investors, rely on this data as an analysis tool to make decisions and to assess the firm s plans and performance (Deari, 2010; Healy & Palepu, 2012 ). Much of this information can be obtained from a company s annual report that is usually provided to investors. Aspects of Nike s financial information are discussed in the ensuing sections. The financial data is evaluated, analyzed and interpreted. Nike classifies its sales revenues into local and international categories. For the 2014 fiscal year, Nike and Converse sales in the US contributed to 46% of total revenues with 26 % of these sales from Nike s three largest customers (Nike Inc., 2014). In retrospect, sales from the international category accounted for 54% of Nike s total revenues. In this category, its three largest customers accounted for a total of 6% of its international revenues. These metrics are particularly useful when it comes to a scan of the external environment using tools such as Porter s five forces, one of which is buyers purchasing power. Nonetheless, the focus of this project is on financial data and Nike s financial outlook. One of the financial indicators is operating income, which is the profit an enterprise realizes after deducting operating expenses. It is also referred to as the earnings before interest and tax (EBIT). The operating income is calculated as the difference between gross income and operating expenses as well as depreciation and amortization. Alternatively, the operating income may be Page 26 of 36

27 I FINANCIAL STABILITY obtained by adding interest and tax to the net income. Other aspects of income that provide valuable insight into a company include the income before taxes and net income. Income before tax is basically the operating income less the interest expense, while net income goes a step further to deduct tax. Each of these figures are obtained through a successive deduction in the preceding order. Nike provides each of these figures in its annual report, and these are the figures used herein. For Nike, its gross income was $12,446 million, while its operating expenses, including administrative expenses were $8,766 million. Consequently, its operating income was $12,446 - $8,766, which is $3,680 million. The income before taxes for Nike was $3,544 million while the net income, evaluated after deductions of discontinued operations was $2,693 million. Earnings per share (EPS) indicates the amount of profit allocated to each common share of a company. Nikes EPS for 2014 stood at $3.05 for basic earnings and $2.97 for diluted shares. The other significant component of income allocation and distribution is retained earnings. Retained earnings refer to the portion of profit generated which is not paid out as dividends but instead, retained for reinvestment into the company s core business. It is calculated as follows: retained earnings = starting retained earnings + net income dividends. Nike s retained earnings for 2014 were $4,871. The sales growth rate is an indicator of the rate at which sales of a company are growing. It is a comparative tool that compares the financial results of a company over the years. It is obtained as the quotient of a given year s sales, divided through the previous year s sales, multiplied by 100. The tax rate, on the other hand, represents the rate of taxation applicable to a company. This figure is rather straightforward and does not require calculation. Finally, the dividends payout ratio is a Page 27 of 36

28 I FINANCIAL STABILITY comparative figure that evaluates the dividends paid out to stockholders against the company s net income. It is the quotient of the former divided by the latter. Nike s sales growth rate was evaluated using the figures for revenues. The table below presents a summary of Nike s sales growth rate over the last five years. The effective income tax rate is also provided in the same table. Year Sales growth rate 9.82 % 4.91 % % 9.72 % Income tax rate 24.0% 24.7% 25.0% The final item is the dividends payout ratio. Again, this ratio is obtained by dividing the dividends paid out with the net income. Thus, for 2014, for instance, this ratio was 799/2693, which equals 0.30 for 2013, this ratio was 0.29 while for 2012 the ratio was Further information about Nike s financial status can be obtained from analysis through financial ratios. Liquidity analysis provides an indication as to whether a company is capable of meeting its short-term debt obligations, and is performed through liquidity ratios. The most common ratio is the current ratio (current ratio = current assets / current liabilities). It indicates the ability of the company s assets to pay off current liabilities. A higher ratio is desirable. Nike s current ratio is 2.7 (Nike Inc., 2014). A closely related analysis tool is solvency analysis. Solvency analysis provides an indication of the ability of the firm to attend to its long-term debt obligations. Page 28 of 36

29 I FINANCIAL STABILITY It is determined through solvency ratios, including debt to equity and debt to assets. The debt to equity ratio is derived as the quotient of total debt divided by total equity (Debt to equity = Total debt / Total equity). Unlike the current ratio, here, a lower figure is desired. Nike s debt to equity ratio for 2014 is 1199/10824 = This ratio is very low and thus presents a favorable position of Nike. Capital utilization and profitability ratios are another set of ratios that provide valuable insight into Nike. The return on equity indicates the portion of the net income that is earned on shareholder s equity. It indicates what portion of the profit a company generates from the money invested by shareholders, and is obtained as the quotient of net income divided by shareholder s equity. Nike s ROE for 2014 was 24.6% (Nike Inc., 2014). The return on assets indicates the profit a company generates for every dollar of assets invested (Healy & Palepu, 2012 ). It is a product of the return on sales (net profit margin) and the asset turnover. In its most basic expression, the return on assets is a quotient of the net income divided by assets. Nike s ROA for 2014 stood at 14.9% a decrease from the previous year. Another ratio is the price/earnings (P/E) ratio, which indicates the amount investors are willing to pay for every dollar of reported profits. Nike s P/E ratio for 2014 was Based on the financial analysis, Nike is a good investment option. It has very favorable figures on all financial ratios. Page 29 of 36

30 SECTION VI CONCLUSION Evaluations of Nike s past performance in domestic markets and growing popularity of both individual and team sports, international expansion is the next big thing for Nike. While Adidas currently controls the market in Brazil, Nike should make the move in order to take advantage of air time available during the World Cup and the Summer Olympics. The recent uptick in media coverage of sports and healthy lifestyles is free advertising for the Nike brand. Along with a young, healthy workforce, many of whom are attracted to these sports and lifestyle, a solid workforce will be available. Brazil has recently emerged as a more viable business partner. The country is experiencing more economic diversification and a growing consumer market. Brazil has a population of 208 million with 91.48% adult literacy. Life expectancy in Brazil is 74 years from birth indicating a healthy population in general. The unemployment rate in Brazil is low at 6.8%. Wages continue to rise and foreign investment is high. Brazil has an abundance of semiskilled and unskilled labor but the country experiences considerable bureaucratic interference and regulation, multiple taxes and high taxation rates, and the country has not invested in major infrastructure to support sophisticated manufacturing facilities. Brazil is very inviting to foreign investors and multinational operations. The city of Manaus has a long-term free-trade zone agreement in place until the year Banks in Brazil are among the most solid globally and all the major international banks have operations in the country. Page 30 of 36

31 SECTION VI CONCLUSION The Brazilian government and most states promote new investment in all types of industry. These groups typically work with global corporations to provide assistance for financing and advisory services. At all levels of government including the federal, state, and local, tax incentives are commonly negotiable and often times, granted. Brazil has a large labor force of mostly of semiskilled and unskilled workers which will provide very good workers for the manufacturing of shoes and sportswear. Although this labor force is available and a good fit for Nike manufacturing facilities, Brazil has a large presence of Trade Unions which can be extremely confrontational in labor contract negotiations. Fringe benefits and social security costs are a significant line item in overall labor costs. General Trade Relations for doing business is very good. Brazil is a member of the Latin American Integration Association (ALADI), the World Trade Organization (WTO), formerly the General Agreement on Tariffs and Trade (GATT), and the Common Market of the Southern Cone (MERCOSUR), whose members currently include Brazil, Argentina, Paraguay and Uruguay, with Chile, Bolivia, Peru, Colombia, Ecuador and Venezuela being associated countries. (PwC Report) Under the MERCOSUR treaty agreement, tariffs are abolished; the movement of labor, goods and services is unrestricted; capital investment is encouraged; macroeconomic policy is coordinated; and foreign-trade policies and tariffs for non-member countries are harmonized. In 2011, Brazil exported $642 million in consumer items such as footwear, headgear, and other fashion accessories. This indicates a labor forces accustomed to working with these garments as Page 31 of 36

32 SECTION VI CONCLUSION well as an export system in place for the commodities ( imports/?country=br) Overall, foreign investors looking to invest in real estate for manufacturing facilities have an excellent window of opportunity for an international start up in Brazil. The demographics of Brazil and the current popularity of soccer along with the upcoming Olympic Games provides a renewed market for trendy, high quality, and high performing sportswear. Page 32 of 36

33 SECTION VI CONCLUSION In conclusion, the Task Force for International Expansion recommends opening a facility in Brazil for the manufacturing and distribution of sports shoes and accessories. The low cost of real estate and existing, vacant, manufacturing facilities is the key factor in this recommendation. Although current infrastructure in the region needs improvements, local governments appear eager to partner with our firm. Nike s commitment to bring jobs to the region is playing a large role in negotiating favorable prices for real estate and allowing consideration for tax reductions and rebates. Local union representatives are apprehensive but appear to be willing to cooperate fairly in wage and benefit negations. Based on financial performance over the past five years in all markets, Nike is very profitable. Market share is growing and we are gaining tremendous brand loyalty in the middle age market. As noted in the opening statement, the huge popularity and fan base of soccer outside of the United States along with the upcoming Summer Olympics in South America makes this a perfect time to expand. Brand rollout, real estate acquisition, and labor negotiations should start within the first quarter. The purchase of an existing, abandoned facility will give us speed to market and reduce overall capital expenditure for startup. Anticipated results of this expansion and start up is projected in the following pro forma forecasts for the next five years: Page 33 of 36

34 SECTION VI CONCLUSION NIKE Brazil Operations Pro Forma Income Statement for the Period Ending December 31, 2019 ($ in millions) 19.6 % increase year to year INCOME STATEMENT Forecast sales revenue Credit sales $ 1,475 $ 1,720 $ 2,005 $ 2,338 $ 2,726 Cash sales $ 650 $ 675 $ 720 $ 730 $ 735 Total Sales $ 2,125 $ 2,395 $ 2,725 $ 3,068 $ 3,461 Returns $ (10) $ (10) $ (10) $ (10) $ (10) Net sales revenue $ 2,115 $ 2,385 $ 2,715 $ 3,058 $ 3,451 Cost of goods sold (3% COL increase) Materials $ (250) $ (258) $ (265) $ (273) $ (281) Labor (wages) $ (675) $ (695) $ (716) $ (738) $ (760) Overhead (electric/water) $ (65) $ (67) $ (75) $ (80) $ (85) Total Cost of Goods Sold $ (990) $ (1,020) $ (1,056) $ (1,091) $ (1,126) Depreciation $ (22) $ (22) $ (22) $ (22) $ (22) Selling, general, admin $ (10) $ (11) $ (15) $ (18) $ (20) Operating profits (EBIT) $ 103 $ 312 $ 566 $ 837 $ 1,157 Interest expense $ (33) $ (45) $ (45) $ (45) $ (30) Taxable income $ 70 $ 267 $ 521 $ 792 $ 1,127 Taxes (federal, etc.) $ (32) $ (28) $ (28) $ (28) $ (35) Net Income $ 108 $ 507 $ 1,013 $ 1,555 $ 2,219 Common stock distributions (dividends).64 $ 69 $ 324 $ 649 $ 995 $ 1,420 Retained earnings $ 177 $ 831 $ 1,662 $ 2,551 $ 3,640 Page 34 of 36

35 SECTION VI CONCLUSION NIKE Brazil Operations Pro Forma Income Statement for the Period Ending December 31, 2019 ($ in millions) 19.6 % increase year to year INCOME STATEM Forecast sales revenue Credit sales $ 1,475 $ 1,720 $ 2,005 $ 2,338 $ 2,726 Cash sales $ 650 $ 675 $ 720 $ 730 $ 735 Total Sales $ 2,125 $ 2,395 $ 2,725 $ 3,068 $ 3,461 Returns $ (10) $ (10) $ (10) $ (10) $ (10) Net sales reven $ 2,115 $ 2,385 $ 2,715 $ 3,058 $ 3,451 Cost of goods sold (3% COL increase) Materials $ (250) $ (258) $ (265) $ (273) $ (281) Labor (wages) $ (675) $ (695) $ (716) $ (738) $ (760) Overhead (elect $ (65) $ (67) $ (75) $ (80) $ (85) Total Cost of Goo $ (990) $ (1,020) $ (1,056) $ (1,091) $ (1,126) Depreciation $ (22) $ (22) $ (22) $ (22) $ (22) Selling, general, $ (10) $ (11) $ (15) $ (18) $ (20) Operating profits $ 103 $ 312 $ 566 $ 837 $ 1,157 Interest expense $ (33) $ (45) $ (45) $ (45) $ (30) Taxable income $ 70 $ 267 $ 521 $ 792 $ 1,127 Taxes (federal, et $ (32) $ (28) $ (28) $ (28) $ (35) Net Income $ 108 $ 507 $ 1,013 $ 1,555 $ 2,219 Common stock di $ 69 $ 324 $ 649 $ 995 $ 1,420 Retained earnings $ 177 $ 831 $ 1,662 $ 2,551 $ 3,640 Page 35 of 36

36 SECTION VI CONCLUSION References Deari, 2010; Healy & Palepu, 2012, Business Analysis Valuation: Using Financial Statements, Cengage Learning Page 36 of 36