EXCUTIVE SUMMARY

BACKGROUND

Nike Inc. was founded by Bill Bowerman and Phil Knight in 1964. Within 58 years, the company has transformed its business model to become one of America’s largest corporations. Currently the world’s largest designer, manufacturer and distributor of sports equipment, apparel, footwear, accessories, and other services, the American multinational headquartered in Oregon, United States, has a brand value in excess of $32 billion (Nike Annual Report and Accounts, 2021). Nike Inc. offers six broad product lines. The company partners with independent contractors to outsource all raw materials used in the production process. All manufactured products are primarily marketed and distributed by affiliated retail stores across the world. The company also explores other marketing channels such as independent distributors, digital platforms, sales representatives and licensees (Nike Annual Report and Accounts, 2020).

Between FY2018 and FY2021, Nike Inc reported a significant increase in revenues—from $36.3 billion to $44.5 billion respectively—and net income within the period also skyrocketed from $1.9billion to $5.7billion respectively. However, business financials declined in 2020 due to the outbreak of COVID-19, which slowed production and generally affected global economies. Revenue and net income also maintained a downward slope from 1.87% (2020) to 36.98% (2021).

PURPOSE OF THE REPORT

This paper on Nike Inc’s financial performance aims at analyzing the feasibility of a proposed investment in women’s apparel business, mainly to ascertain the expected return on investment (ROI).

CONCLUSION

ROI is significantly high because guarantees a short payback period, positive NPV and IRR > interest rate. Moreover, sensitivity analysis indicates the proposed investment will provide very wide margins of safety for all simulated variables.

RECOMMENDATIONS

Nike Inc. recognizes the profitability of women’s apparel and currently funds the “Global Women’s Fitness Initiative” to emphasize focus on the market segment. But this business strategy has been ineffective over the years due to lack of data-based analysis and market forecast. Nike sells products that are closely connected and the brand uses cross-promotional ventures (such as international sporting events) to boost sales. Thus, the company drives marginal revenue by producing wholistic products like sports gear, covering apparel and clothing that cut across all demographics (as shown in Appendix 1). The Consultant therefore suggests Nike should increase investment on women’s apparel because the business has proven to be highly profitable in recent years. The company should also maximize debt financing as a preferred strategy because the interest rates are quite low at 3% and the interest cover is 29 times higher (Katie, 2019).

MOTIVATION FOR THE PROPOSED INVESTMENT

Integrating a female demographic in Nike’s business model will significantly increase revenues because some girls/women love sporting activities and feel good wearing sport outfits—even though they do not consider themselves athletic. Women’s apparel has high market appeal. The large number of apparel users also provides a non-traditional advertising opportunity that significantly increases sales. Therefore, focus on women’s apparel would be an effective internationalization and/or globalization strategy for achieving competitive advantage.

Why?

Nike Inc reported a significant drop in net profit between 2019 ($4 billion) and 2020 ($2.5 billion) due to impacts from the global pandemic. Thus, continued decline in net profits highlights a new dimension of risk which can affect visibility in global markets and attainment of business objectives if the investment proposal is ignored.

How?

Low profits caused by the pandemic led to workforce downsizing and temporary closure of Nike Inc’s physical stores. The lockdown of international airports, shipping ports and national borders disrupted supply chain activities, too. Social distancing also limited purchase at physical stores. Although the company financials showed signs of recovery in 2021 with $5.7 billion reported as profit, there is need to sustain productivity and competitiveness against market shocks from various economic and demographic factors (Nike, 2020).

Value Proposition

Nike incurs huge ads and administrative expenses to maintain brand visibility at the global stage. The company recognizes that “health is wealth” and is focused on exploring innovation management and other digital capabilities in product development. In 2019, CEO Mark Parker announced 35% growth in women’s product segment with highlight on the physical, mental and emotional benefits of physical activities. The evolution in women’s apparel keys into widespread campaigns for an active, healthy lifestyle among all age brackets—including pregnant women.

Women’s apparel is a fast-growing market segment with high ROI. Nike’s collection of athletic gear, sports bras, tights and other apparels is expected to add some billions to annual sales. The new designs in bright colours and black basics are worth about $10bn today and should explored to sustain profits (John, 2014)

APPRAISAL OF THE PROPOSED INVESTMENT

The Consultant proposes and initial investment valued at $7.3 billion. The amount should be spent on establishing/outfitting a new factory for the production of women sporting wears. The capital outlay and expected inflow for the proposed investment are as follows:

As at FY2021, Nike Inc has an estimated cost of capital valued at 3% based on the effective interest rate.

The importance of appraising viability of proposed investments for a large corporation like Nike Inc cannot be overemphasized. Payback Period (PP), Accounting Rate of Return (ARR) and Discounted Cash Flow (DCF) are the widely used evaluation metrics for capital investment decisions. DCF is further divided into Internal Rate of Return (IRR) and Net Present Value (NPV) (Bamber & Parry, 2014).

Payback Period

The payback period provides insight into the timeline (expressed in years) when a capital investment can generate enough revenues to recover the initial capital outlay.

The table above shows that Nike’s investment in women’s apparel will achieve a positive net cash flow after three years and before the end of its fourth year. The payback period of 3.76 years and huge profit margins make this investment project very attractive.

The Net Present Value (NPV)

Porterfield (1965) described NPV as a discounted cashflow method of analyzing capital investment with focus on the time value of money. NPV is based on the assumption that bigger cash flows are better than smaller ones and earlier cash flows are better than later ones. Basically, the statistical tool helps to ascertain value to be created by undertaking a given investment project. The NPV is calculated as the difference between the present value of cash inflows and the present values of total cash outflow. Therefore, when the NPV is positive, it means the inflow is higher than the outflow and this highlights the viability of an investment project.

Further, the table below indicates NPV of the proposed investment in women’s apparel is $1.292 Billion after 5 years—a pointer to the profitability of proposed investment.

The Internal Rate of Return (IRR)

IRR refers to the rate of return that equates the investment outlay (outflows) with the present value of all inflows. In other words, IRR is the rate of return that makes the NPV = 0. Therefore, when the rate of return is higher than the IRR, the project will yield a negative NPV, and hence, unprofitable. Based on this, Nike Inc’ robust risk management mechanisms and the maximum interest rate payable on debt financing can be leveraged to achieve competitiveness and sustainable profits (Pandey, 2005).

Manipulation of the Excel template as shown in the table above reveals the NPV of proposed investment to be zero when cost of capital cost is at 15.5%. The investment is therefore viable because Nike Inc. has a strong financial base to fund it, as well as a market appeal to recover from loans with interest rate as high as the IRR value of 15.5% Additionally, Nike Inc. can offset the loan from net cashflows and still make profits because IRR on the project (15.5%) exceeds initial capita cost of (3%).

PESTEL ANALYSIS.

To ascertain the feasibility of this report, it is important to analyze the political, economic, social, technological, environmental and legal (PESTEL) factors present in the external business environment.

Political: Some identified factors influencing Nike’s global dominance and profitability are government legislations on quality standards and licensing. Changing regulations in the manufacturing industry as well as Nike’s environmental, social and governance (ESG) impact will therefore determine the success or failure of its global expansion project. For example, violation of local or international regulations on human rights and environmental sustainability can lead to costly lawsuits and fines.

Economic Factors: Manufacturing business is a capital-intensive project and profits are largely influenced by expenditure on loyalty cards and community development programmed. Other factors include customers’ purchasing power, inflation, taxation, and attractiveness for investors (i.e. shareholders and partners). Focus on niche market (women’s apparel) and cost differential can increase ROI.
Technological: An increased investment in innovation and digital capabilities is a necessity for achieving competitive advantage in the manufacturing industry. But the huge cost of technology acquisition and the challenge of diffusing technology in business activities are some of the technology-based concerns.

Social: Globalization of business demands consideration for the culture and traditions, including beliefs, moral values and religious background of customers. While businesses are allowed to use aggressive marketing in TV, billboard and print media ads, it is worth noting that what is considered acceptable in one location or for a customer segment may be offensive and unacceptable to others. This highlights the need to integrate societal values, perceptions, preferences and behaviors in the decision-making process.

Environmental: Although Nike Inc lays claims to operating a sustainable business ESG impact, the TV broadcasting project might face litigations related to how it sources raw materials or disposes waste products. Commitment to environmental sustainability is a key factor to business growth.

Legal: The manufacturing industry is highly regulated by governmental laws, particularly on copyright issues, patents protection, and character defamation that are subject to costly lawsuits if neglected.

SWOT ANALYSIS

RISK ASSESSMENT

Business risk means the possibility an expected ROI would not be actualized due to certain factors. In this context, the return means the NPV of Nike Inc’s investment that will increase ROCE from 48.8% to 72%, ROA from 15.77% to 19.7%, and net profit margin from 12.85% to 15.61%. (All initial ratios were computed from Nike Inc 2021 annual reports).

Risk assessment is conducted by simulating the extent to which various factors that influence the NPV (that is, cash inflow, cash outflow and cost of capital) would have to change for the NPV to become zero or negative thereby affecting the expected ROCE, ROA and Net profit margin of the proposed investment. The table below shows result from the simulations.

Sensitivity to the cost of capital for Nike Inc’s project

As shown in the table above, an 417% rise in interest rate (from 3% to 15.5%) will yield a negative NPV. This level of increase in interest rates will reduce Nike’s ROE from 44.86% to 29.7% and the company’s interest cover from 29 times to 6.64 times.

Sensitivity to the project cost

Table above shows the proposed investment will yield a negative NPV if implementation costs increases by 18%. Where the increased costs were incurred from additional investment in assets, a 44% increase in the project costs will reduce Nike’s projected ROA to 13.7%.

The Consultant does not expect inflation rate or other factors to cause such a massive increase in projected costs.

Sensitivity of NPV to the project benefit (cash inflows)

Table above indicates there will be a negative NPV if projected cash inflows from women’s apparel business decline by 15.3% (to 84.7% of its present value). Likewise, a 15.3% decrease in projected cash inflows will lower projected net profit margin from 15.61% to 13.08%.

In conclusion, discounted payback period of the investment is approximately 4 years, thus, this relatively short timeframe makes the project acceptable.

REFERENCES
Bamber, M. and Parry, S. (2014). Accounting and Finance for Managers. [e-book) London: Kogan Page. Available through: Anglia Ruskin University Library http://libweb.anglia.ac.uk
John K. (2014). Nike makes a big push into the fast-growing women’s segment. Fortune. https://fortune.com/2014/10/22/nike-women-business/
Katie D. (2019). Women’s World Cup investment as sales jump 7%. The Drum. https://www.thedrum.com/news/2019/09/26/nike-reports-payoff-women-s-world-cup-investment-sales-jump-7
Nike Inc. (2020). Nike statement on COVID-1, viewed 5th May 2022, https://news.nike.com/news/nike-coronavirus-statement Nike Statement on COVID-19
Nike Inc. (2021). Annual report and accounts. Retrieved from https://s1.q4cdn.com/806093406 /files /doc_financials/2019/annual/nike-2019-form-10K.pdf
Pandey I. M (2005). Financial Management. Ninth edition. Vikas publishing house PVT ltd, New Delhi
Porterfield, J. T. (1965). Investment Decisions and Capital Costs. Prentice hall, 1965
Rothaermel, F. (2017). Strategic Management. 3rd Ed. New York: McGraw Hill.
Statista (2022). Nike’s wholesale revenue worldwide from 2017 to 2021, by customer segment. https://www.statista.com/statistics/888763/nikes-revenue-by-customer-segment-worldwide/

APPENDIX 1: NIKE’S REVENUES BASED ON GENDER (2014-2021)
*Amounts are in $ millions

Source: Statista (2022)
Nike in 2021 generated $18,883m as profit from selling men’s products compared to $16,694m in 2020. Profit realized from women’s products also increased from $6,999m in 2020 to $8,555m in 2021.