NIKE Inc.

Introduction to company

Nike incorporated its business in 1968. Nike designs, develops, and markets athletic footwear, apparel, equipment, and accessory products. The products that Nike produces are sold in Nike owned stores and independently owned distributors all over the world. Nike sells performance products for virtually every sport. The company produces almost all of its products using independent contractors. All footwear and apparel products or produced outside the United States, while equipment and accessory products are produced in the U.S. and in other countries. Nike Inc. also owns other brand names such as Hurley, Bauer, and Converse.

Strengths, Weaknesses, Opportunities, and Threats

Perceived by the company’s management-Strengths- President and CEO Mark Porter says the Nike’s ability to innovate is the key factor in the overall success in Nike. Innovations in the soccer and golf departments have led Nike to be at the top of the list in both categories. Weaknesses- In the annual report, the ability to predict changes in the market is Nike’s biggest weakness. Things such as seasonal preference, popularity, and demand are hard to predict and are the main focus for improvement for Nike. Opportunities- In the letter the shareholders written by the President of Nike, he says that one huge opportunity is in Nikes sister brands such as Hurley, Bauer, and Converse. These brands can contribute immensely to the growth and success of Nike. Threats- The main threats to the Nike Corporation are the intense competition it receives in the United States and all over the world. The athletic industry is so huge that it is very hard to be competitive and stay competitive.

Perceived by the outside world- Strengths-Nike is a very competitive company. It is a leader in all the industries that its products are in. It does not use factories for production. Therefore, Nike has no money invested in buildings or manufacturing workers. The research and development team at Nike is very strong, innovating products so that they are of the highest quality and lowest prices available. Most important, Nike is a global brand, its logo is recognizable everywhere and it is the leading sports brand in the world.

Weaknesses- Nike’s revenue depends heavily on its footwear department. So, if its market share decreases, it might result in other products that Nike offers suffering. Also, most of Nike’s income comes from retail stores, so when competition forces prices lower, pressure is put on Nike to lower its prices to the retail stores. Opportunities- Nike was once just an athletic brand, but now it is becoming a fashion brand. The company could start producing products such as jewelry to gain high profits. Also, Nike’s global brand will allow it to expand into countries such as China and India, which have increasing populations. Threats- The fact that Nike trades with so many different countries and currencies, a profit in one country could be a loss in another. Price sensitivity and global competition are also huge threats to Nike.

2006 Ratios

Comparison of the Company vs. Industry Ratios

Valuation Ratios

            From the information above for the valuation ratios for Nike compared to its competition in the industry, it is clear the Nike is very competitive with all of its competitors. The price per earnings, prices to book, and price to free cash flow ratios show that Nike is either above average or very close to being above average in all of the valuation ratios taken into consideration. The industry ratios are an average of all the companies that produce and sell the same types of products that Nike does. The data shows that Nike is doing very well in this area. Also, looking at the high and low price per earnings ratio for the last five years for Nike compared to the industry shows that Nike has been right on par with the competition in the past as well as the present. In looking at the valuation ratios for Nike and its competitors, it is clear that Nike is very competitive in its industry.

Profitability Ratios

            The gross margin ratio tells us about the cost of production in relation to the selling price of merchandise. The gross margin ratio for Nike is just slightly below the industry average. So, the cost of making products and selling price of products for Nike are on par with the competition. The operating margin shows the amount of sales dollars left over after production costs. Again, Nike is slightly below the industry average but still highly competitive. The profit margin for Nike is also almost even with the industry. This shows how much profit comes out of sales. In this cast, both Nike and the industry are making minimal profits compared to sales dollars.

Effectiveness Ratios

            At present, Nike’s return on assets and return on equity are a little below average. However, the five year averages of these two ratios show that Nike has been doing better than its competition. The return on assets ratio for Nike shows that the company is growing fast and earning good profits from all of its assets. The return on equity for Nike shows that the stockholders are doing well from Nike, and the Nike is doing well from its stockholders.

Efficiency Ratios

            The receivable turnover for Nike shows that they collect outstanding dept from its customers almost seven times a year. This is below average compared to the industry. Although it does not indicate that Nike is doing badly, it should still want to get this number as high as possible. Nike’s inventory turnover for this year is slightly above average compared to the industry. This shows that Nike is doing well managing its inventory levels, which looks very attractive to potential investors. The asset turnover ratio for Nike shows that it is using its assets well to generate sales dollars. The ratio is slightly below the average, but overall it is doing really well compared to other industries.

Comparison of Prior Year Ratios

            When comparing Nike to itself over the past years, I will look at the major groups of ratios to compare to; profitability ratios, leverage ratios, efficiency ratios, and different measures of liquidity.

            Profitability ratios show how good or bad the company uses its resources to generate profit. To measure profitability, profit margin, return on assets, and return on equity are used. All three of these measures are above the average taken from the past five years. This shows that Nike has used its assets, equity, and operating costs effectively in gaining more profit gradually over the years.

            Leverage ratios are used to show the financial strength of a company. These ratios involve looking at the long term and total dept compared to equity. Nike shows decreasing numbers over the past three years in both ratios. This shows that Nike is gaining more money over time to pay off dept.

            Efficiency or turnover ratios show how quickly a company collects debt from customers and how fast it can sell its entire inventory and restock. Nike has increasing receivables turnover which means that it is collecting dept faster and faster. The inventory turnover is decreasing, but not by a lot. These ratios show that Nike is doing better in collecting its money, but a little slower on selling inventory over the past three years.

            Liquidity shows how fast a company can turn assets into cash. To measure liquidity, the quick ratio, current ratio, and net working capital to sales ratio can be used. These three ratios show that Nike is doing well in turning its assets into cash. From 2004 to 2006, Nike went up and then back down. The ratios show that 2005 was an above average year for Nike. Even though the numbers went down a little in 2006, they are still right on average with overall numbers.

            Overall, when compared to the industry, Nike is doing well as a company. After comparing the ratios, it is clear that Nike is constantly growing. All of the ratios are either slightly below industry averages, or above average. It seems to me that Nike has only been average this year as a company, but when looking at past numbers, I know that Nike will continue to be highly competitive and very threatening to others in the industry. After reviewing this information, it is clear that purchasing stock from Nike would be a great idea and would turn out to be a prosperous investment.