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  Brand Equity

 

Nike: Building a Global

brand

  Case analysis

Akshay sashikumar

10/02/2012

 

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Nike, Inc. 

is a major publicly traded sportswear and equipment supplier based in the United States.

 The company is headquartered near Beaverton, Oregon, in the Portland metropolitan area. It

is the world's leading supplier of athletic shoes and apparel and a major manufacturer

of sports equipment, with revenue in excess of US$18.6 billion in its fiscal year 2008 (endingMay 31, 2008). As of 2008, it employed more than 30,000 people worldwide. Nike

and Precision Castparts are the only Fortune 500 companies headquartered in the state of 

Oregon, according to The Oregonian.

 The company was founded on January 25, 1964 as Blue Ribbon Sports by Bill

Bowerman and Philip Knight, and officially became Nike, Inc. on May 30, 1978. The company

takes its name from Nike (Greek Νίκη, pronounced [nǐːkɛː]), the Greek goddess of victory.

Nike markets its products under its own brand, as well as Nike Golf, Nike Pro, Nike+, Air

 Jordan, Nike Skateboarding, and subsidiaries including Cole Haan, Hurley

International, Umbro and Converse. Nike also owned Bauer Hockey (later renamed Nike

Bauer) between 1995 and 2008.  In addition to manufacturing sportswear and equipment,

the company operates retail stores under the Niketown name. Nike sponsors many high

profile athletes and sports teams around the world, with the highly recognized trademarks of 

"Just do it" and the Swoosh logo.

Nike, Inc.

Type Public company

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Traded as NYSE: NKE

S&P 500 Component

Industry Apparels, accessories

Founded 1964 (as Blue Ribbon Sports)[1]

Founder(s) Bill Bowerman

Philip Knight

Headquarters Washington County, Oregon, United States

(Near  Beaverton, Oregon)

Area served Worldwide

Key people Philip Knight

(Chairman)

Mark Parker 

(President and CEO)

Products Athletic footwear  and apparel,sport

equipments and other athletic and

recreational products

Revenue US$ 19.014 billion (FY 2010)[2]

Operating

income

US$ 2.517 billion (FY 2010)[2]

Net income US$ 1.907 billion (FY 2010)[2]

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Total assets US$ 14.419 billion (FY 2010)[2]

Total equity US$ 9.754 billion (FY 2010)[2]

Employees 34,400 (May 2010)[2]

Website Nike.com

PRODUCTS

Nike produces a wide range of sports equipment. Their first products were track running

shoes. They currently also make shoes, jerseys, shorts, baselayers, etc. for a wide range of 

sports, including track and field, baseball, ice hockey, tennis, association football

(soccer), lacrosse, basketball, and cricket. Nike Air Max is a line of shoes first released by

Nike, Inc. in 1987. The most recent additions to their line are the Nike 6.0, Nike NYX,

and Nike SB shoes, designed for skateboarding. Nike has recently introduced cricket shoescalled Air Zoom Yorker, designed to be 30% lighter than their competitors'. In 2008, Nike

introduced the Air Jordan XX3, a high-performance basketball shoe designed with the

environment in mind.

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Nike sells an assortment of products, including shoes and apparel for sports activities like

association football basketball, running, combat sports, tennis,American football, athletics,

golf, and cross training for men, women, and children. Nike also sells shoes for outdoor

activities such as tennis, golf,skateboarding, association football, baseball, American

football, cycling, volleyball, wrestling, cheerleading, aquatic activities, auto racing, and other

athletic and recreational uses. Nike is well known and popular in youth culture, chav culture

and hip hop culture for their supplying of urban fashion clothing.

Nike recently teamed up with Apple Inc. to produce the Nike+ product that monitors a

runner's performance via a radio device in the shoe that links to the iPod nano. While the

product generates useful statistics, it has been criticized by researchers who were able to

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identify users' RFID devices from 60 feet (18 m) away using small, concealable

intelligence motes in a wireless sensor network.

HEADQUATERSNike's world headquarters are surrounded by the city of Beaverton, but are

within unincorporated Washington County. The city attempted to forcibly annex Nike's

headquarters, which led to a lawsuit by Nike, and lobbying by the company that ultimately

ended in Oregon Senate Bill 887 of 2005. Under that bill's terms, Beaverton is specifically

barred from forcibly annexing the land that Nike and Columbia occupy in Washington

County for 35 years, while Electro Scientific Industries and Tektronix receive the same

protection for 30 years

MANUFACTURING

Nike has contracted with more than 700 shops around the world and has offices located in

45 countries outside the United States.Most of the factories are located in Asia, including

Indonesia, China, Taiwan, India], Thailand, Vietnam, Pakistan, Philippines, and Malaysia. Nike

is hesitant to disclose information about the contract companies it works with. However, due

to harsh criticism from some organizations like CorpWatch, Nike has disclosed information

about its contract factories in its Corporate Governance Report.

ENVIORNMENTAL RECORD

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According to the New England-based environmental organization Clean Air-Cool Planet, Nike

ranks among the top three companies (out of 56) in a survey of climate-friendly

companies. Nike has also been praised for its Nike Grind program (which closes the product

lifecycle) by groups like Climate Counts. One campaign that Nike began for Earth Day 2008was a commercial that featured basketball star Steve Nash wearing Nike's Trash Talk Shoe,

which had been constructed in February 2008 from pieces of leather and synthetic leather

waste from factory floors. The Trash Talk Shoe also featured a sole composed of ground-up

rubber from a shoe recycling program. Nike claims this is the first performance basketball

shoe that has been created from manufacturing waste, but it only produced 5,000 pairs for

sale.

Another project Nike has begun is called Nike's Reuse-A-Shoe program. This program,

started in 1993, is Nike's longest-running program that benefits both the environment and

the community by collecting old athletic shoes of any type in order to process and recycle

them. The material that is produced is then used to help create sports surfaces such as

basketball courts, running tracks, and playgrounds.

A project through the University of North Carolina at Chapel Hill found workers were exposed

to toxic isocyanides and other chemicals in footwear factories in Thailand. In addition to

inhalation, dermal exposure was the biggest problem found. This could result in allergic

reactions including asthmatic reactions

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NIKE, Inc.’s wholly-owned affiliates

 

NIKE, Inc.’s wholly-owned affiliates, reported as

Other Businesses – Cole Haan, Converse, Inc.,Hurley International, LLC, NIKE Golf, and Umbro,Ltd. – play a significant role in our future growth

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plans. At the end of fiscal 2011, NIKE, Inc.’s affiliatebusinesses contributed approximately $2.7 billionof the company’s $20.9 billion in revenue. As partof our growth strategy, we continue to invest inopportunities that will generate the highestpossible long-term returns.

.

COLE HAAN

Cole Haan, a wholly-owned subsidiary of NIKE, Inc., is one of America’s leading luxurybrands, offering high-quality men’s and women’s footwear, accessories and outerwear. Eachproduct blends craftsmanship, design and innovation to give it distinctive character andstyle. Cole Haan operates more than 180 retail locations throughout the United States,Canada, the Middle East and Asia. Cole Haan is headquartered in New York City and

 Yarmouth, Maine. Cole Haan realized $518 million in sales in fiscal 2011. For moreinformation on Cole Haan and the company's latest collections, please

visitwww.colehaan.com.

CONVERSE, INC.

Converse, Inc., established in 1908 and based in North Andover, Massachusetts, has built areputation as “America’s Original Sports Company”™ and has been associated with a richheritage of legendary shoes such as the Chuck Taylor® All Star® shoe, the Jack Purcell®shoe and the One Star® shoe. Today, Converse offers a diverse portfolio including premiumlifestyle men's and women's footwear and apparel. Converse product is sold globally by

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retailers in over 160 countries and through more than 50 company-owned retail locations.Converse realized $1.1 billion in reported revenue in fiscal 2011. For more information onConverse and the company's latest collections, please visit www.converse.com.

HURLEY INTERNATIONAL, LLC

Headquartered in Costa Mesa, California, Hurley International LLC designs and distributes aline of action sports apparel for surfing, skateboarding and youth lifestyle apparel andfootwear under the Hurley brand name. Hurley realized $252 million in reported revenue infiscal 2011. For more information on Hurley and the company's latest collections, pleasevisit www.hurley.com.

 JORDAN BRAND

A division of NIKE, Inc., Jordan Brand is a premium brand of footwear, apparel andaccessories inspired by the dynamic legacy, vision and direct involvement of Michael Jordan.

 The Jordan Brand made its debut in 1997 and has grown into a complete collection of performance and lifestyle products. The Jordan Brand remains active in the communitythrough its WINGS for the Future program serving three pillars of community investment—Education, Sport and Creativity. For more information on Jordan Brand,

visit www.Jumpman23.com.

NIKE GOLF

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Located at NIKE’s World Headquarters in Beaverton, Oregon,

Nike Golf designs and markets golf equipment, apparel, balls, footwear, bags and

accessories worldwide. Nike Golf is passionately dedicated to ushering in the future of this

great sport by developing ground-breaking innovations that enable and inspire athletes to

become better. Nike Golf realized $623 million in reported revenue in fiscal 2011. For more

information on Nike Golf and the latest collections, please visit www.nikegolf.com.

UMBRO, LTD.

Founded in 1924 and headquartered in Manchester, England. Umbro, Ltd. designs,distributes, and licenses athletic and casual footwear, apparel and equipment, primarily forthe sport of football (soccer), under the Umbro trademarks. Umbro Ltd. has been associatedwith football since the 1930s and its relationship with leading national teams and

professional clubs includes exclusive endorsements and distribution rights for playing kit,apparel and equipment, including playing and training kits for England’s National Team.Umbro realized $224 million in sales in fiscal 2011. For more information on Umbro and thecompany's latest collections, please visit www.umbro.com.

Marketing Strategy

Nike promotes its products by sponsorship agreements with celebrity athletes, professional

teams and college athletic teams. However, Nike's marketing mix contains many elements

besides promotion. These are summarized below.

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Market SegmentationMost of the consumers of Nike’s products are mainly sportsmen. This is so because of the

utility that comes with the products. An athlete is more likely to go a sports shoe designed

and marketed by Nike more than a person who detests sporting and exercises. Nike targetsthese consumers by agreements between Nike and athletic teams, college’s athletic teams1

etc for product sponsorship and eventual promotion to the members of these teams. In this

way, Nike is able to reach a wide number of consumers and consumers who are more likely

to buy. Even though others are likely to buy the products, Nike pays specific emphatic

targeting to the athlete more than any group of individuals even though it also targets the

youth who have embraced the hip hop culture .

 Targeting strategies

Nike lays a number of strategies to target their immediate consumers; athletes and other

sportsmen. The targeting strategies include among others the sponsorship of products by

professional athletic teams, celebrity athletes and college athletic teams. This strategy is

specifically successful because of its ability to reach a large number of athletes. If the

athletic team manager prescribes a specific type of track shoes made by Nike, the trainees

have no option other than to buy them. The teams can as well buy the track shoes in bulky

and supply them to the team members.

 The second strategy that Nike applies is the designing of product destination. It does this by

associating success with the product. For example, when a celebrity athlete sponsors a

specific brand of athletic shoes, the brand will be associated with success. This

psychological effect is reinforced with advertisements that affirm this position.

Finally, Nike targets the consumers who are likely to develop product intimacy; those who

care more about the utility and quality of the product than the price. In this way, the pricing

is not affected too much in a bid to accommodate a large number of consumers.

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Pricing StrategiesAs stated in the foregoing section, Nike targets the consumers who embrace product

intimacy and thus care less about the product. This has enables Nike to set relatively higherprices than its competitors. This is a strategy that calls for higher pricing points so as to

push the perceived product value. It has been established that consumers who consider a

product to be of high quality are likely to pay the high price more often and consistently.

Once consumers develop product intimacy, they come to associate their person with the

product and will pay whatever price quoted on the product provided it has the Nike logo on

it.

Another very important thing to note is the fact that Nike uses the vertical integration

pricing strategy in which they take ownership of the participants at channel levels that differ

and they also engage in multifarious channel level operations both in a bid to control costs

and thus influence pricing function.

Distribution StrategiesDistribution strategies embraced by an organization can either give them an edge in market

or make them lag behind the winners in the market. The more efficient the product

distribution is the more sales and thus more profits. The delivery of the right product and at

the right time to the consumer not only effects utility but also leads to high degree of 

consumer satisfaction and loyalty. Nike distributes its products on level basis. The high

priced premium products are given to certain distributors while leaving the low priced to be

sold at highly discounted prices at mega retail stores such as Wal-Mart. Whereas Reebok

embraced a limited distribution strategy Nike ventured more into a global market

capitalization.

Promotional and Communication StrategiesApart from Nike selling quality products which have lead to a high degree of customer

loyalty, the promotional strategies that the company employs are simply superb. Nike has

contracted a number of professional and celebrity athletes which have managed to draw a

considerable attention to their products. Some of the sportsmen signed by Nike include

soccer stars such as Ronaldinho, Ronaldo and Roberto Carlos, Basket ballers such as

 Jermaine O'Neal and Lebron James, triathlete Lance Armstrong and golf superstar Tiger

Woods. This has created a relatively high degree of Nike products’ awareness. Besides the

signing of celebrity sportsmen to promote their products, Nike has also employed a great

deal of advertisements through the mass media. Nike employs a selective- demand

advertisement focused on the high priced shoes used for traditional sports.

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Advertising

In 1982, Nike aired its first national television ads, created by newly formed ad

agency Wieden+Kennedy (W+K), during the broadcast of the New York Marathon. This wasthe beginning of a successful partnership between Nike and W+K that remains intact today.

 The Cannes Advertising Festival has named Nike its Advertiser of the Year in 1994 and 2003,

making it the first and only company to receive that honor twice.[ 

Nike also has earned the Emmy Award for best commercial twice since the award was first

created in the 1990s. The first was for "The Morning After," a satirical look at what a runner

might face on the morning of January 1, 2000 if every dire prediction about the Y2K 

problem came to fruition. The second was for a 2002 spot called "Move," which featured a

series of famous and everyday athletes in a variety of athletic pursuits.

Beatles song

Nike was the focus of criticism for its use of the Beatles song "Revolution" in a 1987

commercial, against the wishes of Apple Records, the Beatles' recording company. Nike paid

$250,000 to Capitol Records Inc., which held the North American licensing rights to the

Beatles' recordings, for the right to use the Beatles' rendition for a year.

Apple sued Nike Inc., Capitol Records Inc., EMI Records Inc. and Wieden+Kennedy

advertising agency for $15 million. Capitol-EMI countered by saying the lawsuit was

'groundless' because Capitol had licensed the use of "Revolution" with the "active support

and encouragement of Yoko Ono Lennon, a shareholder and director of Apple."

According to a November 9, 1989 article in the Los Angeles Daily News, "a tangle of lawsuitsbetween the Beatles and their American and British record companies has been settled."

One condition of the out-of-court settlement was that terms of the agreement would be kept

secret. The settlement was reached among the three parties involved: George Harrison, Paul

McCartney, Ringo Starr; Yoko Ono; and Apple, EMI and Capitol Records. A spokesman for

 Yoko Ono noted, "It's such a confusing myriad of issues that even people who have been

close to the principals have a difficult time grasping it. Attorneys on both sides of the

Atlantic have probably put their children through college on this."

Nike discontinued airing ads featuring "Revolution" in March 1988. Yoko Ono later gave

permission to Nike to use John Lennon's "Instant Karma" in another advertisement.

Minor Threat advertisement

In late June 2005, Nike received criticism from Ian MacKaye, owner of Dischord Records,

guitarist/vocalist for Fugazi & The Evens, and front-man of defunct punk band Minor Threat,

for appropriating imagery and text from Minor Threat's 1981 self-titled album's cover art in a

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flyer promoting Nike Skateboarding's 2005 East Coast demo tour.

On June 27, Nike Skateboarding's website issued an apology to Dischord, Minor Threat, and

fans of both and announced that they tried to remove and dispose of all flyers. They state

that the people who designed it were skateboarders and Minor Threat fans themselves whocreated the advertisement out of respect and appreciation for the band. The dispute was

eventually settled out of court between Nike & Minor Threat. The exact details of the

settlement have never been disclosed.

Chinese-themed advertisement

In 2004, an ad about LeBron James beating cartoon martial arts masters and slaying a

Chinese dragon in martial arts offended Chinese authorities, who called the ad blasphemous

and insulting to national dignity and the dragon. The advertisement was later banned in

China. In early 2007 the ad was reinstated in China for unknown reasons.

Sponsorship

Nike pays top athletes in many different sports to use their products and promote/advertise

their technology and design.

Nike's first professional athlete endorser was Romanian tennis player Ilie N?stase, and the

company's first track endorser was distance running legend Steve Prefontaine. Prefontaine

was the prized pupil of the company's co-founder Bill Bowerman while he coached at the

University of Oregon. Today, the Steve Prefontaine Building is named in his honor at Nike's

corporate headquarters.

Besides Prefontaine, Nike has sponsored many other successful track & field athletes over

the years such as Carl Lewis, Jackie Joyner-Kersee and Sebastian Coe. However, it was the

signing of basketball player Michael Jordan in 1984, with his subsequent promotion of Nike

over the course of his storied career with Spike Lee as Mars Blackmon, that proved to be

one of the biggest boosts to Nike's publicity and sales.

During the past 20 years especially, Nike has been one of the major clothing/footwear

sponsors for leading tennis players. Some of the more successful tennis players currently or

formerly sponsored by Nike include: James Blake, Jim Courier, Roger Federer, Lleyton Hewitt,

 Juan Martín del Potro, Andre Agassi, Rafael Nadal, Pete Sampras, Marion Bartoli, Lindsay

Davenport, Daniela Hantuchová, Mary Pierce, Maria Sharapova, Serena Williams.

Nike is also the official kit sponsor for the Indian cricket team for 5 years, from 2006 till end

of 2010. Nike beat Adidas and Puma by bidding highest (US$43 Million total).

Nike also sponsors some of the leading clubs in world football, such as the Brazil National

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 Team, Portugal National Team, Netherlands National Team, US National Team, Manchester

United, Arsenal, FC Barcelona, Inter Milan, Juventus, Shakhtar, Porto, Steaua, Red Star, Boca

 Juniors, Corinthians, Club América, Aston Villa, Celtic and PSV Eindhoven. Nike will also

sponsor Dundee United from summer 2009.

Nike sponsors several of the world's top golf players, including Tiger Woods, Trevor

Immelman and Paul Casey.

Nike also sponsors various minor events including Hoop It Up (high school basketball) and

 The Golden West Invitational (high school track and field). Nike uses web sites as a

promotional tool to cover these events. Nike also has several websites for individual sports,

including nikebasketball.com, nikefootball.com, and nikerunning.com. By nike outlet.

Nike’s “Just Do It” Advertising Campaign 

According to Nike company lore, one of the most famous and easily recognized slogans in

advertising history was coined at a 1988 meeting of Nike’s ad agency Wieden and Kennedy

and a group of Nike employees. Dan Weiden, speaking admiringly of Nike’s can-do attitude,

reportedly said, “You Nike guys, you just do it.” The rest, as they say, is (advertising)history.

After stumbling badly against archrival Reebok in the 1980s, Nike rose about as high and

fast in the ‘90s as any company can. It took on a new religion of brand consciousness and

broke advertising sound barriers with its indelible Swoosh, “Just Do It” slogan and deified

sports figures. Nike managed the deftest of marketing tricks: to be both anti-establishment

and mass market, to the tune of $9.2 billion dollars in sales in 1997.

—Jolie Soloman “When Nike Goes Cold” Newsweek, March 30, 1998

 The Nike brand has become so strong as to place it in the rarified air of recession-proof 

consumer branded giants, in the company of CocaCola, Gillette and Proctor & Gamble.Brand management is one of Nike’s many strengths. Consumers are willing to pay more for

brands that they judge to be superior in quality, style and reliability. A strong brand allows

its owner to expand market share, command higher prices and generate more revenue than

its competitors. With its “Just Do It” campaign and strong product, Nike was able to increase

its share of the domestic sport-shoe business from 18 percent to 43 percent, from $877

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million in worldwide sales to $9.2 billion in the ten years between 1988 and 1998. Nike spent

$300 million on overseas advertising alone; most of it centered around the “Just Do It”

campaign. The success of the campaign is that much more remarkable when one considers

that an estimated 80 percent of the sneakers sold in the U.S. are never used for theactivities for which they have been designed. Nike’s marketing tactics in the ‘80s, and in

particular its campaign against Reebok, gambled on the idea that the public would accept

sneakers as fashion statements. Nike later cashed in on the jogging/fitness craze of the mid

1980s, during which its “Just Do It” campaign expanded to attract the female and teenage

consumer, in addition to the stalwart 18 – 40-year-old male consumer. (Nike was losing

ground to Reebok during this time, thanks to the explosion of aerobics.) Phil Knight, the

founder and CEO of Nike, suffused his company and ads with the idea of the intense,

inwardly focused competitor. The ads rarely focused on the product itself, but on the person

wearing the product. Heroes and hero worship abound on the Nike campus in Beaverton,

Oregon. The “Just Do It” campaign seemed to capture the corporate philosophy of grit,

determination and passion, but also infused it with something hitherto unknown in Nike ads—humor. Nike had always been known for its “detached, determined, unsentimental”

attitude. “In a word, [Nike is] cool.” The new ads retained that attitude, but several of the

original 12 “Just Do It” ads incorporate jokes, explicit and implicit, to make their point. The

Bo Jackson ad stands out. Jackson is seen working out at several different activities, joking

while on a bike machine, “Now when is that Tour de France thing?” and after slam dunking a

basketball contemplates “Air Bo.” “I like the sound of that,” he says. The “Just Do It”

campaign received mixed ratings, ranging from “an instant classic” to “sociopathic.” One

critic went so far as to say the ads were “an impatient bordering-on-contemptuous

exhortation to the masses. Cool is one thing.Poverty of warmth is another.” Eventually the

campaign was credited with embracing not just resolve and purpose, but also the “beauty,

drama and moral uplift of sport—even, every now and then, fun.”

Linking the Campaign to Consumer Needs

 Through its “Just Do It” campaign, Nike was able to tap into the fitness craze of the

1980s. Reebok was sweeping the aerobics race and gaining huge market share in

the sneaker business. Nike responded to that by releasing a tough, take-noprisoners

ad campaign that practically shamed people into exercising, and more importantly,

to exercising in Nikes.

 The “Just Do It” campaign was also effective in reassuring consumers that the brand

they picked, Nike, was a quality brand. This was most effectively portrayed by

celebrity sports figures such as Bo Jackson, John McEnroe and later, Michael Jordon.

If Michael Jordan can play an entire NBA season in a pair of Nikes, certainly the

average weekend warrior can trust the shoes’ durability. Celebrity endorsements

also appealed to the consumers’ sense of belonging and “hipness,” as Nike became

a self-fulfilling image prophecy: if you want to be hip, wear Nike; if you are hip, you

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are probably wearing Nike. The “Just Do It” campaign was able to turn sweaty, pain-

ridden, time-consuming exercise in Nike sneakers into something sexy and exciting.

Perhaps most importantly, even those who were not in fact exercising in Nikes (the

vast majority) still wanted to own them. By focusing on the aura and image

conveyed by the fitness culture, Nike was able to attract those who wanted the

image without incurring the pain.

Linking the Campaign to Strategy

Nike was in a tough spot in the late 1970’s. It was being swamped by Reebok’s quick

initiative on designing aerobics shoes and needed to respond dramatically and forcefully. It

could be argued that the “Just Do It” campaign was not only about sneakers but about

Nike’s own renaissance. No longer content to be the

choice running shoe of a few thousand marathoners and exercise nuts, Nike wanted toexpand its operation to target every American, regardless of age, gender or physical-fitness

level. “Just Do It” succeeded in that it convinced Americans that wearing Nikes for every

part of your life was smart (the shoes are designed for comfort) and hip (everyone else is

wearing them, you too can belong to this group.) Nike took its own advice and “Just Did It”

by directly attacking Reebok in the sport-shoe market

Why Was the Campaign Successful?

 The timing of this campaign could not have been better. Americans were buying exerciseequipment at a record pace in the mid 1980s, and body worship was at an all time high.

Nike tapped into consumers’ desire for a healthy lifestyle by packaging it into a pair of $80

sneakers. The ads were often humorous, appealing to the cynic in all of us, while imploring

consumers to take charge of their physical fitness. The ads made starting an exercise

regime seem like a necessity, and the way to start exercising was to buy Nike merchandise.

More importantly, by owning Nikes you were instantly a member of a desirable group. The

campaign was easily identifiable (to the point that Nike eventually did not even bother to

display the word “Nike” in commercials—the swoosh was enough) and stayed true to its

message.

Celebrity’s.

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Nike Equity Analysis 

Portfolio Suitability

 In the last three years, Nike’s correlation to consumer discretionary sector is at 0.01. In

simple terms, for the last three years, Nike’s stock doesn’t have any relation to the

movement of consumer discretionary sector. So, even though Nike is considered to be a

consumer discretionary stock, its stock isn’t behaving in line with the sector. The reason for

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this anomaly could lie in the fact that most consumer discretionary stocks are heavily

dependent on US for their revenues while Nike isn’t. Infact, Nike’s three year correlation to

the consumer staple sector is at 0.91 and at 0.89 to the utilities sector. This reinforces the

theory that Nike will not be severely affected by a further slide in the US economy.

 

Sector Performance

Nike belongs to the consumer discretionary sector, a sector which we have been

underweight since we started seeing some signs of an economic downturn in the US in June

(2007) when an inverted yield curve puzzled everyone. An inverted yield curve is almost

always a leading indicator of an economic slowdown since forward yields are low in one of 

the two circumstances; either the GDP growth is expected to decline or inflation is expected

to decrease. However, with central banks worldwide having trouble keeping inflation at bay,

the possibility of decline in GDP growth was more realistic. A decline in GDP wouldn’t bode

well for the consumer discretionary sector and so we have been underweight on that sector

for quite some time now. In the first half of 2008, we have seen a slowdown in GDP growth

coupled with high inflation. However, the yield curve is now upward sloping and so GDPgrowth is expected to pick-up sometime next year (2009). This begs the question if it is a

good time to get back into the consumer discretionary sector while it is still reeling from an

effect of a downturn and selling at a discount; XLY - Consumer Discretionary SPDR - is selling

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close to its five year lows in the mid 20s. The yield curve is just one indicator of GDP growth

and so I looked at performance of XLY during the last economic recession.

 

I used the last recession as a point of comparison since the macroeconomic conditions

would be the closest, if not the same, for companies operating in the last 10 years. As wecan see in the first chart, XLY underperformed S&P only for one year – 2000 - during the last

recession. We want to check the performance of XLY in the last one year; the next chart

compares XLY’s performance with S&P in the last one year and it

has u

nderperformed the S&P by about 10 percentage points. However, given the current credit

market turmoil, I was still a little wary of this sector. Focusing on companies with extensive

international exposure would mitigate the risk of a prolonged downturn in the US markets

and Nike tops that list, moreover, Nike is underpriced which makes for a good value

investment.

Nike’s Stock Performance

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8/2/2019 Project Nike

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NKE’s stock closely followed XLY during the first recession of this decade and

underperformed the S&P for about one year in 2000-

2001.

In the last one year, Nike has outperformed the S&P by about 15 percentage points while

XLY has underperformed the S&P by 10 percentage points. Clearly, Nike is not following

declines of the consumer discretionary sector in this downturn and that could be because of 

its extensive international exposure. In 1999-2000, Nike’s revenues from US were at 52%

while 34% of Nike’s TTM revenues are from US. The recent slide in Nike’s price is attributed

to flat orders from US for the rest of 2008 and so a slowdown in the US is already priced in

the stock. The market ignored Nike’s excellent performance in the international segment.

Nike’s revenues are well diversified and a slowdown in any one region of the world is less

likely to have a significant impact on Nike’s overall performance.

Growth

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