I Love Nike,
But...
by Tom Gardner
(TomGardner)
I love Nike.
I'm not unique in my love for the company. I'm like the greater majority
of Americans (increasingly humans) who look to the company for athletic footwear
and attire. While I'm not in the growing group that has swooshified their
entire wardrobe, I recognize as much as the next Fool that they own a dominant
position in the world of sportin' shoes and apparel.
I also love Nike's marketing program.
The Company has designed promotions to establish its name as a stronger brand
than the word America. Nike's advertisements have preached inclusiveness,
merit, and spirit in a nation that doesn't always prize those.
For instance, the Tiger Woods promotions have effectively waved a scolding
index finger at country-club exclusivity in America. And these ads don't
simply say, "Shame on you." They champion the idea that false authority,
exclusivity and arrogance will get walloped by the qualities listed above
-- the same qualities that are the Nike shoe, and shirt, and cap, and the
swooooooooooooooosh.
I also love their income statement.
Take a look at the positive business momentum over the past three years.
1996 1995 1994
Sales $6.5 bil. $4.8 bil. $3.8 bil.
Earnings $550 mil. $400 mil. $299 mil.
Net Margins 8.5% 8.3% 7.9%
Here's another company whose sales are growing dramatically, but whose
profitability is expanding at an even greater rate. Over the past two years,
it has boosted net margins by over 7 1/2%. At that growth rate, in twelve
years, Nike will be driving 20 cents in profit per dollar of sales. In the
clothing and shoe businesses, the likelihood of extending margins that high
are nil. But Nike's margin expansion over the past twenty-four months has
been outstanding.
Not surprisingly, the stock has also been a spinning slam-dunk over the past
few years, and over the past decade:
In 1987, Nike traded at $1/share.
In 1990, at $8/share.
In 1994, at $12/share.
Today, Nike is trading at $60/share.
(Those prices reflect split-adjustments. Investors weren't buying Nike stock
at $1 in 1987.)
Over the past ten years, Nike has compounded 51% annual growth, proving nearly
as phenomenal as Microsoft, with its rise of over 60% per year during that
time. And since 1994, Nike's valuation has sped the plow, growing at 58%
per year.
I love the approach, the global brand extension, and the selling growth.
But I haven't fallen in love with Nike's balance sheet.
Because of its business, Nike will never be able to manage inventories and
receivables as aggressively as a company like Microsoft.
Nike builds up inventory positions during the year to match internal sales
projections. Contrarily, Microsoft carries very little inventory of any kind
-- and will carry increasingly less as it distributes software via the Internet.
Nike also aggressively books sales in advance of their closing; the company
had posted over $1.8 billion in accounts receivable as of February 28. I'm
not going to raise accounting questions here; I just want Fools like TMF
Ralegh to recognize that the $1.8 billion in receivables is cash that Nike
doesn't yet have working for it -- garnering interest, used in acquisition,
invested in The Foolish Four. I prefer businesses that can demand upfront
payments for all merchandise because it gets the capital into the business
now.
Consider the differences in the relationships between sales, inventory &
receivables figures between Microsoft and Nike.
Trailing
12-month
Sales Inventories
Microsoft $10.4 billion Under $275 million
Nike $8.7 billion $1.1 billion
Trailing
12-month Accounts
Sales Receivable
Microsoft $10.4 billion $866 million
Nike $8.7 billion $1.8 billion
There's far more money flowing through Microsoft's business each day than
through Nike's. For this reason, Softy has piled up over $9 billion in cash
while Nike has $300 million in cash. Not everyone will agree, but for me,
cash is king. Microsoft has large share repurchase potential; Nike
far lesser potential.
Conclusion
Yes, I think Nike has a great business. No it isn't fair to compare it
straight-up to Microsoft (although it is important to study which businesses
to invest in). In the near future I'm going to run some basic comparisons
between Nike and another clothier, Gap. I'll be proposing that Gap is doing
a better job of managing its balance sheet than Nike, and that if Gap can
hold to its numbers as it expand internationally, its stock will outperform
Nike in the decade ahead.
Nike has a great brand name and wonderful opportunities across the globe.
But at these rich market valuations, after the market's double over the past
three years, I'd be looking to flow my investment money upward toward the
cream today. Nike's definitely near the top of the cup, I just don't think
that right now they're in the cream.
On to Lesson # 2 -- Finding
the True Value |