Nike in Dow Shows Marketing Genius as Much as Innovation
Nike Inc. (NKE)’s addition to the Dow Jones Industrial Average is a testament to the company’s ability to shrug off hard times and transcend its U.S. origins, making its swoosh logo known from Beijing to Buenos Aires.
The world’s largest maker of sporting goods will join the 30-member gauge when the market opens on Sept. 23 along with Goldman Sachs Group Inc. and Visa Inc. They are replacing Bank of America Corp., Hewlett-Packard Co. (HPQ) and Alcoa Inc. (AA)
Nike has transformed itself from a shoe company founded for $1,000 in 1965 by a former runner named Phil Knight and his coach into an global behemoth with 48,000 employees and sales of $25 billion. While Nike is struggling to re-ignite growth in China and offset rising labor costs, it has caught up with Adidas in soccer, pushed into wearable technology and deployed sports figures from basketball player Kobe Bryant to soccer star Cristiano Ronaldo to sell its wares around the world.
“I often describe them as a marketing company that makes shoes,” said Matt Powell, an analyst for researcher SportsOneSource, who has followed Nike for more than a decade.
Nike, based in Beaverton, Oregon, reached an all-time high yesterday in New York, gaining 2.2 percent to $66.82. The shares have advanced 30 percent this year, compared with an 18 percent gain for the Standard & Poor’s 500 Index.
By this time, many enterprises of Nike’s size and age are mature businesses, their best days behind them. Yet Chief Executive Officer Mark Parker, who started out as a shoe designer before becoming CEO in 2006, sells Nike to investors as a growth company. While the financial crisis crushed sales in 2009, Nike has turned in 10 percent compound annual sales growth in the past three years and it expects those gains to continue and for sales to reach as much as $30 billion in 2015.
Nike has had some missteps along the way. Revenue is declining in China, once one of the company’s fastest-growing markets, after Nike expanded too quickly. The company is now discounting items to clean out excess inventory. Nike has blamed the reversal in China on changing consumer tastes after failing to notice that local shoppers, like their U.S. counterparts, have come to expect a more tailored fit.
Such fashion misses aren’t unheard of in the U.S, where apparel sales have flagged lately as shoppers focus on cars and housing-related merchandise.
“The majority of athletic footwear is bought for fashion purposes and that’s the big risk here,” said Brian Yarbrough, an analyst with Edward Jones & Co. in St. Louis who has a hold rating on the company’s shares. “With basketball and running, things come and go.”
Rising labor costs in Asia are also weighing on profit. Gross margin, the percentage of sales left after costs of goods sold, has declined for eight of the past 10 quarters. The company has responded by raising prices, which it can pull off because of its enduring brand strength.
Nike’s growth is largely two-pronged: pushing into a new sport or taking share from competitors in an established business. Since it’s a force in every major sport, there are few opportunities for branching out into new categories that will have a substantial impact on sales, so Nike mainly focuses on expanding an existing unit.
Exhibit A: how Nike caught up in soccer, or what people outside the U.S. call football, after flailing in the 1990s.
Adidas, based in Herzogenaurach, Germany, had dominated the market since the 1950s with other European brands such as Puma SE. (PUM) Nike didn’t really get serious about building a legitimate soccer business until the 2000s, when it started spending lavishly on endorsement deals, including $440 million on a 13-year agreement with Manchester United that began in 2002. Since then, Nike has essentially drawn even with Adidas in soccer with sales reaching $1.9 billion last fiscal year.
Besides providing Nike a third leg for its running and basketball businesses, soccer gave Nike legitimacy as an athletic brand outside the U.S. That in turn lifted the rest of its merchandise, Powell said. Now the company generates about 60 percent of revenue outside its home market.
“They tried to become a true international brand for a number of years and couldn’t get it going until they fully committed to being a soccer brand,” said Powell, who is based in Scarborough, Maine. “That’s when their international business took off.”
The widespread adoption of casual attire has also lifted Nike, which sells everything from hoodies to tank tops. Running shoes in particular have been a post-recession panacea. While the company sells performance shoes for serious runners, many of its best-sellers are worn day to day. For many men, sneakers are a form of retail therapy, as handbags are for women. Last year, running shoe sales surged 16 percent to $4.3 billion.
“They’re in a class by themselves,” Powell said.
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