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FINANCIAL ANALYSIS OF NIKE.   Term Paper ID:29543 Click to get this paper

Essay Subject: Impact of Foot Locker, Inc. reducing its order volume from Nike.... More...

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Paper Abstract: Impact of Foot Locker, Inc. reducing its order volume from Nike. Effect on Nike's profits. Overview of Nike, Inc. Its production-marketing strategy. The company's strong financial performance. Nike's competitive environment. Contends that the Foot Locker reductions will not be devastating although they will require Nike to shift its focus in distribution. Paper Introduction: FINANCIAL ANALYSIS OF THE POTENTIAL CONSEQUENCES FOR NINE, INC. OF THE DECISION OF FOOT LOCKER, INC. TO DROP MARQUEE [HIGH-END] NIKE FOOT WARE FROM ITS PRODUCT OFFERINGS Introduction In the Nike, Inc. Form 10-K filed with the Securities and Exchange Commission reporting on Nike’s Fiscal 2002 (closed 31 May 2002) results, the company revealed that it anticipated substantially lower order levels from its largest customer during the remainder of calendar year 2002 and in calendar year 2003. Foot Locker, Inc., which accounted for 10.9 percent of Nike’s total sales in fiscal 2002, informed Nike in April 202 that it was dropping all Nike foot ware products with a retail sales price of $120 or more per pair (Nike, Inc., 2002). Foot Locker projected that it would reduce its total order volume w Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Wall Street Journal, B3.Nike, Inc. "B". No companywants its largest customer to scale back its orders. In fiscal 1996, Nike sales were up 72.5percent, while profits were up 39 percent (Feitelberg, 1996). Women's Wear Daily, 171(56), 3.Ferguson, J. The dark side is that Nike virtually abandoned markets such asJapan where 1 percent control of the distribution of the company'sproduct certainly is not feasible and likely is not even possible. This strategy causes Nike to be vulnerable to changes -political and economic - within the source countries of production, andthis strategy causes Nike to depend heavily on the willingness andcapability of production subcontractors to continue to produce goods forNike within the specifications and time frames required to support Nike'smarketing objectives (Cohan, 2 2). Based onthese projections several financial analysts downgraded Nike's prospectsfor the company's first quarter of fiscal 2 3 (closing 31 August 2 2).The consensus analyst projection was an earnings-per-share (EPS) of $ .68for the first quarter and $2.72 for fiscal 2 3 (Herzog, 2 2b). (2 2, September 18). Where once Nike's competitors were other athleticshoe and clothing manufacturers, Nike's competitive environment now mustinclude those firms that compete against Nike's own retailing outlets andthe several other now small business units of the company, such as itsentertainment business unit (Hoover's, Inc., 2 2). 1671). Oregonian, B-1.Hoover's, Inc. Knight's vision for the company expanded over theyears to a scope well beyond athletic shoes and well beyond the athleticclothing that followed success in the shoe business. The Foot Locker action appliesto all athletic foot ware manufacturers. likes Nike. (2 2, August 16). The indications are, however, that Nike will not experiencesubstantial negative financial impacts from Foot Locker's action. Beaverton, Oregon: Nike, Inc.Nike reduces projections for future orders. Most analysts attribute the slow sales ofexpensive athletic foot ware to the sluggish general economy and reducedpocket money for teenagers. Nike, Inc. The company's first quarter report stated earningsnot only above analysts' projections but also above the company'sperformance a year earlier. (2 2, September 18). In fact, however, Foot Locker stated that Nike islimiting the company's purchases of lower price Nike foot ware in the wakeof Foot Locker's reduction in orders for Nike's higher priced products(Erman, 2 2). This combined production-marketing strategy has anenviable record of producing very strong profits. Onemight think that Nike would seek to fill this space with its own lowerpriced foot ware. Forbes ASAP, 114-117. (2 2, July 22). A reduction in Foot Locker orders in the magnitude of $25 million,if not replaced by other distributors, would represent 2.5 percent ofNike's fiscal 2 2 revenues. A. Foot Locker's action also may be a big step in freeing distributorsfrom the iron control imposed on them by Nike (Herzog, 2 2a). The possibilityexists, of course, that Nike will be successful in placing some of theproduct that would have gone to Foot Locker with other distributors. A. Aninsistence on 1 percent distribution control, therefore, may actuallythwart Nike's objective global leadership in the athletic shoe industry-overall, in every region, and in every segment. In fiscal 1995, thecompany boosted its market share by 2 percent on a 3 percent increase innet sales. UCLA Journal of Environmental Law & Policy, 2 (2), 133-185.Dukcevich, D. (1996, May 24). Nike's got global game. Reuters Business Report, 1-2. There is no question about the importance of Nike to FootLocker. Environmental rights of indigenous peoples under the Alien Tort Claims Act, the public trust doctrine and corporate ethics, and environmental dispute resolution. (2 2, August 16). If the FootLocker action leads to the weakening of Nike's control over thedistribution of its products, Nike will require a major strategy revision. Another facet of the darkside of this policy is that distributors in North America and WesternEurope, including Foot Locker, resent Nike's dictatorial distributionpolicies. Nike, however, controlsapproximately 9 percent of that market segment ("Nike Reduces Projectionsfor Future Orders", 2 2). Foot Locker considers reducing Nike orders as demand slips. Value Line concluded that Nike was in a positioned to maintainthe momentum developed in the first half of the decade of the 199 s(Ferguson, 1996, p. Foot Locker changes mix of sneakers - Nike's biggest customer, faced with lukewarm reaction, cuts back on expensive shoes. financial analysis of the potential consequences for nine, Inc. Some analysts interpret the Foot Lockerdecision as a blow to Nike's strategy of distribution control (Erman,2 2). Nike, Inc. Nike projected a decline in Foot Locker orders approximating $12 million for the balance of calendar year 2 2. The potential financial consequences for Nike over the short-termstemming from the Foot Locker decision do not appear to be onerous for thecompany. Case study: Reinventing the heel. Foot Locker projects orderreductions up to $25 million for all of calendar year 2 3. Foot Locker Reduces Orders for Nike's Highest- Priced Athletic Shoes. 1671). Corporate Profile, 1-6. Retrieved from the Internet on 2 2-1 -1 at: http://biz.yahoo. (2 2, October 1 ). Nike,however, made a mockery of those projections - at least in the firstquarter of fiscal 2 3. billion, and a net income of$668 million (Nike, Inc., 2 2). Nike may think that it has Foot Locker over a barrel; however,Nike also is over a barrel, as almost a quarter of its revenues will comefrom Foot Locker even with a $25 million reduction in Foot Locker orders.Nike has a lot to lose if competitors step in and replace its products onthe Foot Locker shelves (Herzog, 2 2a). Nike's strong financial performance in fiscal 2 2 was not somethingnew. This research examines the potential financial consequences for Nikeof the decision by Foot Locker to drop the higher-priced Nike foot wareproducts from its own product offerings. Form 1 -K filed with the Securities and ExchangeCommission reporting on Nike's Fiscal 2 2 (closed 31 May 2 2) results,the company revealed that it anticipated substantially lower order levelsfrom its largest customer during the remainder of calendar year 2 2 and incalendar year 2 3. Foot Locker's decision,however, relied on the failure of Nike's premium product to sell in aperiod of economic decline. Thefollowing factors support this assessment: > Nike has been successful in placing high-end products intended for Foot Locker with other distributors (Herzog, 2 2b) > While future orders from distributors in the United States dropped 2.5 percent from a year earlier, future orders from distributors in Europe increased 15 percent, and future orders from distributors in Asia increased 24 percent; overall, future orders increased 6.3 percent from a year earlier (Dukcevich, 2 2; "Nike Reduces Projections for Future Orders", 2 2; Erman, 2 2) ReferencesCohan, J. com/rb/ 2 918/textiles_nike_earns_4.htmlFeitelberg, R. The examination of thepotential financial consequences for Nike of the Foot Locker decisionfollows the review of literature. Additionally, however, the effectiveness the use by Nike and otherathletic foot ware manufacturers of sports celebrities to promote theirproducts has been diminishing as some of the bloom wears off professionalsports - especially the National Basketball Association. Since thattime, Nike performance continued (and continues) to improve (Nike, Inc.,2 2) While Nike management pursues total control of the company'sdistribution process, this same management appears to be complacent aboutrelinquishing total control over the production of the goods marketed bythe company. More important for Nike's financial performance may be theimplications of the Foot Locker action rather than the immediate effects ofthat action. Oregonian, B1.Herzog, B. Important earning performance measureswere as follows for fiscal 2 2 (calculated from data obtained from Nike,Inc., 2 2): > Return on revenues: 1 .1% > Return on total assets: 15.6% > Return on total capital: 22.2% > Return on equity: 25.6% CEO (and co-founder) of Nike, Phil Knight, has a substantial equityposition in the company. Thus, Nike's largest competitor is Adidas-Salomon, withannual sales approximating 68 percent of Nike annual sales (Nike is theglobal industry leader). Nike's competitive environment expanded as its own range of businessactivities expanded. Nike has a history of penalizing distributors that actindependently. (2 2, August 14). Nike, Inc. Nike earnings rise on strong sales. Effects on Nike's profits likely would begreater than 2.5 percent, as Nike's profit margins are substantially higheron its more expensive foot ware products (Herzog, 2 2a). (1996, March 21). Nevertheless, Nike's major competitors continue to be the other majormanufacturers of athletic shoes, clothing, and equipment, as these areas ofbusiness activity continue as by far the largest contributors to Nike'sannual sales. Foot Locker orders accounted for 27 percent of Nike's revenues infiscal 2 2, which closed 31 May 2 2 (Lawton & Tkacik, 2 2). to drop marquee [high-end] nike foot ware from its product offerings Introduction In the Nike, Inc. (2 2, Winter). Fila (annual sales approximating 42 percent ofNike sales) and Reebok International (with annual sales approximating 37percent of Nike sales) also are major competitors of Nike, Inc. Nike retailingoutlets are now an important component of the company's business strategy.The vision of the company also is changing from that of designer-manufacturer to that of designer-distributor, as the company has anincreasing proportion of its products manufactured on contract (Rapaport,2 2). Retrieved from the Internet on 2 2-1 -1 at: http://www.hoovers.com/premium/profile/4/ , 2147,14254, .htmlLawton, C., & Tkacik, M. With respect to distribution, Nike contends that the company hascomplete control of the distribution of the company's products in NorthAmerica, and that the company has 9 percent control in Western Europe.While Nike management likes to point to these claims as indicators of thesuccess of the company's strategy, there is another side to thesestatements. Forbes, 31.Erman, M. A brief review of relevantliterature follows this introductory discussion. The probability, however, is that Nike will be able to placeall or most of the product with other distributors. Outlook for the Future Nike's performance in the first quarter of fiscal 2 3 does not meanthat the company will not suffer from Foot Lockers actions later in thefiscal year. Review of Literature Nike, Inc., headquartered in Beaverton, Oregon, designs and marketsglobally footwear, apparel, and accessories for athletic and leisureapparel. A shift inconsumer preferences away from super expensive athletic foot ware wouldrequire a modification of Nike's product strategy. (2 2, June 24). In the mid-199 s, Value Line described the financial performance ofNike as "impressive" (Ferguson, 1996, p. Foot Locker projected that it wouldreduce its total order volume with Nike in the range of $15 -to-$25 million in calendar year 2 3 (Herzog, 2 2a). Placed in perspective, a $25 million reduction in Foot Locker ordersfrom Nike represents approximately 2.5 percent of Nike's annual revenues.Assuming that Nike could not place the product with other distributors, theprofit loss for Nike would be disproportionately higher because thecompany's profit margin is higher on athletic foot ware priced upwards of$12 (the cut-off point used by Foot Locker in developing its new productstrategy). Dropping expensive Nike foot ware by Foot Locker opens shelf space inFoot Locker stores for the products of other athletic foot waremanufacturers ("Nike Reduces Projections for Future Orders", 2 2). New York Times, C4.Rapaport, R. The production of an overwhelming majority of the company'sproducts occurs in low-wage, developing economies, while the sales of anoverwhelming majority of the company's products occur in high-wage,developed economies. Nike reported an EPS of $ .81 for the firstquarter of fiscal 2 3 compared with $ .75 a year earlier (Erman, 2 2).First quarter revenues increased to $217.2 million from $2 4.2 million ayear earlier, and the gross margin increased to 41.4 percent from 39.4percent a year earlier (Erman, 2 2). Nevertheless, theplanned Foot Locker order reductions will not be devastating for Nike,although (if they materialize) they will require Nike to shift its focus indistribution. There likely is some truth in this assessment. Form 1 -K. Nike, as is true of many other American companies, wants tobe free of the headaches associated with manufacturing operations, andwants to lower production costs associated with production in third worldcountries. (2 2a, September 13). Potential Financial Consequences Foot Locker controls 19 percept of the retail athletic foot waremarket in the United States ("Nike Reduces Projections for Future Orders",2 2). Foot Locker, Inc., which accounted for 1 .9 percent ofNike's total sales in fiscal 2 2, informed Nike in April 2 2 that it wasdropping all Nike foot ware products with a retail sales price of $12 ormore per pair (Nike, Inc., 2 2). In Foot Locker's last fiscal year, 47 percent of the products soldby the company were Nike products. of the decision of foot locker, inc. With the planned order reductions fromNike, the proportion of Nike products in Foot Locker's sales should drop to43 percent. Nike's total revenues in fiscal 2 2 were $9.893 billion (Nike, Inc.,2 2). Why Wall St. (Hoover's,Inc., 2 2). Net sales for the fiscalyear ending 31 May 2 2 totaled $9.9 billion on a total asset base of $6.4billion and a total capitalization (equity plus long-term debt) of $4.5billion, yielding an income before tax of $1. Nike retaliates against distributors who fail to follow itsdictates by denying them access to product. Foot Locker opted to drop high-priced athletic foot warebecause the product was not selling well. Value Line Investment Survey, 1671.Herzog, B. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.