Nike runs hard!

I have never been to Beaverton in Oregon, a town of 90 thousand folks not far from Portland. The place is far from the bustling streets of New York (on the other side, the West coast), and most significantly for us in the global HQ of Nike Inc. Why Oregon? Well, that is where founder Phil Knight and Bill Bowerman (Knight's track coach) met, at the University of Oregon which is a fair distance away, but probably not unreachable if you are wearing a pair of Nike Zoom Wildhorse. According to Google maps the distance is 171.8 kilometers, perhaps 4 days of really hard trail running will get you there!!


Phil Knight was a talented middle distance runner and had a 4:10 mile time, that is really good! But more importantly for us, Phil Knight is the founder of Nike, his mate Jeff Johnson, according to Wiki suggested the name change (from Blue Ribbon sports, not a loaf(er) of bread) after the Greek goddess. Carolyn Davidson designed the famous swoosh logo in 1971 and was paid a whopping 35 Dollars for the designs. According to my trusty inflation calculator that translates to 195.71 Dollars in 2012. But don't feel sorry for Carolyn, after the company had listed, Phil Knight was so happy with her design that he gave her a diamond ring (with a swoosh) and a few hundred shares, back in 1983. Some estimates suggest around 500 shares, there have been five 2-1 splits since then. 16 thousand shares? At last evenings closing price that puts her net worth at 1,125,440 Dollars, a diamond ring and quarterly dividends of 3360 Dollars before tax. Well, she did say that they paid what she billed, so the rest as they say is history.


Why all this background about Nike? The company reported last evening after the market had closed and the results sparkled, trumping expectations by a long, long way. Revenues for their first quarter of their 2014 financial year increased 8 percent to 7 billion Dollars, 6.5 billion of that was their Nike brands, Converse (the shoes) makes up the balance of that. Nike have also owned Hurley for 11 years plus. Greater China was a drag on sales growth, North America and Europe delivering the goods! If ever you needed a sign that those geographies are back and that emerging markets are sucking a little wind, I guess sports apparel is a discretionary purchase. Sales are still skewed to footwear, which is 3,979 billion of total sales, apparel is a little over 2 billion with 434 million Dollars worth of equipment. EBIT topped 1 billion Dollars, increasing over 30 percent. Importantly as well gross margins increased 120 basis points to 44.9 percent.

But that is not what you really want to know, right? That is all very nice that the company is increasing margins, growing their top line at comfortably above inflation and continuing to attract newer customers as well as wowing their existing clients like me. I for one prefer their running shoes. They are nothing short of fabulous. But the business is more than fine products, I think that in the last annual report, the CEO Mark Parker summed it up well:

Sports and athletes. Innovation. Technology. Performance. Strategy. Sustainability. Speed. Culture. Investment. Passion. Community. These are the elements of our success and our potential. And none of them are static. How well we balance these elements - embrace, develop and leverage them - that is the art of growth. And we grow more skilled in that art every year.

Michael over the desk said something interesting, at least their product is not considered bad for your health, the converse in fact. Converse? Get it? Weak. Sorry. And the fact that their market continues to grow, fitness is for richer people. An association with a football team or brand is far bigger nowadays than it ever was. If I want to associate myself with a specific football team I can do so today, by buying their official merchandise at the Sportsmans Warehouse. You would be surprised that Nike sponsors only 6 English teams, including Manchester City and United, as well as Arsenal (sigh, poor fans cant appreciate a wonderful manager) and Everton. In Spain it is Barca and Atletico Madrid amongst the majors. They are however the official balls across the leagues.

Manchester United alone has 35.3 million likes (followers) on Facebook and over 1 million followers on Facebook, 332 thousand followers on Instagram. And all those people have or want a new football jersey. Manchester United reckon that 659 million people are "followers" globally. Their website has 62 million hits a month.


I think that what I am trying to point out is that the future is bright for Nike in official merchandise apparel (more middle income people wanting football jerseys and the like) as well as fitness levels continuing to pick up globally. Weight loss, child obesity, living longer and exercising into your golden years, as well as looking good whilst doing it. Innovation in exercise, Nike are at the forefront of that technology, leaders. Nike remains inside one of our core investment themes, aspirational consumerism, and we continue to add. The stock is expected to pop at the open and trade around the 75 Dollar level, on a forward multiple (2014) of 21 times earnings. Hardly cheap at these levels, but the earnings momentum should continue to see the company grow more aggressively here as sales in the developed world continue to pick up, and sales in the developing world stabilize and pick up.