Traditionally innovative: A must-know investors guide to NI

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part1of22)

Traditionally Innovative: The History Of NIKE

ByPhalguniSoniDisclosureDec2,20143:58pmEST

A legendary company with a tradition of fostering innovation

Print

NikeisthenameoftheGreekgoddessofvictory.Itsalsoanaptnameforacompanywithapassionforathleticexcellence.
NIKE,Inc.(NKE)istheworldslargestsellerofathleticfootwearandapparel.ThecompanywasoriginallyfoundedasBlue

RibbonSportsin1964bycurrentChairman,PhilipKnight,andBillBowerman,aformertrackandfieldcoachattheUniversity
ofOregon.

NIKEs history of innovation started with the waffle trainer

NIKE,Inc.wasincorporatedinitspresentformin1968,inBeaverton,Oregon.Overtheyears,thecompanysproductshave
beenthestuffoflegend,achievingcultstatus.Thecompanysknownforintroducingproductsthatgetsoldoutwithinminutes
ofhittingstores.NIKEfiledasmanyas540patentsin2013alone.
BillBowermanslegacyatNikeisimmeasurable,saidMarkParker,PresidentandCEOofNIKE,Inc.Theproductshe
designedandinventedhavepoweredNikesascentastheworldsleadingsportsbrand,andhiscommitmenttopushingthe

boundariestomaximizeathletesperformanceremainsattheheartofNikesinnovationspirit.
NIKEcofounderBowermansfirstpatentwasthewaffletrainerin1974.Usinghiswifeswaffleiron,hedesignedashoethat
wouldgivehisrunnersadditionaltractionandgripwhilerunning.

NIKEs swoosh came into play for $35!

NIKEsfamouslogo,theswoosh,wascreatedin1971byauniversitystudent,CarolynDavidson,foramere$35.Mostof
NIKEsfootwearwouldcostmorethanthattodayevenafterfactoringininflation!

Co-founder Philip Knight: Redefining the playing field

CofounderPhilipKnightiscurrentlyChairmanofNIKE.FormerlythePresidentandCEO,hesbeenavitalchange
agentthroughoutthehistoryofNIKE.Hestartedoutsellingshoesfromthebackofacaratathleticevents.Initsfirstyear,he
clockedsalesof$8,000.Fastforward~50years,andthecompanysgrowntoachieverevenuesof$27.8billioninfiscal
year2014.

Knightsideashavebeenrevolutionaryandhavetransformedanentireindustry.Fromnewmanufacturingstrategies,to
endorsementsoftopathletesandsportsmarketing,hesarecognizedindustryleader.

ETF impact
NIKE,Inc.(NKE)hadamarketcapof$83.8billioncompanyasofNovember25,2014.ItformspartofS&P500Indexandthe
moreselect,30stockDowJonesIndustrialAverage.Anumberofexchangetradedfundshaveexposuretothestock
includingtheSPDRS&P500ETF(SPY),theSPDRDowJonesIndustrialAverageETF(DIA),theSPDRConsumer
DiscretionarySelectSectorETF(XLY),andtheVanguardDividendAppreciationETF(VIG).

An investment opportunity?
NIKEhasincreaseditsdividendspersharefor13consecutiveyears.HowisNIKEabletodothis?Inthiskeyinvestorsguide
toNIKE,youllreadanoverviewofthecompany,includingdetailsofoperationsandananalysisofitsfinancials.Youllalso
readaboutitsrelativecompetitivepositionandthecompanyskeystrengths,weaknesses,opportunities,andthreats.Well
captheserieswitharelativevaluationanalysisversusitspeers.

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part2of22)

Where NIKE Stands In The Brand Stakes

ByPhalguniSoniDisclosureDec2,20143:59pmEST

Why NIKE is the #1 sports brand in the world

Thesportswearequipmentandapparelindustryishighlycompetitiveandincludesmanyprominentplayers.NIKE,Inc.(NKE)
isthelargestsellerofathleticfootwearandapparelintheworld.Ithasafootprintin190countries.NIKEhassustainedits
competitiveedgebyapplyingsomeeffectivestrategies:
FocusingoninnovationandtheintroductionofproprietaryproductsNIKEAIR,Lunar,Shox,Free,Flywire,DriFit,FlyKnit,NIKE+,and
NIKEFuel
Buildingupaportfolioofgloballyrecognizedbrands
UsingtargetedhighimpactmarketingathighprofilesportingeventssuchasthesoccerWorldCup,theRioOlympicGames,andtheNFL
SuperBowl
MakingendorsementdealswithhighprofileathleteslikeNeymar,LeBronJames,andRogerFederer

NIKE is a winner in the brand stakes

NIKEistheworldsnumberonesportsbrand.1Itsbrandvaluewasestimatedat$19billionbyForbesmagazinein2014.Its
upfrom$15billionin2012and$17.3billionin2013.WaltDisneyCompanys(DIS)ESPNwassecondwithabrandvalue
estimatedat$16.5billion,followedbyGermanysAdidasAG(ADDYY),theUnitedKingdomsSkySportsandfastgrowing
USbrand,UnderArmourInc.(UA).

ETFs holding NIKE

TheVanguardTotalStockMarketETF(VTI)andtheiSharesCoreS&P500ETF(IVV)haveexposuretoNIKE,Inc.(NKE).

NIKEs brands
NIKEoffloadedtheColeHaanandUmbrobusinesses,onFebruary1,2013,andNovember30,2012,respectively.Thiswas
donesothecompanycouldbetterfocusitsresourcesondrivinggrowthinitsexistingstableofbrandstheNIKE,Jordan,
Converse,andHurleybrands.Thenextpartofthisserieswillcoverthese.
1.TheForbesFab40:TheWorldsMostValuableSportsBrands2014

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part3of22)

An Overview Of NIKEs Brand Stable

ByPhalguniSoniDisclosureDec2,20143:59pmEST

The NIKE brand

NIKEsbrandproductsareavailableineightmainsportingcategories:
Running
Soccer
BasketballincludesBrandJordan
MensTrainingincludesUSfootballandbaseball
WomensTraining
ActionSportsincludesHurley
Sportswearsportsinspiredlifestyleproducts
Golf

NIKEalsomarketsproductsundertheNIKEbrandfocusedonkidsandothersports,includingcricket,lacrosse,tennis,
volleyball,andwrestling,amongothers.
NIKEslineofperformanceequipmentincludesbags,socks,sportballs,eyewear,timepieces,digitaldevices,bats,gloves,
protectiveequipment,golfclubs,andotherequipmentdesignedforsportsactivities.

NIKEs brand stable includes Brand Jordan and Brand Hurley

AsmentionedinPart2ofthisseries,theNIKEbrandisthemostvaluablesportsbrandintheworld.Besidesitswellknown
namesake,NIKEsbrandstableincludesseveralotherbrandsthatwereeitherdevelopedorganicallyoracquired:
BrandJordannamedaftericonicbasketballsuperstarMichaelJordan
BrandConverseitslineofcasualsneakers,apparel,andaccessories,purchasedin2003
BrandHurleytargetedatactionsportslikesurfing,skateboardingandyouthcustomers

NIKEs Brand Jordan: All about basketball

NIKEisthemarketleaderinbasketballbyawidemargin.NIKEsBrandJordanisnamedaftericonicplayerMichaelJordan.
TheBrandJordandivisiondesigns,distributes,andlicensesathleticandcasualfootwear,apparel,andaccessoriesunderthe
Jumpmantrademark.Thecategorytargetsbasketballrelatedproducts.SalesofBrandJordanproductsareincludedwithin
theBasketballcategory.

Brand Converse
ConverseisareportablesegmentforNIKE,Inc.andisawhollyownedsubsidiarybrand.Itoperatesinoneindustrythe
design,marketing,licensing,andsellingofcasualsneakers,apparel,andaccessoriesundertheConverse,ChuckTaylor,All
Star,OneStar,StarChevron,andJackPurcelltrademarks.Converseresultsarereportedonastandalonebasis.

Brand Hurley
OperatingoutofCostaMesa,California,HurleyisalsooneofNIKEswhollyownedsubsidiarybrands.Hurleyisayouth
focusedbrandandthelineincludesactionsportssuchasskateboardingandsurfing.NIKEdesignsanddistributeslifestyle
apparelandaccessoriesundertheHurleytrademark.SalesofHurleybrandproductsareincludedwithintheActionSports
category.

ETFs holding Nike

TheVanguardDividendAppreciationETF(VIG),theSPDRConsumerDiscretionarySelectSectorETF(XLY),theSPDRDow
JonesIndustrialAverageETF(DIA),andtheSPDRS&P500ETF(SPY)haveexposuretoNIKE,Inc.(NKE).
ReadaboutNIKEscustomersinthenextpartofthisseries.

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part4of22)

NIKEs Target Market Today And Tomorrow

ByPhalguniSoniDisclosureDec2,20143:59pmEST

Who uses NIKEs products?

NIKE,Inc.(NKE)istheworldsleadingsportsfootwearandapparelcompany.NIKEshighperformanceathleticgearis
mostlytargetedatprofessionalathletes.NIKEsinnovations,products,andservicesseektodevelopathleticpotential,
accordingtothecompany.
Thecompanyalsofocusesonwomencustomers.Infact,theWomensTrainingsegmentisfastergrowingthantheMens
Trainingsegment.Withaviewtoensuringfuturegrowth,youngathletesareabigpartofitssalesstrategies,especiallyin
categoriessuchassoccer,basketball,andrunning.YoungathleteswillformNIKEstargetmarketinthefuture.Wellhave
moreontheseopportunitiesandtheirpotentiallateronintheseries.

NIKE brands
NIKEpurchasedConversein2003.Thebrandsproductlinelooksatthepremiumtargetmarket.Itincludescasualapparel
andfootwearproducts,whicharesportybutnotnecessarilyhighperformance.BrandHurleycatersprimarilytoactionsports
suchassurfingandskateboarding.BrandJordan,namedafterbasketballsuperstarMichaelJordan,isalsoapremiumlabel
brandtargetedatathletes.
Asidefromthese,NIKEscomeupwithvariousproductlinesendorsedbyathletessuchasLeBronJames.Theselinesare
highperformanceandtargetedatathletes.

Digital sport
DigitalhasbeenthefocusofNIKEsmarketingeffortsinrecentyears.Thecompanysgonehitechwithitspushintodigital

sportandecommerce.ItintroducedtheNike+runningsensorincollaborationwithAppleInc.(AAPL).Otherproductssuch
astheNikeFuelBandpersonalizethehitechexperienceforthecustomer.TheFuelBandtrackstheintensityofworkoutsand
evenmotivatesthewearers,amongitsmanyuses.Theseproductsappealtobothathletesaswellasnonathletes.
Thepushintodigitalgivesthecompanytheopportunitytoengagedirectlywiththecustomer.Digitalinitiativesareespecially
appealingtoyoungercustomers.Theyalsoprovideinvaluablefeedbacktothecompanyabouttheoverallcustomer
experience.
TheSPDRConsumerDiscretionarySelectSectorETF(XLY),theiSharesS&P500Growth(IVW),andtheiSharesRussell
1000Growth(IWF)haveexposuretoNIKE,Inc.(NKE).

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part5of22)

An Overview Of NIKEs Supply Chain And Manufacturing

Strategies
ByPhalguniSoniDisclosureDec2,20143:59pmEST

The cogs in NIKEs supply chain

DeliveryprecisioninamultiproductandmultijurisdictionalcompanylikeNIKE,Inc.(NKE)iscritical.Itimprovesprofit
margins,reducesinventories,minimizespricemarkdowns,andensuresthatthecustomerreceivestherightproduct
assortmentontime.NIKEmoved~900millionunitsthroughitssupplychainlastyear.Itsmanufacturingnetworkconsistsof
over700factoriesin42countries.Eachproductmovesfrom57distributioncentersacrossanetworkof18,500accountsand
140,000retaildoors.
YetNIKEownsnofactoriesformanufacturingitsfootwearandapparel,whichmakeup~88%ofitsrevenues.
Instead,manufacturingisoutsourcedtothirdpartiesbecauseofthecostadvantagesofdoingso.Mostrawmaterialsin
NIKEssupplychainaresourcedinthemanufacturinghostcountrybyindependentcontractors.Overseasmanufacturingof
productsfeaturesinthestrategiesofrivalsUnderArmourInc.(UA),VFCorporation(VFC),LululemonAthleticaInc.(LULU),
andAdidasAG(ADDYY)aswell.

NIKEs manufacturers
NIKEisoneofthepioneersoftheindustrydefiningmanufacturingoutsourcingstrategy.Itsnowexploringinnovativewaysof
manufacturingsoitcancustomizeproductsonanunprecedentedscale.

Key manufacturing thrusts

LeanmanufacturingBytheendoffiscalyear2013,between70%and76%ofitsappareland85%ofitsfootwearproductswere
manufacturedonleanlines.Thisdeliveredadditionalsavingsof$0.15perunitthroughbetterlaborproductivityandlowerwaste
MaterialconsolidationReducingthenumberofvendorsthroughwhichNIKEsourcesmaterialsandalsoreducingthematerialsusedin
manufacturingproducts

Manufacturinginnovationandmodernization

Footwear manufacturers
NIKEsfootwearismanufacturedoutsidetheUSbyindependentcontractmanufacturersthatoftenoperatemultiplefactories.
Infiscalyear2014,thecompanywassuppliedby~150footwearfactoriesin14countries.ContractfactoriesinVietnam,
China,andIndonesiarespectivelymanufacturedapproximately43%,28%,and25%oftotalNIKEsfootwear.Thelargest
singlefootwearfactoryaccountedfor~5%oftotalNIKEbrandfootwearproduction.

Apparel manufacturers
Likefootwear,allofNIKEsapparelismanufacturedoutsidetheUSbyindependentcontractmanufacturers.Infiscalyear
2014,NIKEwassuppliedby~430apparelfactoriesoperatingin41countries.China,Vietnam,Thailand,Indonesia,SriLanka,
Pakistan,andMalaysiaaccountedformostoftheapparelproduction.Thetopfiveapparelcontractmanufacturerstogether
accountedfor~34%ofNIKEsapparelproduction.Oneapparelcontractmanufactureraccountedforover10%ofproduction.

Third-party licenses
NKEalsohaslicenseagreementsthatpermitunaffiliatedpartiestomanufactureandsellusingNIKEownedtrademarks,
certainapparel,digitaldevicesandapplications,andotherequipmentdesignedforsportsactivities.

NIKEs distribution centers

NIKEhasfiveprimarydistributioncentersintheUSlocatedinMemphis,Tennessee,threeofwhichoperateonaleased
basis.Thecompanyhad16distributioncentersoutsidetheUSattheendoffiscalyear2014.NIKEbrandappareland
equipmentproductsarealsoshippedfromitsdistributioncenterinFoothillRanch,California.ConverseandHurleyproducts
areshippedprimarilyfromOntario,California.

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part6of22)

NIKEs Distribution Channels: How Products Reach Customers

ByPhalguniSoniDisclosureDec2,20143:59pmEST

Analyzing NIKEs distribution channels and retail model

NIKEdistributesitsproductsthroughthreemajorchannels:
BysellingproductstowholesalersintheUSandinternationalmarkets
Bydirecttoconsumer(orDTC)sales,whichincludeinlineandfactoryretailoutlets(seegraphbelow)andecommercesalesthrough
www.nike.com
Salestoglobalbranddivisions

Retail partnerships
NIKE,Inc.(NKE)hasalsotriedtocreatecategoryspecificretaildestinationsbypartneringwithfootwearretailerssuch
asFootLocker,Inc.(FL),JDSports,andIntersport.

NIKEs sales mix and retail slant

Salestowholesalersarethelargestrevenuecategory.However,thiscategoryscontributioninthesalesmixcontractedfrom
83.3%infiscalyear2012to79.2%ofrevenuesinfiscalyear2014.DTCsales,ontheotherhand,increasedfrom16.2%to
20.3%overthesameperiod.ThisissignificantlylowerthantheratioofDTCrevenuesforNIKEsrivalsinthespace.Inthe
mostrecentquarter,therespectiveratiosofDTCrevenuetototalrevenueforUnderArmourInc.(UA),VFCorporation(VFC),
andAdidasAG(ADDYY)were25.3%,23%,and25.4%.
NIKEisfocusingondirectsellingtotheconsumerwithitsDTCinitiative.ComparingNIKEsdistributionchannels,directsales
totheconsumerprovidehighermarginsthandosalestowholesalers.Infiscalyear2014,DTCrevenuesaccountedfor~20%

oftotalNIKEBrandrevenuesascomparedto18%infiscalyear2013.Onacurrencyneutralbasis,DTCrevenuesgrew22%
infiscalyear2014and30%in1Q15,yearoveryear.
ThecompanyisattemptingtogrowtheDTCcategoryto$8billioninsalesbyfiscalyear2017,upfrom$5.3billioninfiscal
year2014.Thatsanannualgrowthrateof14.7%,compounded.
Readthekeyelementsofitsstoreandonlinestrategiesinthenextpartofthisseries.

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part7of22)

The Rationale Behind NIKEs Retail Focus

ByPhalguniSoniDisclosureDec2,20144:00pmEST

NIKEs retail click-meets-bricks marketplace strategy

NIKEsDTC(ordirecttocustomer)approachisthreepronged:
NIKEbrandandcategoryexperiencestores
Onlinesalesthroughitsonlineportalwww.nike.com
NIKEfactorystores

Pricing power through the NIKE brand experience stores

TheNIKEbrandexperiencestoresprovidecustomerswiththefullbricksandmortarretailproposition.Premiumstoresthat
offertheconsumerthebestbrandexperience,experiencestoresincludeNIKETOWNs,thelargeststoresinthefleet.Each
NIKETOWNfeaturessixorsevenNIKEbrandcategories,providingtheverybestinnovativeproductandservicesthose
categorieshavetooffer.ThispremiumcustomerexperiencegivesNIKEhigherpricinglatitudeontheproductsoffered.
Forexample,theNIKERunningStoreinNewYorkCitycaterstothecompleteneedsoftherunner,fromcompetetotrain,to
express,allinoneplace.Itsahubforbothpremiumservicesandapremiumexperience.
Thesecondgoaliscreatingcategoryexperiences.Alongwithitswholesalepartners,NIKEaimstocreateuniqueexperiences
suchastheHouseofHoopsforBasketballwithFootLocker,Inc.(FL),ortheNIKETrackClubforrunnerswithFinishLineor
theFieldHousewithDicksSportingGoodsStore,Inc.(DKS).Theseproductdifferentiationstrategiesallowforpremium
pricing.TheyalsobenefitNIKEswholesalepartnersbybringingthemintothelimelight.

Factory stores offer a premium value proposition, broaden NIKEs customer base

NIKEsfactorystoresprovideapremiumproducttoconsumersshoppingforvalue.Duetothevaluepropositioninvolved,they
tendtoattracthighershoppervolumes.

Online sales through www.nike.com

Onlinesalesmadeup~15%oftotalNIKEbrandDTCrevenuesinfiscalyear2014,comparedto~12%infiscalyear2013.
OnlinesellingisoneofkeyfuturegrowthdriversofNIKEsretailstrategies.Thecategorygrewby42%infiscalyear2014,
andwasupby70%yearoveryearin1Q15.
Welllookatothergrowthdriversinthenextpartofthisseries.
Incomparison,Amazon.com,Inc.(AMZN),theworldslargestonlineretailer,grewsalesby20.4%yearoveryearinitsmost
recentquarter,endedSeptember30,2015.WalMartStores,Inc.(WMT),theworldslargestretailer,grewglobalecommerce
salesby~21%inthequarterendedOctober31,2014,onaconstantcurrencybasis.
TheSPDRConsumerDiscretionarySelectSectorETF(XLY)andtheSPDRS&P500ETF(SPY)provideexposureto
AmazonandNIKE.

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part8of22)

Understanding The Catalysts Fueling NIKEs Growth

ByPhalguniSoniDisclosureDec2,20144:00pmEST

NIKEs growth model

NIKE,Inc.(NKE)wasincorporatedasfarbackas1968.Yetitsgrownstrongoverthepastdecadeandpositioneditselfasa
companypoisedforfurthergrowth.NIKEhasgrownitsearningspershare(orEPS)atacompoundedannualgrowthrateof
~13%overthefiscalyearsbetween2004and2014.Itstargetingrevenuesof$30billioninfiscalyear2015and$36billionby
fiscalyear2017,upfrom$27.8billioninfiscalyear2014.Letsexaminethekeygrowthdriversthatthecompanysbanking
on.

Increasing focus on retail and creating a dynamic retail environment

GettingretaildynamicsgoingisabigchunkofNIKEsgrowthstrategy.Althoughsalestowholesalersaccountedforabout
79%ofNIKEsglobalrevenuesinfiscalyear2014,thecompanysbeentryingtotiltthesalesmixtowarddirecttocustomer
(orDTC)sales,whichhavecomparativelyhighermargins.DTCsalesincludesalesthroughcompanyownedretailoutletsand
ecommercesalesthroughitsportal,www.nike.com.

NIKE unleashes the power of digital

NIKEsdigitalinitiative,NIKE+,hastensofmillionsofusers.Thecompanyplanstogrowthatnumbertohundredsofmillions.
Itsusingdigitaltopersonalizeitsrelationshipwithcustomers.Digitalisalsoagreatmarketingtoolfordrivinghighercustomer

engagement.Forexample,theNIKE+TrainingClubclocked~17milliondownloadsby1Q2015.
NIKEsdigitalecommercethrustisvital.Thecompanyplanstogrowonlinesalesalmostfourfoldfrom$540millioninfiscal
year2013,to$2billionby2017.

Innovation in product design, category leadership

NIKEsthrusthasalwaysbeenonprovidingcustomerswithwellconstructed,uniquelydesignedproducts.Asexplained
earlier,mostproductsareleadersintheindividualcategories.ThecompanyinvestsextensivelyinR&D(researchand
development)fornewtechnologiesandtheirapplicationsforexistingproductlines,dependinguponconsumerpreferences.
TheproliferationofNIKEAIR,Lunar,Shox,Free,Flywire,DriFit,FlyKnit,NIKE+,andNIKEFueltechnologiesthrough
Running,Basketball,MensTraining,WomensTraining,andSportswear,amongothers,typifiesthecompanysdedicationto
designinginnovativeproducts.

Premium services and tailored solutions for customers

NIKEsproductportfoliofeaturespremiumproductsthatcommandhigherprices.Thisenablesthecompanytodifferentiateits
productsinthemarketplaceandatthesametimechargehigherpricesthanthecompetition.
NIKEsalsofocusedonprovidingapersonalizedcustomerexperience.TheNIKERunningStoreinNewYorkCitycatersto
thecompleteneedsoftherunnerfromcompetetotraintoexpress,allinoneplace.Itservesasahubofapremiumlevel
services,aswellaspremiumlevelexperiences.

ETFs holding Nike

TheVanguardDividendAppreciationETF(VIG),theSPDRConsumerDiscretionarySelectSectorETF(XLY),theSPDRDow
JonesIndustrialAverageETF(DIA),andtheSPDRS&P500ETF(SPY)haveexposuretoNIKE,Inc.(NKE).

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part9of22)

NIKEs Growth Drivers In The US And Overseas

ByPhalguniSoniDisclosureDec2,20144:00pmEST

North America: NIKEs largest growth driver

Despitehavingoperationsin190countriesacrosstheworld,NorthAmericacontinuestobethemostimportantofNIKEs
growthdrivers.NorthAmericansalesmakeupabout44%ofitstotalrevenuesworldwide.And,NIKEsprojectinghighsingle
digittoplinegrowthinNorthAmericathrough2017.
Acombinationofproductinnovationandpricingpowerspearheadthecompanyseffortstostayaheadofthepack.Theres
alsoalargegapbetweenNIKE,Inc.(NKE)anditsnearestcompetitors,UnderArmourInc.(UA),VFCCorporation(VF),
LululemonAthleticaInc.(LULU)andAdidasowned(ADDYY)Reebok.

Emerging markets
NIKEbelievesBrazilandChina(FXI),twokeymarkets,areunderpenetrated.Chinasgrowingmiddleclassandthegrowing
sportingenvironmentareimportantrevenueopportunities.Thecompanywantstoimproveitsproductmixandprofitabilityin
theChinesemarkettotakeadvantageofthechanginglandscape.
Brazilalreadyhasahealthysportsculture,evenapartfromsoccer.NIKEwasasponsorattheFIFA2014soccerWorldCup
andisalsoasponsoratRiosOlympicGames,slatedfor2016.Thecompanywantstousetheseopportunitiestoenhanceits
imagenotonlyinBrazil,butallovertheworld.
Parts11to13discusshowtheseopportunitiesarelikelytopanout.

Womens Training: Growth to outpace overall company growth

Salesofwomensapparel,footwear,equipment,andotherproductsmadeuplessthan25%ofNIKEsrevenuesinfiscalyear
2013.NIKEhastargetedthisareaasagrowthopportunity.A$4billionbusinessin2013,thecompanyplanstogrowits
Womensdivisionby~$3billionbyfiscalyear2017.Thatsfasterthanthecompanysoverallgrowthrate.
OnNovember20,itopenedanexclusivewomensstoreintheFashionIslandlifestylecenterinNewportBeach,California.
AnothersuchstoreopenedinShanghaionNovember29.

Sporting event sponsorships, world-class athlete endorsements

NIKEsongoingplayerendorsementsandsponsorshipdealswithteamsandsportingeventsacrosstheworldkeepsthe
brandinthelimelightandenablesittoshowcasenewproducts.
TheWorldCupisagreatexampleofhowweharnessthepowerofsporttodeepentherelationshipbetweenconsumersand
theNIKEBrand.WeintroducedmorerevolutionaryproductinnovationsinthisWorldCupthaninanyprior,andwereproudof
thefactthatmoreplayersworeNIKEbootsonthepitchthanallotherbrandscombined.Nearly1/3ofthoseplayerswore
Flyknitboots,saidTrevorEdwards,PresidentoftheNIKEbrand,speakingatthe1Q15earningscall.
ReadabouthowNIKEspricingpowerisdrivinggrowthinthenextpartofthisseries.

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part10of22)

Key Revenue Earners Drive Pricing Power For NIKE

ByPhalguniSoniDisclosureDec2,20144:00pmEST

NIKEs product range

TheseareNIKEsmajorproductcategories:
Apparel
Footwear
Equipment

Footwear ranks #1 among revenue earners for NIKE

NIKEisthenumberonebrandforathleticfootwearintheUS.Itleadsthecompetitionbyawidemargin,alwaysthinkingin
termsoftheseparationitcancreatebetweentheNIKEbrandandrivalfootwearmanufacturers.
CompetitorsUnderArmourInc.(UA),VFCCorporation(VF),andLululemonAthleticaInc.(LULU)havesalesmodelstilted
towardapparel.NIKEsthe#1brandinsoccerfootwearinnearlyeverymajormarket,includingGermany,thehomeofrival
brandAdidasAG(ADDYY).
Categoryrevenuesforfootwearcameinat$16.2billioninfiscalyear2014,makingup~58.3%oftotalrevenues.Footwear
salesgrewatacompoundedaveragegrowthrate(orCAGR)of12%overthe20102014period.
Categorygrowthhasbeendrivenpartlybyhigherunitsales,ashiftinthesalesmixtopriciermodels,andexpansioninnew
markets.Averagesellingpricesoffootwearhavegrownconsistentlyinmostmajormarkets.

LeadingmodelsincludetheLeBronrange,thePegasus31,theLunarGlide6andtheFreeFlyknit,theNIKEFreeTrainer4.0,
andAirMaxfootwear.

Apparel innovations provide pricing power for NIKE

Apparelisthesecondlargestcategory,accountingfor29.2%ofrevenues,or$8.1billioninfiscalyear2014.Apparelsales
grewataCAGRof12.6%overthe20102014period.Sellingpriceincreaseshavefeaturedprominently,especiallyinthe
largerreportingmarketsofNorthAmerica,WesternEurope,andEmergingMarkets,excludingChina.Thecompanysalso
triedtotiltthesalesmixtowardpremiumproducts,benefitingthetopline.
NIKEs#1inrunningapparel.ThecompanyhasdevelopednewpremiumrunningmarketswithproductssuchastheDriFIT
KnitandDriFITTouchperformancetops.OthermajorproductsincludetheAirMaxLunar1,theNIKETechWindrunner
jacket,andtheSportswearTechPackapparelrange.InnovationsliketheAeroloftvestgivethecompanypricingpowerover
competitors.
In1Q15,apparelrevenuesgrewinalmostallmajorcategories.TheSportswear,Soccer,WomensTraining,andRunning
categoriesexperiencedespeciallystronggrowth.

Equipment
Athleticequipmentsalesarethesmallestproductcategory,accountingfor6%ofrevenues,or$1.7billioninfiscalyear2014.
ThecategorygrewataCAGRof12.7%overthefiscalyearperiod20102014.
NIKEalsohasatargetedplanforeachworldmarket.Thenextpartcoversgeographiesandtheproductsthatwilldrive
growth.

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part11of22)

NIKEs Global Markets: Top Revenue Earners

ByPhalguniSoniDisclosureDec2,20144:00pmEST

Revenue analysis for NIKE by geographical segment

NIKE,Inc.s(NKE)operationsconsistofthedesign,development,marketing,andsellingofathleticfootwear,apparel,and
equipment.Salesareseasonalanddependentongeography.Historically,Q1andQ4havebeenrelativelystrongerinterms
ofsales.NIKEcategorizesrevenuesbygeography,exceptforitsseparateunit,Converse.NIKEhassevenreporting
segments:
NorthAmerica
WesternEurope
EmergingMarkets
GreaterChina
CentralandEasternEurope
Japan
Converse

NIKEs global markets: North American operations are far from tapped out
NorthAmericaisthelargestsegment,accountingfor~44%oftotalrevenuesin1Q15,upfrom~37.3%in2Q12.In
comparison,NIKEsmajorcompetitorintheUSmarket,UnderArmourInc.(UA),derivesover90%ofitsrevenuesfromNorth
America.OtherNIKEcompetitors,VFCCorporation(VF)andLululemonAthleticaInc.(LULU),alsohaveamuchhigher
dependenceonNorthAmericansales.Inthelastreportedquarter,USsalesasapercentageoftotalrevenueswere59%
forVFCand67%forLululemon.
NKE,UA,andVFCarepartoftheVanguardTotalStockMarketETF(VTI),theSPDRConsumerDiscretionarySelectSector

ETF(XLY),andtheSPDRS&P500ETF(SPY).
NIKEsNorthAmericansegmentgrewatacompoundedaveragegrowthrate(orCAGR)of16.4%overthefiscalyearperiod
between2010and2014.Itsalsooneofthemoreprofitablesegmentswithoperatingprofitmarginof27.6%in1Q15.

NIKE: On the offensive in North America

NIKEisalreadythecategoryleaderinmostmarketsitoperatesin.Itsnowstrategizingonhowtowidenthegapwithits
nearestcompetitors,orincreasethedegreeofseparation.How?
Innovation
Providingthecustomerwithpremium,musthaveproducts,andapremiumexperience
Transformingthemarketplaceandexpandingitsdirecttoconsumerfootprint

ThecompanyhopestogrowitsNorthAmericansegmentbyhighsingledigitseachyearthroughfiscalyear2017.Readabout
NIKEseconomicmoatinPart17.

Western Europe: Another North America in the making?

Thisisthesecondlargestsegment,accountingfor~21.5%oftotalrevenuesin1Q15,upfrom~16.5%in2Q12.The
segmentsgrownataCAGRof6.4%overthefiscalyearperiodbetween2010and2014.
TheWesternEuropesegmenthasbeentransformedoverthepastfewquarters.TheresultofNIKEseffortstogivethe
marketpremiumbilling,likeitdoesNorthAmerica.Theimpactofthenewmarketingstrategiesisreflectedintheoperating
profitmargin,whichroseto23.6%in1Q15,comparedto17.1%infiscalyear2014.

Growth opportunities in Western Europe

Inparticular,NIKEstargetingthelargereconomiesofUnitedKingdom,France,Germany,Austria,andSwitzerland.Its
lookingatRunning,Soccer,andWomensTrainingtodrivegrowth.NIKEstargetisover$6billioninrevenuesbyfiscalyear
2017,upfrom$5billionin2014.
Readaboutothersegments,next.

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part12of22)

Future High-Performance Markets For NIKE

ByPhalguniSoniDisclosureDec2,20144:01pmEST

Greater China: High-return, high-performance markets for NIKE

GreaterChinamadeup~8.5%ofNIKEInc.srevenuesin1Q15.ThesegmentsrevenuesgrewataCAGR(compounded
averagegrowthrate)of10.6%overthefiscalyearperiodbetween2010and2014,to~$2.6billioninfiscalyear2014.Atan
operatingprofitmarginof31.4%in2014,GreaterChinahasthehighestreturnonsalesamongNIKEssegments.
Althoughmarginsarehigh,theyvetakenadiprecently.NIKE,Inc.(NKE)isnowrepositioningitselfintheChinesemarket.
Itstryingtocreateamoredifferentiatedproductportfolio.
OverheadhasincreasedwiththecompanysstrategicinvestmentsindirecttoconsumerandnewheadquartersinShanghai.
Higherdiscountsandcloseoutsaleshavealsobeenfactors.Thecompanysobjectiveistoincreaseretailprofitabilityand
buildamoresegmentedmarket.KeygrowthcategoriesincludeRunning,Basketball,andWomensTraining.

Macro tailwinds in China

TheChinesesegmentshouldbenefitfromtheChinesegovernmentseffortstoincreaseconsumerspending.Consumer
spendingmakesupjust~34%ofChineseGDP(grossdomesticproduct).ThisislowwhenyoucompareittoIndiasratioof
62%orSouthKoreas52%ratio.Facedwithaslowingeconomy,theChinesegovernmentislookingtoraisethelevelof
consumption.
ConsumerspendingislikelytobeacrucialgrowthdriverinChinagoingforward.Thiswouldbenefitconsumerdiscretionary
(XLY)companieslikeNIKE,especiallyconsideringtheboominsportsandsportsmarketinginChina.SomeofNIKEsmajor
initiativesinChinaincludetheendorsementofathleteLiNaandtheopeningofitssecondwomensonlystoreinShanghai,

onNovember29.
TheiSharesMSCIEmergingMarketsETF(EEM),theVanguardEmergingMarketsETF(VWO),andtheiSharesChina
LargeCapETF(FXI)provideexposuretoChineseequities.

Converse: An iconic brand presenting unique opportunities

NIKEacquiredConversein2003.TheConversebrandmadeup~7.2%ofNIKEsrevenuesin1Q15,downfrom~8.8%in
2Q12.Thecompanyexpectstoachieve$3billioninrevenuesforthesegmentthroughfiscalyear2017.Itsintheprocessof
convertinglicenseestoadirectdistributionmodel.Thisshouldprovideopportunitiesforgrowingrevenues.Licenseesmake
upabout50%oftheglobalmarket.NIKEalsoplanstoleverageConversebrandssuchasCONSorJackPurcell,and
increasenewapparelofferingstofuelgrowth.
TheseinitiativesappeartobepayingoffforConverse.Thesegmentsoperatingincomemarginspikedsharplyto32.3%in
1Q15,overtakingChinas32.1%margin.
Readaboutthemarketsthatcouldprovidecauseforconcern,next.

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part13of22)

NIKEs Forecast For Emerging Markets: Current And Future

Concerns
ByPhalguniSoniDisclosureDec2,20144:02pmEST

Segments that could prove to be a near-term headache for NIKE

TheEmergingMarketssegment,whichexcludesChina,isthethirdlargestforNIKE,Inc.(NKE)intermsofsales.Emerging
Marketsmadeup~11.7%oftotalrevenuesin1Q15,downfrom~17.1%in2Q12.ThesegmentsrevenuesgrewataCAGR
(compoundedaveragegrowthrate)of17.9%overthefiscalyearperiodbetween2010and2014,to~$3.9billionin2014.

NIKEs forecast for Emerging Markets

NIKEexpectsrevenuestogrowto$6.5billionbyfiscalyear2017.LatinAmerica,particularlyBrazil,isexpectedtobeakey
growthdriver.ThecompanyexpectsBraziltobecomeitsthirdlargestmarketgloballyintimefortheOlympicGamesinRio
slatedfor2016.NIKEislookingattheRunning,Soccer,andWomensTrainingcategoriestodrivegrowth.
Thatsaid,thelargerLatinAmericaneconomiesofArgentinaandBrazilhaveundergonesignificantcurrencydepreciationin
recentyears.Slowingornegativeeconomicgrowthisanotherchallenge.Mexico,anothermajoreconomy,faceddistribution
disruptionsin1Q15thataffectedtheprofitabilityoftheentiresegment.

Central and Eastern Europe, Japan: Currency and macroeconomic headwinds may affect targets
CentralandEasternEuropeandJapanaretwosmallersegments,accountingfor4.9%and2%oftotalrevenues,
respectively.WhiletheNIKEbrandiswellreceivedbytheyouthcultureinbothgeographies,CentralandEasternEurope
revenueshaveexperiencedmodestgrowth,whileJapansrevenueshavedeclinedduringtheperiodbetweenfiscalyears
2010and2014.

ThecompanyexpectstheJapanesemarkettogrowinthemidsingledigitsthroughfiscalyear2017.However,currency
headwindscouldseeNIKEfallshortofitstarget.TheJapaneseyenrecentlyhitsevenyearlowscomparedtothedollar,and
thetrendislikelytocontinue.
ThedepreciationoftheRussianrublemayalsoaffectthemidteenpercentagegrowthtargetprojectedforCentraland
EasternEuropethroughfiscalyear2017.
BoththeJapaneseandRussianeconomiesfaceeconomicgrowthchallenges,althoughfordifferentreasons.Thiscouldalso
adverselyaffectrevenuesfromthesesegments.

Some NIKE rivals more immune to global challenges than others

ThesechallengesarelesslikelytoaffectcompetitorsUnderArmourInc.(UA)andLululemonAthleticaInc.(LULU),asthey
havelowerexposuretothesemarkets.AdidasAG(ADDYY)andVFCCorporation(VF)havemoreexposureoverseasand
arealsolikelytobeaffectedbycurrencyandmacroheadwinds.

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part14of22)

Understanding NIKEs Cost Structure Advantage

ByPhalguniSoniDisclosureDec2,20144:02pmEST

Comparing NIKEs cost structure

Keepingatightgriponcostsiscriticaltoanycompanysprofitabilityandforshareholderreturns.SomeofNIKE,Inc.s(NKE)
marginsarelowerthanthoseofitscompetitors.Thecompanysgrossprofitmargin,inparticular,hastrailedthatofits
rivalsUnderArmourInc.(UA),VFCorporation(VFC),LululemonAthleticaInc.(LULU),andAdidasAG(ADDYY).

NIKE targets increase in gross profit margins

NIKEplanstoexpanditsgrossprofitmarginbyanaverageof0.3%to0.5%peryearthroughfiscalyear2017.Itslookingata
fewwaystodothis:
Shiftingtohigherpricedpremiumproducts
Increasingthemixofretail(XRT)salesinoverallrevenues
Controllingcoststhroughtheuseofinnovativetechnologies

Asdiscussedearlier,NIKEenjoyssignificantpricingpowerinthemarketplaceduetoitsabilitytoinnovateandprovidea
differentiatedproduct.Thefirmplanstocontinuealongtheselinestoexpanditstopline.

NIKEs shift to direct-to-consumer pays off

NIKEsalsobeeninvestingsignificantlyinexpandingitsretailfootprintthroughitsdirecttoconsumerstrategythatwe
coveredinParts6and7.Thisincludesbothbricksandmortarretailanddigitalcommerce.Currently,revenuesto
wholesalersmakeupabout~78%ofthesalesmix.Retailsalesgenerallyhavehighermargins.Anincreaseintheratioof
retailsaleswouldpositivelyimpactNIKEsgrossmargin.

NIKEseffortsonthecostsideincludetheuseofnewandleanmanufacturingtechnologiessuchasFlyknitandwaterless
dyeing,whichsavecosts.Itsalsotryingtominimizetheimpactofadversecurrencymovementsbysettingupaninternal
tradingcompany.

Gross profit margin expands in 1Q15

Asaresultoftheseinitiativesandtheshiftinthesalesmixtohighermargingeographies,thecompanysgrossprofitmargin
increasedto46.6%in1Q15,comparedto44.9%in1Q14.NIKEexpectsthemargintoexpandby1.25%infiscalyear2015.

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part15of22)

NIKEs Manufacturers: Future Cost-Side Headwinds

ByPhalguniSoniDisclosureDec2,20144:02pmEST

Selling, general, and administrative (SG&A) expenses

DespitetheimprovementinNIKE,Inc.sgrossprofitmargins,SG&Acostshavebeenontheriseoverthepastyear.
Operatingexpensesmadeup31.5%ofrevenuesin1Q15.Investmentsinretail,bothonlineandbricksandmortar,have
impactedcosts.Theyrealsolikelytoincreasegoingforward.Digitalinfrastructure,increasedoverheads,andeventdriven
promotionalexpendituresarealsolikelytoincreaseSG&A.

Tax rates
TheeffectivetaxratesforNIKE,Inc.(NKE)andVFCCorporation(VF)aresignificantlylowerthanforothers.Bothfirmshave
benefitedfromhigheroverseassales.Taxratesoverseasaregenerallylower.Thecompanyisprojectinganeffectivetaxrate
of24.5%infiscalyear2015.

Regulatory requirements could hit NIKEs manufacturers

NIKEsmanufacturingoperationsareconcentratedinlowercostcountriessuchasChina,Vietnam,andIndonesia.Although
itsmanufacturingiscontractedout,anincreaseincosts,especiallyonthelaborfront,wouldadverselyaffectprofitability
targets.
RegulatoryrequirementstoincreasesafetystandardsinfactoriesmayalsoresultincostincreasesforNIKEsmanufacturers.
TheapparelindustryhasfacedincreasingbacklashfromhumanrightsgroupsinthewakeoftheBangladeshfactorycollapse
lastyear,whichresultedinthedeathsof700garmentworkers.Itsthoughttobetheworstapparelfactoryaccidentinhistory.
CompaniessuchasTheGapInc.(GPS),WalMartStores,Inc.(WMT),andH&Mhavecometogethertosetupafundforthe

victimsandtheirsurvivors.HighersafetystandardsatfactoriesarelikelytoseecostsriseforNIKEanditscompetitors,Under
ArmourInc.(UA),VFCCorporation(VF),andLululemonAthleticaInc.(LULU),andAdidasAG(ADDYY).

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part16of22)

NIKEs Future Spending Plans

ByPhalguniSoniDisclosureDec2,20144:02pmEST

When a mature company capitalizes on growth opportunities

NIKE,Inc.scapitalexpenditures(orcapex)havebeenontheriseforthepastfivequarters.Infiscalyear2014,capex
increasedbyover47%to$880million,yearoveryear.NIKEsmanagementishopingtocapitalizeongrowthopportunities,
whicharentlimitedtodevelopingemergingmarkets.Despitebeingcategorizedasapremiumbrand,thecompanysbeen
abletogrowitsrevenues,eveninthemiddleoftheGreatRecession.
TheiSharesRussell2000Growth(IWO),iSharesS&P500Growth(IVW),iSharesRussell1000Growth(IWF),andthe
iSharesCoreS&P500ETF(IVV)provideexposuretoNKE.

Future plans cost money

GrowthopportunitiesaboundandaredrivingNIKEsfuturespendingplanshigher:
HigherretailrevenuepotentialItspushtodrivehigherretailrevenuesthroughbricksandmortarstoreshasresultedinhigher
expenditures.Thehitechpremiumimagethatthecompanyputsacrossalsomeansahigherinvestmentonstorerollouts.
ThedigitalexperienceandecommerceThecompanyspendsconsiderablyonenhancingthedigitalexperienceforcustomersand
increasingecommercesales.
ResearchoninnovativemanufacturingtechnologiesThiswouldultimatelyresultinloweringthecostofproduction,butrequiresongoing
investment.

Asapercentageofsales,capexhasrisenfrom2.4%infiscalyear2013to3.2%in2014.NIKE,Inc.(NKE)expectscapexto
rangefrom3%to4%ofsalesoverthenextfewyears.Youcanreadabouttheimpactofhighercapexonthereturnon
investedcapitalinthenextpartofthisseries.

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part17of22)

NIKEs Economic Moat: How Strong is it?

ByPhalguniSoniDisclosureDec2,20144:02pmEST

Foot wars: Analyzing NIKEs competition

UnderArmourneedsdecadestotakeoutNike,accordingtoUnderArmourInc.(UA)CEO,KevinPlank.Plankmadethe
commentsduringarecentinterviewwithBloombergTelevision.Defeatist?Notreally,justanacknowledgementofthe
degreesofseparationthatliebetweenNIKEandthenewkidontheblock,UnderArmour.NIKE,Inc.sbeenaroundfor50
oddyears,whileUnderArmourstartedoutin1996.

Whats an economic moat?

Theeconomicmoatisanallegoricalbodyofwaterthatsurroundsaprofitablecompany,protectingitsmarketshareandfuture
cashflows,muchlikeanactualmoatsurroundingacastle.Acompanywithasustainablebusinessadvantageissaidtohave
awideeconomicmoat.Thatmakesitdifficultforrivalstoerodethefirmscompetitiveadvantageorimpactfuturerevenues
andprofits.
Acompanywithasustainablecompetitiveadvantageusuallyprovidesconsistentaboveaveragereturnsonthecapital
investedinthebusiness.Asisapparentfromthetwocharts,NIKEsreturnshavebeenconsistentovertheyears,saveforthe
recessionmarredfiscalyear2009.Despitethedipinprofitability,revenuesactuallyincreasedthatyear.NIKE,Inc.s(NKE)
returnsarealsoabovethoseofcompetitoraverages,includingUnitedArmour,VFCCorporation(VF),LululemonAthletica
Inc.(LULU),andAdidasAG(ADDYY).UnitedArmour,VFC,andNIKEarepartoftheS&P500Index(SPY).

Analyzing NIKEs economic moat and competitive position

Thefootwearandsportsapparelindustryhasmanyplayersandfewbarrierstoentry.Yet,NIKEisheadandshouldersabove
thecompetition,bothintermsofoperatingandfinancialperformance.Itslargersizemeansthatitsgrowthaffectsthemarket

toaneventgreaterextent.NIKEistheacknowledgedmarketleaderinfootwear,running,soccer,andbasketball.
Inrecentfinancialreleases,managementhasdiscussedwideningthedegreeofseparationthatliesbetweenNIKEandthe
otherplayersinthemarket.
NIKEsabilitytosuccessfullyinnovateiscriticalforkeepingitspricingpowerandthemoatintact.Thecompanyscompetitive
advantagehasbeenbuiltovertheyearsduetoitsinnovationandpioneeringmanufacturingpractices.
Thenextpartofthisserieswilldiscussthecompanysfocusonimprovingreturnsoninvestedcapitalandfreecashflow.

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part18of22)

Why The NIKE Brand Consistently Delivers Above-Average

Returns
ByPhalguniSoniDisclosureDec2,20144:03pmEST

Returns on invested capital (or ROIC) and the firms cost of funding
NIKE,Inc.(NKE)hassuccessfullybuiltacultbrandwhosenewproductsselloutwithinminutesofhittingthestores.Thefirm
hasalsodemonstrateditspricingpower.Themusthaveauraaboutitsproductshavehelpedthecompanyearnconsistent
aboveaveragereturns,overandaboveitscapitalcosts.

NIKEs above-average returns

NIKEsfavoredyardstickformeasuringreturnsisthereturnoninvestedcapital(orROIC).TheROICmeasureshowmuch
cashflowisgeneratedbyafirmsinvestments.Itscalculatedbytakingnetoperatingprofitslessadjustedtaxes,anddividing
thatbyinvestedcapital.Capitalinvestmentsincludethosefinancedbybothdebtandequity.
ThedifferencebetweentheROICandthefirmscostoffunds,1determinestheexcesseconomicvaluegeneratedbythefirm,
overandaboveitscostoffunds.Agreaterdifferenceimplieshighervalueandviceversa.Asyoucanseeinthechart,NIKEs
ROICwashigheranditsweightedaveragecostofcapital(orWACC)waslowerthantheaverageamongitscompetitors.This
suggeststhatNIKEhasgeneratedhighereconomicvalue.
NIKEscompetitorsincludeUnitedArmourInc.(UA),VFCCorporation(VF),LululemonAthleticaInc.(LULU),andAdidasAG
(ADDYY).UnitedArmour,VFC,andNIKEarepartoftheVanguardTotalStockMarketETF(VTI),theSPDRConsumer
DiscretionarySelectSectorETF(XLY),andtheSPDRS&P500ETF(SPY)

Strategy going forward

NIKEisdeterminedtogeneratehigherpositivecashflowandmaintainROICinthemidtwentiesrangegoingforward.The
companysstrategyhingesonacoupleofthings:
Betterworkingcapitalandinventorymanagement
Capitalexpendituretargetedathigherreturninvestmentsforexample,retailstorerollout,digitalandecommerce,andinnovation

Sofar,NIKEisontracktomeetitsgoals.ROICcameinat26.2%in1Q15,anincreaseof0.7%overlastyear.Asyoucan
seeinthegraphPart17,thedifferencebetweentheROICandNIKEscostofcapitalappearstobewidening,which
suggestseconomicvalueisincreasing.Thenextpartofthisserieswillexplainwhy.
1.weightedaveragecostofcapitalorWACC

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part19of22)

Using Leverage To Enhance Returns In The Footwear Industry

ByPhalguniSoniDisclosureDec2,20144:03pmEST

Returns and financing structures in the footwear industry

NIKE,Inc.(NKE)anditscompetitors,UnitedArmourInc.(UA),VFCCorporation(VF),LululemonAthleticaInc.(LULU),and
AdidasAG(ADDYY),employlittleornoleverageintheircapitalstructures.Asnotedearlierinthisseries,allofNIKEs
manufacturingiscarriedoutbyoverseasthirdpartycontractors.Thisreducestheneedforextensivelevelsofcapital
deployment.
UAsandLULUscapitalstructuresinvolvenoborrowingwhatsoever.Thisgivesthecompaniesadditionalroomtoincrease
futureshareholderreturnsbyusingleverage.Forexample,UAandLULUhadrespectiveeffectivetaxratesof37.8%and
29.6%intheirlastfiscalyears.Comparatively,NIKEandVFChadrespectiveeffectivetaxratesof24%and22.6%.NIKEand
VFCalsohadhigherreturnsonequitycomparedtoUA.
UA,VFC,andNIKEarepartoftheS&P500Index(SPY).

NIKEs borrowing trend

NIKEborrowed~$1billionindebtinfiscalyear2013.Thisraiseditsdebtlevels,althoughtheystillremainlow.Anincreasein
leveragethatis,debtfinancingreducestheweightedaveragecostofcapital(orWACC),becausetherequiredrateof
returnondebtislowerthanonequity.Interestonborrowingisalsotaxdeductible,whichfurtherreducesthecostoffunding
andenhancesshareholderreturns.
Duetotheincreaseinleverageemployedandthesteadyimprovementincashflows,thefirmisincreasingitsexcessreturns
earnedoveritscostofcapital,yearoveryear.NIKEscapexissettoincreaseinthecomingyears,aswesawinPart16of

thisseries.Thiscouldseethefirmincreasetheuseofdebtinitscapitalstructuretofinancecapitalprojects.Thatwould
enhancereturnstoshareholders.
ThenextpartofthisserieswillcoverhistoricalandfuturereturnstoNIKEshareholders.

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part20of22)

Do NIKEs Shareholders Enjoy A Best-Of-Both-Worlds Advantage?

ByPhalguniSoniDisclosureDec2,20144:03pmEST

Dividends and growth: Analyzing NIKEs shareholder returns

NIKE,Inc.(NKE)isawellestablishedplayerinthefootwear,sportsapparel,andequipmentspace.Unlikenewkidsonthe
block,UnitedArmourInc.(US)andLululemonAthleticaInc.(LULU),itsbeenaroundsincethe1960s.Thefirmsalsoraised
itsdividend13yearsinarow.Thisiskindofunusual,consideringthatitlikestocategorizeitselfasagrowthcompany.And
growthcompaniesgenerallydontliketopayouttoomanydividends,preferringinsteadtoholdbackthecashflowfrom
earningstofinancefuturegrowthopportunities.
Thecompanyishelpedbythefactthatitsmanufacturingisconductedmostlybythirdpartycontractors,reducingtheneedfor
repeatedcapexinjections.Thisfactoralsohelpsthecompanygroworganically,andnotnecessarilythroughacquisitions.

NIKEisapartofbothgrowthanddividendorientedexchangetradedfundssuchastheiSharesS&P500Growth(IVW),the
VanguardDividendAppreciationETF(VIG),theiSharesRussell2000Growth(IWO),theiSharesInternationalSelect
Dividend(IDV),andtheiSharesSelectDividend(DVY).ItsalsopartofETFstrackingbroadbasedmarketindicessuch
asSPYandDIA.

RivalsUAandLULUhaventpaidadividendasyet.Theupsideforshareholdersintheshortandmediumtermmustcome
fromsharepriceappreciation.Lookingatthefiveyeartotalaverageshareholderreturns,bothfirmshaventdonetoobadly.
Bothhave,infact,performedbetterthanNIKE.Butthelackofdividendscancontributetoreturnsvolatility.For
example,LULUstotalreturnsoverthelastyearhavebeennegative.

Benefits of increasing dividends to shareholders

Whendividendsareconsistentlyincreasing,itsignalsmanagementconfidenceinthecompanysabilitytoconsistently
generateincreasingcashflows.Adividendcanalsoprovidesomeupsidetoyourportfolio,evenwhenastockisgetting
hammeredintheshortterm.

Share buybacks spike returns for NIKEs shareholders

ManagementaimstoreturnmorecashtoNIKEsshareholdersintheformofsharebuybacks.Theyauthorizedan$8billion
fouryearsharebuybackprogramin2012.Sharerepurchasestotaled$2.6billioninfiscalyear2014.These,alongwiththe
improvementinmarginsandlowertaxrateswediscussedinPart15,havepositivelyimpactedearningspershare(orEPS).
EPScameinat$2.97infiscalyear2014.NIKEexpectsacomparativeincreaseintheregionof20%inits2015EPS.Read
aboutNIKEsrelativevaluationinthenextpartofthisseries.

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part21of22)

Determining NIKEs Fundamental Value

ByPhalguniSoniDisclosureDec2,20144:04pmEST

NIKEs fundamental value: Does the shoe fit?

NIKE,Inc.s(NKE)managementaimtodeliverreturnstoshareholdersinthetopquartileoftheS&P500Index(SPY).Inthis
partoftheseries,wecompareNIKEsvaluationtothoseofitspeersusingacrosssectionalanalysis.
ThefirstgraphbelowpitseachcompanysforwardEVtoEBITDA1multiplewiththetwoyearexpectedgrowthratein
EBITDA.AhigherEV/EBITDAmultipleisjustifiable,providedthecompanyisexpectedtogrowcommensuratelyinthefuture,
andviceversa.

Inthegraphbelow,UnitedArmourInc.(UA),withagrowthrateofover25%peryear,isvaluedatamultipleofjustunder36x.
NIKE,VFCCorporation(VF),andAdidasAG(ADDYY)areallfallingbelowthetrendline,suggestinganupsideinstock
pricesmaybeinthecards.AnnualexpectedgrowthratesinEBITDAforthethreefirmsrangefrom~10.6%forADDYYto
13.8%forNKE.

NIKE versus the competition

Inthisseries,werefocusingspecificallyonNIKEsfundamentalvalueandhistoricalperformance.Thecompanys
performance,whilelaggingbehindmostothersintermsofthetotalshareholderreturnsmetric,hasbeenconsistentovera
longerperiod.
Forexample,UnitedArmourandLululemonAthleticaInc.(LULU)arenewkidsontheblock,relativelyspeaking.The
upsideforshareholdersofthesecompanieshascomefromsharepriceappreciation.Neithercompanyhasthegeographical
diversificationenjoyedbytheotherthreefirms.
NIKEisalsosignificantlylargerthanthepeergroup.Itsmarketcapis~2.6xthatofVFC,itsnearestrival.Sothegrowthrates
arecalculatedoverarelativelylargerbase.
TheannualaverageincreaseinNIKEsEBITDAoverthepastfiveyearshasbeen13.9%,slightlyaheadofthe13.8%
estimateusedinthemodel.ThetilttowardretailanddigitalcommercewouldpositivelyimpactfuturemarginsandEBITDA.
Theupsidefortheconsumerdiscretionarysector(XLY)isalsolikelytocomefromanimprovingUSeconomyandlabor
market.
Basedontheseassumptions,NIKEappearstobeslightlyundervalued.
CouldtherebesomebumpsintheroadaheadforNIKE?ReadaboutthekeyriskstoNIKEsreturnsintheconcludingpartof
thisseries.
1.enterprisevaluetoearningsbeforeinterest,taxes,depreciation,andamortization

Traditionallyinnovative:AmustknowinvestorsguidetoNIKE(Part22of22)

Variables that could threaten NIKEs Business Model

ByPhalguniSoniDisclosureDec2,20144:04pmEST

Threats to NIKEs business model

WhiletheoutlookappearsrosyforNIKE,Inc.(NKE),therearesomethorns,too,thatcouldchallengethecompanysabilityto
achieveitsfinancialandoperationaltargets.

Exposure to overseas markets and currencies

Comparedtoitsrivals,UnitedArmourInc.(UA),VFCCorporation(VF),LululemonAthleticaInc.(LULU),andAdidasAG
(ADDYY),NIKEderivesalargerportionofitsrevenuesfromoverseasmarkets.Thisleavesthefirmvulnerabletoboth
economiccyclesinothergeographiesandadversecurrencymovements.EitherofthesevariablescouldreduceNIKEs
profits,asnotedearlierinthisseries.
Inthecurrentcontext,thisoverseasexposureriskisparticularlyapplicable.Economicgrowthhasbeensubduedoreven
negativeinmajoreconomiesincludingChina,Japan,Brazil,Argentina,Russia,andWesternEurope.Currenciesinthese
countrieshavealsodepreciatedsignificantlythisyearagainsttheUSdollar.NIKEcouldfaceheatinmostoftheseeconomies
apartfromChina,asdiscussedinPart13.
Incontrast,rivalsUAandLULU,whichderiveover75%ofrevenuesfromtheUSmarket,couldbenefitfromthegeographic
tilt.TheUSeconomyisgrowingandsoisconsumerspending.Thirdquartergrossdomesticproductgrewbyalargerthan
expected3.9%.Consumerspendingisalsoontherise,increasing3.6%yearoveryearinOctober.USsalesareparticularly
relevantnowforconsumerorientedfirmsintherunuptotheholidayseasonthatstartedjustbeforeThanksgivingand
continuesuntiltheNewYear.

YoucangainexposuretoUAandNIKEthroughthetheSPDRS&P500ETF(SPY)andtheSPDRConsumerDiscretionary
SelectSectorETF(XLY).

Competitiveness, similar strategies adopted by rivals

AlthoughNIKEleadsthemarketbyawidemargin,rivalscouldpossiblyemulateitspremiumstrategyinanattempttoeatinto
itsmarketshare.Still,itwouldtakeyearstobuildthebrandthatNIKEsgot.
Adidascouldbeitsclosestcompetitorinaglobalcontext,butitsgotitsworkcutoutforitintheUSmarket.Thatsaid,
thenewlyrevampedReebokbrandandretailpushmayposeathreatinthecasualsportsapparelsegment.
Tostayahead,NIKEmustcontinuetolaunchinnovativeproductsandmaintainthewidthofitseconomicmoat,asdiscussed
inPart17ofthisseries.

Consumer price sensitivity

HigherpricedproductsalsoleaveNIKEvulnerabletoconsumerpreferences.Althoughthecompanyprovedtoberelatively
resilientinthemostrecentrecession,aneconomicdownturncouldreducedemandandunitsales.

Supply chain risks

Asmentionedearlierintheseries,allofNIKEsmanufacturingisoutsourcedtothirdpartycontractorsincountries
includingChina,Indonesia,andVietnam.Governmentlegislationregulatingfactoriesoranincreaseininputcosts,especially
laborcosts,couldpresentchallengestoNIKEsfinancialgoals.
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