Group Assignment September Semester 2013
Content
Chapter 1: Introduction ..................................................................................................................................... 1 1.1 Background of Nike .................................................................................................................................... 1 1.2 Management of Nike................................................................................................................................... 1 1.3 Successful Story ......................................................................................................................................... 2 1.4 Background of Puma................................................................................................................................... 3 1.5 Management of Puma ................................................................................................................................. 3 1.6 Successful Story ......................................................................................................................................... 4 Chapter 2: Financial Analysis............................................................................................................................ 5 2.1 Vertical Analysis ........................................................................................................................................ 5 2.2 Trend Analysis ........................................................................................................................................... 6 2.3 Ratio Analysis ............................................................................................................................................ 7 2.3.1 Profitable Ratio ........................................................................................................................................ 7 2.3.2 Liquidity Ratio......................................................................................................................................... 9 2.3.3 Asset management ratio.......................................................................................................................... 10 2.3.4 Debt Utilization Ratio............................................................................................................................. 12 2.3.5 Investments ........................................................................................................................................... 14 Chapter 3: Financial Market and Impact........................................................................................................... 17 3.1 Global Economy ....................................................................................................................................... 17 3.2 Currency Fluctuations ............................................................................................................................... 17 3.3 Changes in Tax ......................................................................................................................................... 18 3.4 Rising Input Cost ...................................................................................................................................... 18 3.5 Intense Competitive Landscape.................................................................................................................. 18 3.6 Product Counterfeiting Risk....................................................................................................................... 19 Chapter 4: Challenges Faced and Solutions ...................................................................................................... 19 4.1 High Inventory ......................................................................................................................................... 19 4.1.1 Solution................................................................................................................................................. 20 4.2 High Production Cost ................................................................................................................................ 20 4.2.1 Solution................................................................................................................................................. 20 4.3 Selling and administrative expense............................................................................................................. 21 4.3.1 Solution................................................................................................................................................. 21 4.4 Tax rate .................................................................................................................................................... 21 4.4.1 Solution................................................................................................................................................. 22 5. Summary and Future Outlook ...................................................................................................................... 22 5.1 Performance in Operating .......................................................................................................................... 22 5.1.1 Future Outlook....................................................................................................................................... 22 5.2 Performance in Financial Market ............................................................................................................... 23 5.2.1 Future Outlook....................................................................................................................................... 23 Reference....................................................................................................................................................... 24 Appendix 1：Nike Annual Report................................................................................................................... 27 Appendix 2 ：Puma Annual Report................................................................................................................ 30 Appendix 3: Process of Calculation ................................................................................................................. 33
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Chapter 1: Introduction 1.1 Background of Nike
Nike Inc., (Nike) was founded on January 25, 1964 as Blue Ribbon Sports by Bill Bowerman and Phil Knight and officially became Nike, Inc. on May 30, 1971. Headquartered in Beaverton, Oregon, Nike is the largest seller of athletic footwear and athletic apparel in the world and is traded on the New York Stock Exchange. The Company sells its products to retail accounts, through Nike owned retail stores and Internet sales, and through a mix of independent distributors and licensees, in approximately 190 countries around the world. Nike is a leader company in athletic footwear industry, which has strong corporate image and brand value delivering to its customers. Sustaining innovation lead Nike develop high technology in their effort to stay ahead of their competitors with its products (Nike Inc., 2013). Nike’s successful based on three main factors: engaged with effective marketing strategies, vividly advertising campaigns and outsourcing the production at low cost labor market as developing countries. 1.2 Management of Nike
Nominating and Corporate Governance Committee of Nike the “Committee” considers and evaluates candidates for appointment or election to the Board of Directors. In evaluating potential candidates for suitability, the Committee considers many factors to identify individuals with the requisite intelligence, education, experience, and character to make significant contributions to the Board of Directors.
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Source From: Nike Board of Director and Executive http://nikeinc.com/pages/executives 1.3 Successful Story
By the mid-1980s, Nike had slipped from its position as the industry leader, the debut of a new signature shoe for an NBA rookie by the name of Michael Jordan in 1985 helped bolster Nike’s bottom line. In 1989, Nike built on its momentum from the ‘Revolution’ campaign with the tagline “Just Do It.” In 1990s, Nike signed the World Cup-winning Brazilian National Team began designing the team’s distinctive uniform. Nike Golf landed named Eldrick “Tiger” Woods for a reported $5 million per year. Competitors laughed and critics howled at Nike’s \"folly,\" until Tiger won the 1997 Masters by a record 12 strokes. In 2010, Nike signed Chinese tennis player Li Na, Algerian- French dancer Sofia Boutella, British hurdler Perri Shakes-Drayton, Russian-born tennis star Maria Sharapova, running a new project “Make Yourself” campaign to target women customers (Roy, 2012). The Nike+ FuelBand mobile app launched in 2012, which can be seen as a transition from traditional advertising to new media there are series of interactive campaigns designed to engage consumers on a whole new level and stimulate conversation in the athletic community (Nike Inc., 2013).
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1.4 Background of Puma
Puma AG Rudolf Dassler Sport (Puma) is a major German multinational company that produces athletic and casual footwear, as well as sportswear, headquartered in Herzogenaurach, Bavaria, Germany. The company was formed in 1924 as Gebrüder Dassler Schuhfabrik by Adolf and Rudolf Dassler. The relationship between the two brothers deteriorated until the two agreed to split in 1948, forming two separate entities, Adidas and Puma (Puma, 2013). Both companies are currently based in Herzogenaurach, Germany. Puma is one of the world’s largest providers of sport lifestyle footwear, apparel and accessories under the leading brands such as Alexander McQueen, Mihara, Rudolf Dassler Schuhfabrik, and Puma the black label. The company through its subsidiaries operates in more than 120 countries globally. The company, under its Footwear segment, is engaged in the designing, manufacturing and marketing of wide range of shoes for men, women, and juniors for various sports, including football, motor sport, cricket and golf.
1.5 Management of Puma
Board of Directors: consists of both internal management directors and independent directors. The two groups of directors bring benefits to Nike the different knowledge and experience contributes into management it also provides another frame of overall board in thinking. Puma’s board would be classified as an oversight board, playing an active role with regards to management’s decisions making of strategy. On the corporate level Puma’s strategy based on the mission “to be the first truly virtual sports company” that focus on building network of independent firm, suppliers and customers instead of managing activities of the value chain through direct ownership (Puma, 2013). In order to achieve this goals Puma has decentralized its structure and develop a virtual corporate structure which supported by organizational matrix. Managing the virtual structure, Puma create the group executive committee that incorporates the functions of brand management, product, and finance and growth management, legal and organizational structure in the central part.
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Key EmployeesNameJean-François PalusPositionResponsibilitiesEducationChairman of the BoardManaging Kering'sFrance’s HECmergers and acquisitions,business schoolreporting to Francois-Henri Pinault, Chairmanand CEO of Kering.Experienceauditor and financialadvisor,Deputy CFO, GroupFinancial Control Director,store manager and CorporateSecretary and member ofConforama’s ExecutiveBoardBjorn GuldenCEOglobal textile salesMBA from OlinBusiness School(Babson) in BostonMichael LaemmermannCFOFinance and LegalCEO of Danish jewellery,Director of Europe’s largestfootwear retailer, RackRoom Shoes CEO andPresident.Magic City CampusGeneral Manager Finance,Senior Hs in MINOTDirector of Controlling, ChiefFinancial OfficerUniversity ofKarlsruhe with aMasters in BusinessAdministration andEngineeringVice President (automotiveand Industrial), ManagingDirector Hong Kong andHead of Global Sourcing atadidas Group, global sourcingactivities for adidas, Reebok,Taylormade and others.Member of the Board ofDirectors of Bouygues.Furthermore, he has beenChairman of the ArtemisGroupChairman of the Board ofBastec AB, Thomas FrickAB and T.M.C ABDeputy Chief Financial &Administrative Officer in M6groupDirector of Sapardis S.AAndy KoehlerCOOFunctions Operations:Supply ChainManagement, Logisticsand IT since François-Henri PinaultBoard of DirectorThore OhlssonBoard of DirectorJean-Marc DuplaixBoard of DirectorMichel FriocourtBoard of Director Source From: Puma Managing Director http://about.puma.com/category/company/managingdirectors/ 1.6 Successful Story
In 1970, Brazilian football star Pele helped Brazil to win the World Cup in mexico wearing Puma football boots. Germany’s Boris Becker won Wimbledon wearing Puma shoes and playing with a Puma racket. Eight years later, Puma sold in big department stores for very little money that result in its shoes become expensive and no more competitive advantage. In 1993, Jochen Zeitz named chairman and CEO of Puma he cutting costs by 40% and then pushes Puma IPO on the German stock exchange. Shortly, Jochen Zeitz was offshoring Puma’s production from German to Asia. Due to those business movements, Puma stop losing and earned $29 million on sales in 1996 (Puma, 2013).
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Chapter 2: Financial Analysis
The global economic recession resulted in a significant slow-down in international trade and a sharp rise in protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. Companies in our industry are facing trade protectionist challenges in many different regions, and in nearly all cases we are working together to address trade issues to reduce the impact to the industry, while observing applicable competition laws. Notwithstanding our efforts, such actions, if implemented, could result in increases in the cost of our products, which may in turn adversely affect our sales or profitability and the imported footwear and apparel industry as a whole. Accordingly, we are actively monitoring the developments described below. 2.1 Vertical Analysis
Amount Revenue Cost of revenue Net income 60.00%23331000 13183000 2223000 Nike 2012 Percent of total Amount Puma 2012 Percent of total 100% 51.70% 2.50% 100% 4202706.7 56.60% 2173760.7 10.50% 90203.9 50.00%40.00%30.00%20.00%nike-2012puma-201210.00%0.00%cost of revenuenet income We choose one year to compare this two company and we can see the figures shown in the table, Nike more profitable than Puma in 2012. Nike’s cost of revenue is 56.60%, compare to Puma’s 51.70%. This means that for every $1 in net sales, Nike got almost $0.56 in 2012, and Puma got almost 0.51% in
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2012 is spent on cost of revenue. Nike’s percentage of net income to revenue is 10.5%. That means 10.5% of revenue results in profit for the company’s stockholders. On the other hand, Puma’s percentage of net income to revenue is 2.5%.Nike sells to thousands of retail accounts and operates 16 distribution centers outside of the United States. In many countries and regions, including Canada, Asia, Europe and some Latin American countries we have a futures ordering program for retailers similar to the United States futures program, the common-size statement highlights Nike advantage over Puma.
2.2 Trend Analysis
Net sales Trend percentages 233.31% 201.17% 190.14% 100% 42.93% 41.84% 35.84% Nike Puma 31-Dec-12 31-Dec-11 31-Dec-10 31-Dec-09 31-Dec-12 31-Dec-11 31-Dec-10 23331000 20117000 19014000 10000000 4202706.7 4183876.2 3584264.4
net sales 250.00%200.00%150.00%100.00%50.00%0.00%2012 nike2011 puma Assume Nike and Puma total revenues were 10,000,000 in 2009 and rose to 2,3331,000 in 2012, the base the is 2009,so that year’s percentage is set equal to 100 .We can see the figures shown in the table: Nike’s net sales has been continued increasing during these three years, especially year of 2012. Puma’s net sales also keep an increasing trend, but still cannot compete with Nike; Nike sells products to retail accounts, through Nike’s own direct to consumer operations, and through a mix of independent distributors, licensees and sales representatives around the world. Compare with Puma, the sales figures of Nike higher than Puma, this is weakness for puma, cannot fight with Nike to get
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leader industry during these three years. Puma is still a small player relative to Nike. But has crept up in recent years, and in 2011, has reached its highest Global 500 brand value, Puma has the ingredients and heritage to increase its brand value and rise up the table. Selecting the right rising athletic and sports stars, clearly differentiating themselves against Nike and Adidas, capitalizing on their sporting heritage and treading a delicate path between product innovations and continuing their success of producing more style driven, non-performance-related product lines will all play a part. We can see puma has been prepared to challenge the Nike from many ways; puma is strength of the competitor in the next few years, in response to threats, Nike also has a lot of way to meet threats and more details shown in another chapter. 2.3 Ratio Analysis
We have to say, Nike is a leader of the industry, the company compare with Puma and analysis some representative ratios to explain why Nike can be a leader in industry depend on the annual ratio result that calculated by us in sheet of excel. (All industry averages taken from “Thomson Reuters”)， 2.3.1 Profitable Ratio
Profitable ratio Net profit margin Gross margin Return on asset Return on equity Net profit margin: Measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, Nike‘s net profit margin have been deducted. Net profit margins vary widely across industries. Puma s’ net profit margin decreased from 2010 to 2012, the problem very serious in 2012, Nike’s advantage over Puma during this three years.
profit 43.50% 14.90% 22.44% 45.74% 14.77% 22.17% 46.28% 13.78% 20.67% 48.28% 3.12% 4.40% 49.63% 9.31% 15.39% 49.69% 9.42% 16.05% Nike puma 31-May-12 31-May-11 31-May-10 31-Dec-12 31-Dec-11 31-Dec-10 9.73% 10.80% 10.03% 2.15% 7.65% 7.47% Page 7 of 37
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Gross profit margin: The higher the gross profit margin the better, and for the Nike has continued to decrease from 2010 to 2012. So the company got a little problem in the area of each sales dollar remaining after the firms has paid for its goods. The situation of Puma is quite good.
Return on assets: Indicates how efficient management is at using its assets to generate earnings. The higher the number the better, because of the company can earn more money on less investment. For the Nike, the ratio of ROA has been increasing in the past three years, Puma has huge decreased from 2011 to 2012, the condition is not very stability, Nike in this area got a generate earnings more than his competitors.
Return on equity: measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested. ROE is useful for comparing the profitability of a company to other firms in the same industry. Nike made a lot of profit to their
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shareholder, because of the ratio of ROE keep rising during these three years (2010-2012); Puma has huge decreased from 2011 to 2012, the condition is not very stability, the Nike has a high profitability than Puma.
Overview: A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time. For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.so the result shown that the Nike is doing well compare to Puma.
2.3.2 Liquidity Ratio
Liquidity ratio Current ratio Cash ratio Quick ratio Quick ratio: This is a more stringent measure of liquidity than the Current Ratio because it excludes inventory. This ratio is more relevant than the Current Ratio for some industries where inventories are not liquid. The quick ratio from 2010 to 2012 there is little reduce in Nike company , puma also，but Nike’s quick ratio is above the industry average of 1.86 (Routers) being above the industry indicates that we could sell our inventory than what other companies in the industry would have to sell to meet current obligations. Puma’s quick ratio is lower than Nike and below the industry average of 1.86 (Routers).
Nike puma 31-May-12 31-May-11 31-May-10 31-Dec-12 31-Dec-11 31-Dec-10 3.05 0.97 1.77 2.85 1.15 1.94 3.26 1.53 2.32 2.04 0.54 1.24 2.04 0.55 1.33 1.94 0.63 1.35 Page 9 of 37
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Cash ratio: The cash ratio is most commonly used as a measure of company liquidity. It can therefore determine if, and how quickly, the company can repay its short-term debt. Nike’s cash ratio has continued falling from year 2010 to 2012, we unexpected to see this downgrade, we would be willing to extend to the asking party. Even thought, the cash ratio of Nike is still higher than Puma.
Overview: A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts. A company's ability to turn short-term assets into cash to cover debts is of the utmost importance when creditors are seeking payment. Bankruptcy analysts and mortgage originators frequently use the liquidity ratios to determine whether a company will be able to continue as a going concern. 2.3.3 Asset management ratio Asset management ratio A/C turnover Inventory turnover Total asset turnover 31-May-12 31-May-11 31-May-10 31-Dec-12 31-Dec-11 31-Dec-10 7.44 4.44 1.53 6.95 4.59 1.37 6.87 4.64 1.37 Page 10 of 37 Nike puma 5.37 3.11 1.28 4.9 3.1 1.22 5.46 3.47 1.26 Financial Management & Policy
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Total asset turnover: The amount of sales generated for every dollar's worth of assets. Measures a firm's efficiency at using its assets in generate sales or revenue, the higher the number the better. The ratio of asset turnover keep stable in 2010 and 2011 is 1.37, but in the 2012 has a quite changes, raised up to 1.57 .It indicates pricing strategy: Nike with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover. There is a little distance between Nike and Puma, but Puma’s amount of asset turnover still lower than Nike.
Inventory turnover: Nike’s inventory turnover of 4.56 below the industry average of 5.91 (Router).Nike’s ratio of inventory turnover decreased from year 2010 to2012, so reducing inventory turnover levels were a key initiative for Nike in fiscal year. Due to our ability to quickly turnover inventory, Nike benefits from greater cash flows, reduced storage costs, and less spoilage. In addition, quick turnover reduces Nike’s inventory of out-of-style shoes and clothing. Company management stated, \"We put a considerable amount of effort into improving product buying power patterns and as a result the composition and levels of inventory resulted in improved gross margins relative to a year ago.\" Inventory levels are being reduced due to increased sales in the company's own branch retail stores. Puma also stay a decreased trend, but the ratio of inventory turnover is lower than Nike, for Puma is not a bad condition.
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Receivable turnover: An accounting measure used to quantify a firm's effectiveness in extending credit as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient. A low ratio implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm. Nike’s A/C ratio keeps increasing from year 2010 to 2012, Nike account receivable is efficient. By maintaining accounts receivable, Nike is indirectly extending interest-free loans to their clients. Nike’s condition is still better than Puma.
Overview: Asset management ratios are the key to analyzing how effectively and efficiency business is managing its assets to produce sales. Asset management ratios are also called turnover ratios or efficiency ratios. If the company has too much invested in their company's assets, operating capital will be too high. If don't have enough invested in assets, the company will lose sales and that will hurt profitability, free cash flow, and stock price. So the result shown that the Nike can easy to efficiency and effectively to managing its asset to produce sales, Nike do a quite performance compares to Puma. Nike is doing well compare to Puma. 2.3.4 Debt Utilization Ratio Debt utilization ratio Debt ratio Long term debt ratio Interest coverage Nike Puma 31-May-12 31-May-11 31-May-10 31-Dec-12 31-Dec-11 31-Dec-10 0.04 0.02 91.39 0.07 0.03 84.65 0.06 0.05 70.92 Page 12 of 37
0.05 0.00012 25.72 0.06 0.00018 64.08 0.08 0.0048 69.72 Financial Management & Policy
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Total debt ratio: What is acceptable varies by industry. A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. Nike’s total debt ratio is 0.06, which is below the industry average of 0.07. The debt ratio which is dealing from year 2010 to 2012, the figures are shown in the table, because of previous years the company has been aggressive in financing area with debt, create a stable basis, and during this three year the debt ratio reduces is normal. New products become more and more mature than before, the brand has been known in the world. But for Puma, they have to develop new product and put new technology into products to attract more customers, they are on the raising period, so the debt ratio a little higher than Nike.
Long term debt ratio: Similar to total debt ratio but focused only on long-term debt. In these three years, the long term debt ratio of Nike in a downward trend and the reason similar to debt ratio, Puma also.
Interest coverage: Also known as times interest earned used to determine how easily a company can pay interest on outstanding debt. The lower the ratio, the more the company is burdened by debt expense. Nike keep increasing during these three years ，floating is not big，It is good for Nike to pay short-term
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debt，the company has ability to raise money. The debt condition of Puma is not very good, the burden become more and the company cannot easy to pay interest on outstanding debt.
interest coverage ratio1005002012 nike2011 puma2010
Overview: debt utilization ratio helps company measure ability to sell inventory, collect receivable, and pay current liabilities. We can see the figures shown in previous tables, obviously Nike’s performance quite good, the higher ability to pay their debt, create a very good reputation. Puma need some times to develop themselves. 2.3.5 Investments Investments P/E ratio EPS Dividend coverage 0 3.73 46.99 3.64 41.04 9.38 224.85 7.68 225 7.74 248 Nike Puma 31-may-12 31-may-11 31-may-10 31-dec-12 31-dec-11 31-dec-10 20.7 2.41 18.7 2.24 19.9 1.93 14.36 16.85 10.54 21.35 11.9 19.53 End of years price 51.06 EPS（*shown in annual income statement )
EPS：Nike‘s EPS which is in maintaining growth, floating is not very big, represent the company got profit and this is good for the company's stock investors. Puma is doing well compare to Nike.
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P/E ratio ：The price to earnings ratio (PE Ratio) is the measure of the share price relative to the annual net income earned by the firm per share. PE ratio shows current investor demand for a company share. The PE ratio has units of years, which can be interpreted as the number of years of earnings to pay back purchase price. Many factors led to the changes in the stock market, Nike’s P/E ratio has a float is normal, from year 2011 to 2012, the P/E ratio increased by two percent，A high PE ratio generally indicates increased demand because investors anticipate earnings growth in the future. Even though the P/E ratio of Puma is lower than Nike, but from 2010 to 2012, Puma keep an increase trend and performance not bad.
Share price: closing prices provide a useful marker for investors to assess changes in stock prices over time, the closing price of one day can be compared to the previous closing price in order to measure market sentiment for a given security over a trading day. Stock market has four performances: the opening price, closing price, the highest and the lowest price, the closing price is most important because it is a basic data used to analysis of the stock market, only the closing price is the benchmark of profit or loss. Nike is a potential stock which is to attract people to buy. From year 2010 to 2012, Puma’s share price has been decreased but still more higher than Nike.
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Dividend coverage: Measure of the ability of an organization to pay dividends. A higher or lower dividend cover may be appropriate depending on the level of stability in earnings of the organizations. Nike’s dividend coverage ratio has been decreased from year 2010 to2012; the level of earning got a big floating in a company, the dividend cover ratio is not safety of the current dividend rate of a particular stock. The condition of Puma is quite good; keep an increase trend during this three years and higher dividend than Nike.
Overview: investors purchase stock to earn a return on their investment, gain or losses from selling the stock at a price, dividend which is help analysis evaluation stock investment. Puma’s performance is quite good, and the investment condition of Puma become very attract investors, so Nike need to work on so continuing to increase EPS so that it is more competitive with other companies in its industry.
At the end of May 31, 2012, it appears that Nike is in an optimal financial condition. Not only does it exceed the industry averages in liquidity, solvency, and profitability, but they also have well-structured plans to combat any threat that may arise. Nike’s current situation showcases their ability to survive in the long-run and grow. Nike’s cash management leaves no room for immediate
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liabilities to go unpaid, thus granting the company the ability to function fluidly. The bottom line is that Nike will continue to be a leader and one of the most preferred, iconic brands in its industry. Chapter 3: Financial Market and Impact
The global economic recession resulted in a significant slow-down in international trade and a sharp rise in protectionist actions around the world. These trends are affecting many global manufacturing and service sectors, and the footwear and apparel industries, as a whole, are not immune. 3.1 Global Economy
The uncertain state of the global economy continues to impact businesses around the world. The current political and economic global environment has resulted in continued economic unpredictability, particularly in Europe where there are concerns regarding the increased debt levels of certain countries and their ability to meet future financial obligations, as well as the overall stability of the Euro currency (Nike Annual Report, 2012). Continuing volatility and disruption in the global capital and credit markets have led to a tightening of business credit and liquidity, a contraction of consumer credit, business failures, higher unemployment, and declines in consumer confidence and spending in many parts of the world. The economy depression direct impact on Athletic industry by influenced the purchasing power of customers that may lead Nike and Puma sales decreased, particularly to Puma which currency significant influenced by Europe economy. 3.2 Currency Fluctuations
A majority of products of Nike and Puma are sold outside of the domestic market. As a result, companies conduct transactions in various currencies, which increase the exposure to fluctuations in foreign currency exchange rates relative to the domestic currency (Nike Annual Report, 2012). International revenues and expenses generally are derived from sales and operations in foreign currencies, and these revenues and expenses could be affected by currency fluctuations.
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3.3 Changes in Tax
The effective income tax rate in the future could be adversely affected by a number of factors, including: changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, the outcome of income tax audits in various jurisdictions around the world, and any repatriation of non-domestic earnings for which companies (Nike Annual Report, 2012). The trend of income tax is going up that arise the operational cost and decline the revenue of Nike and Puma. 3.4 Rising Input Cost
The increasing price of raw materials and labor costs could be a cause for concern to the company. The athletic industry uses raw materials including natural and synthetic rubber, nylon, leather, canvas, polyurethane films and plastic compounds. Raw material, especially rubber, is a key component in the production. The cost of rubber has been gradually increasing, owing to the increase in the oil prices. According to industry analysts, the average world natural rubber price was increased by more than two percentage points during 2009-2012 (Rubber Economist Report, 2013). With the political strife in Libya, the oil prices have soared across all markets. The entire industry faces challenges in maintaining pricing pressure on its products due to increase raw material cost. Nike and Puma heavily dependent on Asian sourcing markets, the increased raw material costs in Asian sourcing markets may impact the growth of the companies.
3.5 Intense Competitive Landscape
The profit and market share could be impacted by the growing competition in the marketplace. With rising competition, the industry has been realizing consolidation wherein the smaller entities are being acquired by or merged with major players. The influx of private labels in the industry is also on the rise. To survive and succeed in a stiff competitive environment, it becomes very important for companies to distinguish its product and service offerings through a clear and unique value proposition. The key players such as Nike Inc., Adidas Group, PUMA AG Rudolf Dassler Sport, Polo Ralph Lauren, Fila USA, Inc., Reebok International Ltd. and Callaway Golf Company. Some of these players enjoy a strong financial
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and marketing in the global market. Rising competition may also force Nike and Puma to reduce its prices, which could affect its profit margins adversely. 3.6 Product Counterfeiting Risk
Athletic business could be adversely affected due to the huge influx of counterfeit products across the global market. Such high penetration of counterfeit merchandise may lower the sales of Nike and Puma adversely affect its profit margins. Moreover, as the customers end up buying counterfeit products bearing the look-alike brand labels, the low quality of these counterfeits affects the perception of consumer and also tarnishes the brand image of the genuine company. Since 1982, the global trade in illegitimate goods has increased from $5.5 billion to about $600 billion annually (Congressional Record, 2005). These challenges and any under performance of the counterfeit products will have a major effect on revenues of Nike and Puma.
Chapter 4: Challenges Faced and Solutions 4.1 High Inventory
The inventory turnover of Nike declined that limited its profitability and increases its inventory cost. In the past three years, it reported decline in inventory turnover ratio. Nike reported an increase in its inventories for the fiscal year ended May 2012, which reflect it not able to turn its inventory into sales. The company’s inventories as a percentage of total assets increased to 21.6% in 2012 from 18% in 2011. Inventories were up 23.4% in 2012 versus that in the previous year. This may result in pushing up its inventory costs. Decline in inventory turnover reflects that the company would require 89.5 days to sell its inventory on hand in 2011, as compared to 87.2 and 73 days in 2010 (Nike Annual Report, 2012), respectively. The increase in days of inventory on hand indicates the company’s weak sales or negative purchasing. The rise in inventory could lead the company to reduce the product’s price via providing a discount. This shows the company is not effective to turn its inventory to sales. Failure to reduce its excess inventory will affect its operating margins and net profitability.
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4.1.1 Solution
The effective inventory management is essential for the proper functioning of a company, keeping update the inventory management system or choosing the most suitable inventory management software. In addition, based on the size of Nike to engage with strategic system company or advanced software company is a wise choice, partnership may lead the inventory problem ease to solve. Furthermore, set up factory outlet or discount store keeping clearance over time for its inventory, on the other hand doing this which could fulfill the potential customers who cannot afford the products of Nike with the full price to target the lower level of customers. The directly way is control the volume of production. 4.2 High Production Cost
The gross profit margin of Nike declined that limited profitability by the rising cost. In the past three years, Nike reported rising cost regarding the raw material and labor cost for the fiscal year ended May 2012, which reflect it not able sell its products well.
The company’s gross profit margin from 46.28% in 2010 decrease to 45.74% in 2011 and continue declined to 43.50% in 2012 (Nike Annual Report, 2012). The increasing price of raw materials and labor costs force the gross profit margin of Nike going down. Raw material, particularly rubber is the most important factor in the process of production of the Nike’s products. According to industry analysts, the average world natural rubber price was increased by more than two percentage points during 2009-2012 (Rubber Economist Report, 2013). With the political changing in Libya, the oil prices also went up. Nike met challenges on its production due to increased raw material cost. The company is heavily dependent on Asian sourcing, most of Nike’s products from Asian. The increased raw material costs and wage inflation in Asian sourcing markets influenced the profitability of Nike. 4.2.1 Solution
Raw material and labor cost are going up that indicate the cost advantage of Nike no longer as before, which direct impact on product’s price result in rising. Cost-benefit analysis is necessary ongoing, there are some products with low profit or bad sales. According to the rising cost, the low profit product and
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the bad sales products is not suit anymore it may just achieve the breakeven or lose money, it would be better cut off those products lines and reallocates resource to the beneficial product line to maintain the gross profit margin. Keeping innovation is another choice by declining rubber used for its products. 4.3 Selling and administrative expense
Selling and administrative expense as a percentage of revenues increased 50 basis points grew at a slower rate than revenue, up 11 percent to $7.4 billion. Demand creation expenses were up 11 percent to $2.7 billion due to an increase in sports marketing expense, marketing support for key product initiatives, investments in retail product presentation for wholesale accounts and marketing support for the European Football Championships and Summer Olympics (Nike Annual Report, 2012). Operating overhead expenses increased 11 percent to $4.7 billion due to additional investments made in the wholesale and direct to consumer businesses. Selling and administrative expense increased from 6326 in 2010 increase to 6693 in 2011 and continue going up to 7431 in 2012. Compared to the prior year, operating overhead expense increased 11%, for fiscal 2012, changes in currency exchange rates increased the growth of operating overhead expense by 1 percentage point. Operating overhead expense increased 7% compared to the prior year in 2011 (Nike Annual Report, 2012). However, leverage on selling and administrative expense result in creating demands and enhancing sales. Higher selling and administrative expense as a percentage of revenues negatively affected profitability at both companies. 4.3.1 Solution
Higher selling and administrative expense may be a problem for the business of Nike. The company depends on great deal of advertising and event marketing that needed carefully monitor its marketing expense and tight control the sales team. 4.4 Tax rate
Tax rate for fiscal 2012 was 50 basis points higher than the effective tax rate for fiscal 2011 primarily due to changes in estimates of uncertain tax position. Tax rate for fiscal 2011 was 80 basis points higher than the effective tax rate for fiscal 2010 primarily due to the change in geographic mix of earnings (Nike Annual Report, 2012). The Company recognizes interest and penalties related to income tax matters in
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income tax expense. The liability for payment of interest and penalties increased $17 million, $10 million, and $6 million during the years ended May 31, 2012, 2011, and 2010. 4.4.1 Solution
Reevaluation the income tax rate among the geographic segments of Nike put more resources into the low income tax rate area to offset the high income tax area or keep the balance between supply and demand in the high income tax area to reduce the cost of tax. 5. Summary and Future Outlook 5.1 Performance in Operating
During the fiscal year from 2010 to 2012, profit and liquidity were going down. Even though, the liquidity of Nike decline that still higher than industry benchmark. Go through the annual report of Nike that obviously explained the reasons that profit declined due to rising cost in production and management. Nike heavily invest in the function area such as event marketing, IT and inventory management. Those functions as a long-term investment, the result cannot be seen immediately that is beneficial the company in the future. 5.1.1 Future Outlook
Nike has potential to improve revenue from athletic industry. Accordingly, wage increased in emerging countries will contribute to the growth of the athletic industry in emerging countries, particularly India and China. The customers spending more on sports goods of emerging markets exceeded the spending in developed countries. Furthermore, the global sports goods markets are positively impacted by the London 2012 Olympic Games and the UEFA EURO 2012, two of the sport’s largest events in 2012. Based on the event marketing generated revenue for Nike, the next big event will be FIFA World Cup in 2014. That increase in demands from the three market segments that are athletic apparel, athletic footwear, and equipment the global retail sporting goods market share expected to grow more than 3% in 2015. Nike global brands value is also going up at the same time.
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5.2 Performance in Financial Market
In the past three years, Nike performance well in the financial market. EPS and stock price continue going up that enhancing investors and shareholders confident to hold Nike’s stock for a long-term investment. Nike’s PE is round 20 in 2012 that exceeded US standard 14, which showed a strong growing trend regarding sports goods industry for continue rising. 5.2.1 Future Outlook
The latest 3 years stock price of Nike showed that $ 41.4 in 2010 increased to $ 46.99 in 2011 and continue increased to $ 51.06 in 2012. Accordingly, the stock price increased year to year it obvious seen at least 9.2% increasing rate for Nike. Nike's stock price was beneficial from the Summer Olympics Games and the UEFA Euro 2012. Nike's stock performed stronger in the following year, as before the shares have outperformed beyond the industry in every five Summer Olympic Games years. The next big event will be FIFA World Cup in 2014 that is favorable news for its stock. As estimation, shares will be rose at least 20% to $ 80 after 2014 and continue going up in 2015. Nike’s share price will increase over time from 2014 $ 80 up to $ 94 in 2015.
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Appendix 1：Nike Annual Report
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Appendix 2 ：Puma Annual Report
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Appendix 3: Process of Calculation Sheet 1
Sheet 2
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Sheet 3
Sheet 4
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Sheet 5
Sheet 6
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Sheet 7
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