Episode 24 | Can Nike “Just Do It” Again?

In Episode 24 of "Market News with Rodney Lake," Rodney Lake, Director of the GW Investment Institute, dives into Nike's current challenges and opportunities. From iconic brandings like the Nike Swoosh, Jordan, and Air Force 1 to revenue declines and margin struggles, Lake evaluates the company's performance. He emphasizes the need to watch key factors like distribution channels, valuation, and growth markets like China. Tune in to learn more!

Transcript

Rodney Lake
 Thank you for joining Market News with Rodney Lake. This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the director of the GW Investment Institute. Let's get started. Welcome back to Market News with Rodney Lake. I'm your host, Rodney Lake. Today's episode. We don't have a guest. We're going to be talking about a company.

Rodney Lake
 We're going to use the framework, the GW investment, Stewart framework, business management, price valuation and balance sheet. We're coming to you from the studio here in the GW School of Business at my trusty mug right here, you know, merch available link below. Just kidding. No merch yet. Go to the bookstore if you want some merch. All right, so today's episode is going to be on the company Nike.

Rodney Lake
 Nike is not a large holding in our portfolio, but there's been a lot of changes at Nike. So I think with, you know, let's take some time to go over what's happening at Nike. And I think everybody knows Nike and I wear a Nike Air Force One's on campus. For those you don't know that that are customized with the ji-woo on the bottom.

Rodney Lake
 I'm a little bit biased, but that's separate from as a customer, but that's separate from you know, this as an investment. So as an investment, we really need to think about, you know, what's good for us as shareholders. Right. And we really need to understand the company from that perspective. So if we look at Nike, I think most people really understand what Nike the business is, right?

Rodney Lake
 It's really about the shoes. It's about the apparel. It's about the brand. Started long time ago by Phil Knight. But let's get into the framework. So we got business. We got management. We got price valuation and balance sheet. That is the GW Investment Institute framework that we evaluate companies with. And again this is not investment advice. This is for informational, educational and entertainment purposes only.

Rodney Lake
 So let's dive into the business. So when we talk about Nike the business let's talk about the overall company. What is the market cap for this company. Well it's a very large company. So I think it's worth, you know, really trying to understand, you know what, you know, size of the company. This is and so the market cap is 116 billion, you know, market cap.

Rodney Lake
 So that that's a very large company, but not not astronomically large when you compare it to the tech giants that are in the trillions of dollars. And so when you think about Nike, you think larger than life, Nike, the brand. But when you look at it as compared to, let's say, tech company like Apple or Nvidia or Microsoft, you know, that are denominated in in trillions.

Rodney Lake
 And Amazon, as an example, Nike would be much smaller company in comparison to those tech giants. But certainly the brand of Nike is enormous. And people know that. And again, started way back in the day, by Phil Knight. It really started as Blue Ribbon Sports Shoe Dog, if you're interested in in a biography is very good overview of the history of Nike.

Rodney Lake
 But let's talk about Nike today. So the business we're talking about selling shoes, we're talking about selling apparel. We're you know, talking about, you know, again, equipment. But really it's about the brand and it's about, you know, how people perceive that brand. The just you it has gotten very famous. And of course, their key spokesperson for a long time, Michael Jordan, which continues to be a huge part of their business and is now a separate brand, the Jordan brand.

Rodney Lake
 We're not going to dive deep into a lot of the different stuff here, but I want to make sure that that people really understand you know, a very high level overview of what's happening at Nike. And so when you when you think about Nike, the company you think about, well, a long time ago, it used to be they distributed to, a middleman, a distributor.

Rodney Lake
 So you think footlocker finish line these kinds of companies that Mike Nike would ship to, and then they would sell their shoes. Well, now they shifted. And you can go Nike Direct, for example, the customized Air Force ones that I purchased got online at Nike Direct, and Nike.com. And so there is no intermediary Nike is selling those shoes directly to me.

Rodney Lake
 They're customizing them directly for me. But but it is still a huge part of their business, the old school retail. And recently there is a bit of a falling out, when Nike tried to push more through their own channels and really disrupted those relationships with those key distributors that they had in place. Now, I think they're doing their best job to repair those relationships.

Rodney Lake
 It still counts for something like 60% of their, revenue. So 40% now is Nike Direct. So it's a very important part of the revenue, and it's likely to be in the future, a big part of it. Now, they're going to likely try to make it a bigger and bigger portion. That's Nike Direct moving forward. That said, if that doesn't happen tomorrow, which doesn't seem like it is, you really got to pay attention to those relationships.

Rodney Lake
 And those those sort of intermediaries that sell Nike, on the retail side. And again, some examples not, you know, including everybody, but well-known ones are Foot Locker, Finish Line and other shoe stores, that are similar. And look, this is something that Nike has to focus on. I think, you know, one of the things that they've had trouble with, and in the management is, is, you know, this part of it.

Rodney Lake
 And so they brought back somebody, Elliot Hill. So, we'll get to management here in a moment. So when we talk about Nike, now let's go over, some of the stats, for the business, and we're going to touch on, what's happening in the management. So when we talk about the stats, it is a, you know, again, we talked about the market cap 116 billion.

Rodney Lake
 And we look at the revenue last year, 50 billion, in revenue. And that actually was a, you know, reduced size, down 2.8%, for the 12 months, trailing, through 831, 2024. And so through August, of this year, Nike actually shrank year over year. And in even if you look at, for 2024, through May, you're talking about a modest increase.

Rodney Lake
 So really, you're talking about shrinking. And now, excuse me, you're talking about Nike projecting, to be lower in 2025 year over year and a modest, modest improvement, in 26. And so that's the consensus, analyst ratings here. So that's and, you know, look, you could say it's slightly better, slightly worse, but we're not talking about 20% numbers here.

Rodney Lake
 On the growth side. And actually you're talking about things that are going down. So that's a real concern for the business. And so you can look at the revenue kind of flat here for the most part slightly down to that's not necessarily a good thing when you can grow the top line. Now when we look at gross profits, it's a better story.

Rodney Lake
 You're looking at 44.8%, nearly 45%. And now when you look at the the net margins here, you're talking 11. So you're eating up a lot of that. So there's not a huge net margin business, a good gross margin business, but not a high net margin business. So when we think about the business overall, well, we talked about sort of the mix that it's had between the traditional retailers, Nike Direct.

Rodney Lake
 Now that mix has changed in favor of growing the portion for Nike Direct. And as you can probably guess, the Nike Direct is likely going to have a higher net profit margin back to Nike because you're eliminating a step in the process here. So the more they can do that, the more they can probably improve, the differences between that gross margin and the net margin.

Rodney Lake
 And they're going to be looking to shift that. But at the same time, they have to take care of those relationships that they've built since really the founding of the company, because that's really where, you know, their sales came from through these, intermediary retailers, not direct from Nike. That's not how they built this system. And so cultivating those relationships and making sure that their sound is going to be super important.

Rodney Lake
 And I think, again, this is why they brought back somebody that's been old school, which we'll talk about in a moment. But look, the stats look okay. Not great. And when you talk about free cash flow 7 billion in free cash flow. So not you know, with a very small CapEx here, you're talking 600, billion and CapEx almost 700 billion in CapEx.

Rodney Lake
 So good free cash flow number overall, not outstanding metrics. When you talk about the business. And so when we would grade the business for Nike right now, right. If you include the brand, which is obviously really well known around the world, you talk about the swoosh, you talk about, the Jordan brand, just doing all these things that they've built up over time, you know, gets a very high score for the brand portion of the business.

Rodney Lake
 But then when you break down the specific metrics for Nike, you're not talking about great metrics. 50 billion in revenue basically flat now down year over year, almost 3% through August. Some decent net margins at 45% or gross margins rather at 45%. Okay. Net margins not great for sure, but closer to average business margins here at just over 11% and decent free cash flow.

Rodney Lake
 So when you rate the business and we talk about the scores for the business, you're talking about a score. That's something probably like a 6 or 7 right now I love Nike no offense. To those out there. However the business is not doing great right now. If you have to have a very, you know, pragmatic analysis of the business, there are a lot of concerns that need to be addressed.

Rodney Lake
 Again, this relationship between the retailers and Nike, this mix between the Nike Direct and this, the other channel, how do they manage that? How do they keep this going? The old school version with the retailers, plus making sure that they can maximize their own opportunities with Nike Direct without disrupting, the sales? That's a challenge. Next. Again, you're not talking about high levels of growth right here from where they are.

Rodney Lake
 Again, you're talking, very much a slowdown. That's a big challenge. And then when you look at the the gross margins, not bad. But you look at the net margins, very average. Let's say overall. And so where is the growth going to come from. You got to find those markets. Is it going to come internationally. You know China was a big market and growing.

Rodney Lake
 But the economy in China has also been slowing down more recently. And so there is a concern about okay, well how much consumer demand is going to come out of China. And then where is it going to be, you know, from the rest of the world? Where is that growth going to come from? Where is the engine of growth?

Rodney Lake
 I think they really need to focus here on the US. And certainly I think in the growth markets, including China, they need to figure out how to make sure that they're ready and prepared to address those, when they do turn, because it's likely that they'll turn. I think they're going through some rough patches, but Nike's going to be around next year and the year after, very likely.

Rodney Lake
 How do they position themselves? Which I think rolls into the next part here, which is on the management side. So they brought back Elliott here. Hill, which is a, kind of a lifer at Nike, if you like, somebody that's been there a long time, but they just brought him back, this year, just recently in October of 2024.

Rodney Lake
 And I think part of that is because they seem to be struggling to find their footing, pun intended, to find their footing. And the mix between these two channels that we talk about, the retailers versus direct, Nike, Nike Direct. And so we'll see what happens here. I think Elliott Hills certainly has the, you know, this culture in him.

Rodney Lake
 And he was at, Nike for a long time and certainly can bring back you know, these the elements that have made them successful in the past. Now, is it all going to work out? Time will tell. He's only been in the seat now just a couple of months. And we'll see how this turns out. We're going to have to pay close attention, us at the Detroit Investment Institute and our analysts to say, well, what are the earnings going to be looking like?

Rodney Lake
 And what's this effectively a turnaround story at this point look like moving forward? It's something that we're going to have to pay attention to. It's something that our analysts are going to have to pay attention to. It's not a huge position in our portfolio. We did owned before and sold, in one of our portfolios. We do, continue to own it in another one of our portfolios.

 And so we'll have to see how this plays out over time. Not a huge position for us, but it is something that also analysts are watching for. Is there a prospective, buy in here for one of our investment institute portfolios? Because maybe, Mr. Hill will we'll find a way, to turn these things around and make a big difference, at Nike.

So on the management side, I think they really do have to figure out what Nike's going to be in the future. Now, bringing back somebody from the past certainly has its benefits, but it also could be an inhibitor to what's next. Now we'll have to see. It's been a few months. That doesn't necessarily mean anything yet. That said, I think when you rate the current management, the CEO in, in the group, now that he is inherited and it will be building around him, I think it's early days, even though it's an older person, a person who's been rather in the company for a while.

That said, and I'm still thinking that's like a six right now. And the verdict is out whether this old school, new management will work out and pay these, benefits, for the management team. So I think that's closer to a six. So. All right, now let's move into the the valuation piece of Nike. So when we talk about the valuation piece of Nike all right what's the and we can use PE.

This is an established business. And so we'll overall use PE for a lot of these episodes. When we go through this framework. Can we do that in our classes as well. But when you talk about the price earnings ratio, this is also not a cheap business right now. Right. So you're talking about the PE right now is is 28 times.

So you're kind of right at the S&P and a little bit higher actually than the S&P at the moment. And so you're paying a small premium to the S&P like Nike has a great brand. But it's in a challenging situation right now. So I you know I'm not quite sure whether it deserves. And again huge Nike fan. Just to be super clear as a consumer and personally got my Air Force ones on right now customized for you.

However, should we pay this premium? I'm not convinced. Not necessarily. Are we convinced at the moment that Nike deserves this premium where they are now? Let's see if the management team can revitalize, refill, recharge, reset it, and get back in there with something. But right now, that premium does not look deserved. We'll have to see. Now, where has it been over time?

So the let's say the better news about this is that over time, you're talking about a median of 33 times. And so when you look at it that way, it's kind of trading at a discount to where it has historically over the last ten years. And so that's makes it a little bit more palatable. But but interesting nonetheless, that it still trades at a small premium to the S&P.

But a discount to its long term average, the median, at 33 times approximately. So but it's been much higher. You know, you're talking about highs of 78, but the lows of of, you know, 19 over that same ten year period. So you're on the lower side of this overall and again discount to the ten year average.

So people. Right now are saying, okay, well the market rather is saying that. And the people that make up the market are saying that Nike should be at a discount to its, ten year average because of some of these issues that are in there. And I would very much agree with that. But I would even say maybe it's a little pricey at the moment.

From here again, I think time will tell. It is, I think, an interesting story to follow because it does have such an iconic brand. It does have such a rich history and it has great distribution, even though that they've had trouble with this a little bit between their traditional distribution channels and their new distribution channels, Nike is all over the world.

And can it make a comeback? I think it can. It certainly has, you know, all sort of the DNA within the company to do such a thing. And let's see if the old management now that's the new management can turn this around and make this happen. Just do it. That's what we would say to the to the old management team that's new.

All right. So that's on the valuation side. The valuation is okay. Let's say it's I'd say that's also a six right now. You're not going to get really high rating. When the other metrics are not looking great. And you're trading at a small, premium to the S&P and a small discount to your long term average. So I would say that's kind of a middling number.

Let's call it a six at that. So the scores are right around six. Let's say overall for the categories. But now let's move on to the balance sheet. This is the last component in the GDP Investment Institute framework the balance sheet. So this is important because we want to understand the risk on the balance sheet at the investment and suit.

We are equity holders. So we have to make sure that if there is debt on the balance sheet that we understand what it is and that we're, you know, aware of the risks that we're taking, because, you know, if you've followed any type of equity, holdings or companies that if there is a bankruptcy, if there is, a really bad situation that equity holders generally get wiped out, there are different cases and there's can be restructuring.

And sometimes you get something. But for the most part, you have to consider as an equity holder, you're going to get wiped out. Now specific to Nike here. Let's look at their balance sheet. All that said. So they have about 10 billion in cash and about 12 billion in total debt. So net debt of 2 billion for a company the size of Nike, generating 50 billion in revenue and 7 billion in free cash, that 2 billion of net debt is not a huge concern.

It's not something that we're super excited about, I would say that, but it's also not something where, okay, we're going to lose a lot of sleep at night. So something to watch. You know, if they start issuing a lot of, debt, you know, we'd have to really pay attention. If you look at the interest coverage ratio, we, which is time, interest earn.

You're talking something that's, around 25 times. So that's something that is not something that we, again, we're super concerned about. Again, sort of the net debt of 2,000,000,025 times, times interest earned or interest coverage ratio, which is Ebit over interest. All right. We're not not terribly concerned. It's something that we should be watching. It's something that won't keep us up at night.

However, it is something that we have to pay attention to. It is something that we have to really focus on that the new management team, if they have some sort of expansion plans, are they going to really increase that and make that make that an issue? Now we don't have anything necessarily to think that that's the case right now, but it is something that we have to monitor.

It is something that we have to watch. It is something that we're going to have to really maintain and think about. So balance sheet let's go to the balance sheet. The balance sheet that's probably slightly better here is seven I'd really love to have a net you know cash position than a net debt. But when you talk about 25 times interest covered again earnings before interest and tax over interest, that's the calculation about 25 times right now.

Rodney Lake
 We're not losing sleep at night for that. But it is something that we need to watch as analysts. We need to pay attention to that. What's managed we're going to do dramatic expansion plans. Doesn't look like it at the moment. That would ramp up that debt. But let's see, maybe in a different interest rate environment that would change.

Rodney Lake
 So we have to keep an eye on that. So let's pull it all together. You're talking the business again. Iconic branding the swoosh. Just do it Jordan Air Air Force One which I'm partial to. All these things are great on the brand side. Now if you look at the metrics though we talked about the business 50 billion in revenue year over year decline in August, modest decline but a decline.

Rodney Lake
 You talk about the gross margins. Good. You talk about the net margins average. You talk about the distribution channels and the challenges between the traditional channels. And the Nike Direct needs to be solved. That gets you a six. You move on the management, you got old management. That's now new management. So I think it's important what the new management, which is the old management Elliott is going to do however, you know, time will tell.

Rodney Lake
 Maybe, this is the person to come in and write the shit. And, Mr. Hill, we'll sort this out and bring back that culture and make sure that Nike gets back on track, and make sure that Nike is dunking on the competition, so to speak, moving forward. Still a six right now. I think it's a to be determined.

Rodney Lake
 And so you're at six and six business management. You look at the price valuation I think that's also a six. When you talk about again trading at a discount to the ten year number, you know, 28 versus 33, but really small premium to the market. So or the you could even say, well, it's on top of the market.

Rodney Lake
 Well, with all the challenges, I think that's maybe a fair to slightly modestly, you know, increased valuation that I, that we should be willing to pay for. But it's something to watch. It's not super expensive again relative to its own history. But it's definitely not, you know, cheap by any, imagine, you know, any standard matter. So now that I would call that also a six, any move on to the balance sheet, as we talked about net debt of 2,000,000,025 times coverage, maybe that's a seven.

Rodney Lake
 So that kind of all works out to somewhere between the six and a seven, a 6 to 5, if you like. That's an okay score. I think it's something that we should be paying attention to. Nike is a company that is a small position in one of our portfolios. And I think it's it's time for us to really watch and see what this new management might do.

Rodney Lake
 Can they solve some of these obvious challenges? Where are the growth markets going to come from? Is they going to come from China? Sort of a resurgence of Nike's brand in the US. Time will tell. They get these channel, distributions assistance sorted out. The old management reestablishes that great culture at Nike and brings that back. We'll see.

Rodney Lake
 Just do it again is what our advice is to the new management team. That's the old management team. Just do it now. All that said again this is for entertainment purposes only in educational purposes only. We hope you enjoyed this episode. We look forward to seeing you back on the next episode. That is a wrap. Thank you.

Rodney Lake
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Rodney Lake
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