Nike’s Powerful Brand and Digital Strategy Enable It to Outpace Competitors in a Difficult Market

Senior Equity Analyst

David Swartz

North America

Europe, Middle East & Africa

Greater China

Asia Pacific & Latin America

Other

Revenue by Geography

Revenue segments as reported by the company.

Footwear

Apparel

Equipment

Global Brand Divisions

Converse

Corporate

Revenue Segments

Gross Profit, Operating Income, and Net Income as a percentage of Revenue

Gross Margin

Operating Margin

Profit Margin

Margins

An operating expense is an expense a business incurs through its normal business operations. Often abbreviated as OPEX.

Demand Creation

Operating Overhead

Operating Expenses

Year over year growth in Revenue and Operating Expenses.

Revenue Y/Y

OpEx Y/Y

Growth

Shares outstanding refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company's officers and insiders.

Outstanding Shares

Market Cap

Also known as Price/Sales Ratio. Calculated using Average market cap for the quarter / Annualized quarterly revenue.

Revenue Multiple

We view Nike as the leader of the athletic apparel market and believe it will overcome current challenges like inflation, elevated inventory, and uncertain demand for apparel. Our wide moat rating is based on its intangible brand asset, as we believe it will maintain premium pricing and generate economic profits for at least 20 years. Nike, the largest athletic footwear brand in all major categories and in all major markets, dominates categories like running and basketball with popular shoe styles. While it does face significant competition, we believe it has proven over a long period that it can maintain share and pricing.

We think Nike’s strategies allow it to maintain its leadership position. Over the last few years, it has invested in its direct-to-consumer network while cutting many wholesale accounts. In North America and elsewhere, the firm has reduced its exposure to undifferentiated retailers while increasing its connections with a small number of retailers that bring the Nike brand closer to consumers, carry a full range of products, and allow it to control the brand message. Nike’s consumer plan is led by its Triple Double strategy to double innovation, speed, and direct connections to consumers. The plan includes cutting product creation times in half, increasing membership in Nike’s mobile apps, and improving the selection of key franchises while reducing its styles by 25%. 

Although its recent results in China have been inconsistent due to supply issues, virus-related restrictions, and a political controversy, we still believe Nike has a great opportunity for growth there and in other emerging markets. The firm experienced double-digit annual sales growth in six of the past eight years in greater China and, fueled by high government investment in athletics, we think it will do so again after the current difficulties have passed. Moreover, with worldwide distribution and huge e-commerce platform that brought $12.6 billion in Nike brand digital sales in fiscal 2023, the firm should benefit as more people in China, Latin America, and other developing regions move into the middle class and gain broadband access.

Business Strategy & Outlook

We assign a wide moat rating to Nike based on its intangible brand asset. Nike is the largest athletic apparel company in the world, with $51.2 billion in revenue expected in its most recent fiscal year. Its revenue has increased in 12 of the past 13 years, with the pandemic-affected fiscal 2020 as the sole exception. Nike produces apparel and footwear for professional and amateur athletes, sports equipment, and sports-inspired fashion for both athletes and nonathletes alike. As evidence of its competitive edge, the firm’s adjusted returns on invested capital, including goodwill, have averaged 39% over the past five fiscal years. We forecast that the company’s average annual adjusted ROICs, including goodwill, will exceed its weighted average cost of capital over the next 20 years, as required for our wide moat rating. We estimate Nike’s weighted average cost of capital at 8% and expect its annual adjusted ROICs, including goodwill, to average 43% over the next decade. We believe Nike has been the preferred sportswear brand in the world since the 1980s and that it will remain so for many years. 

Nike achieves premium pricing on many products, supporting our view of its brand power. Its performance athletic shoes are the most expensive on the market. At footlocker.com, for example, Nike produces most of the styles of men’s performance basketball shoes that cost $170 or more per pair (as of July 2023). Some fashionable Nike shoes retail for prices associated with luxury footwear brands. For example, luxury retailer farfetch.com lists dozens of styles of Nike sneakers at prices above $1,000 per pair. Moreover, as evidence of Nike’s enduring popularity, older and limited-edition shoes are regularly sold in resale markets for more than $10,000 per pair.

We believe Nike’s wide moat is supported by its worldwide reach. The company ships products to more than 190 countries, operates more than 1,000 stores (two thirds outside of the U.S.), and has another 6,000 or so branded stores that are operated by franchisees (primarily in greater China). Nike's annual revenue is more than double that of the world's second-largest sportswear firm, narrow-moat Adidas. Nike produced $33.1 billion in fiscal 2023 footwear sales, more than the combined footwear sales of Adidas, Puma, and no-moat Under Armour. It has market-leading share in footwear in all markets and major categories and ships more than 800 million pairs of shoes per year. It is also the leader in athletic apparel, producing $13.8 billion in apparel sales in fiscal 2023. Although Nike is an American brand, 56% of fiscal 2023 sales of the brand came from outside of North America. We believe that no athletic apparel company will be able to approach its global market share in at least the next 20 years, supporting our view that it has a wide moat.

Nike’s brand is enhanced by its large e-commerce business in the U.S. and other countries. The firm generated $12.6 billion in Nike brand e-commerce sales from its digital marketplaces in fiscal 2023, having grown from about $1.5 billion in fiscal 2015. The company expects digital sales from its own channels to increase to 40% of its sales in fiscal 2025, up from 26% in fiscal 2023. We think this growth is achievable as more consumers in developing markets (such as China, India, and Latin America) move into the middle class and gain access to broadband services. Nike is investing heavily in its digital services. Its apps, known as NikePlus, have about 160 million members. Its Training Club and Run Club apps are the largest apps in their fields in the U.S. and Europe and its SNKRS app for hard-core shoe collectors reportedly has several million members. Nike produces limited-edition products that are exclusive to members of NikePlus. For example, more than one third of Cristiano Ronaldo’s Mercurial soccer cleats are available only on nike.com and its apps. Many Nike-sponsored athletes, including Ronaldo, have tens and even hundreds of millions of social media followers. Nike uses their fame to promote its products to a huge audience at relatively low cost. The firm supports its e-commerce with some innovative digital products, such as NikeConnect, a service that allows people to take a picture of a Nike product and identify it. This is a useful service, as Nike estimates there are 5 billion individual Nike products in the world. We believe Nike’s large digital community creates goodwill among its best customers and promotes the brand. While other athletic apparel companies have e-commerce, none of them have the reach of Nike. We think its apps support our wide moat rating.

Nike sponsors many of the world’s most popular athletes and teams in virtually all major sports. Athletes sponsored by Nike include Cristiano Ronaldo, LeBron James, Kevin Durant, Serena Williams, Alex Morgan, Michael Jordan, the late Kobe Bryant, and many track and field athletes. Teams and leagues sponsored by Nike include the NFL, the NBA, many U.S. and international college teams, many national soccer leagues, and the national soccer teams of numerous nations, including Brazil, France, and England. In 2020, for the first time, Nike’s swoosh logo appeared on the front of every Major League Baseball uniform. Nike is the sponsor of choice for athletes and teams due to its status as the world’s largest apparel brand and the tremendous success of its nearly 40-year relationship with Michael Jordan. LeBron James famously turned down more money from Reebok to sign with Nike in 2003, ultimately dooming Reebok to irrelevance in basketball shoes. Whether sponsored or not, athletes all over the world wear Nike apparel while competing. For example, its Mercurial line of soccer cleats is the most popular brand in England’s Premier League. Also, about three fourths of the players in the NBA wear Nike or Jordan shoes. We expect Nike’s powerful brand will continue to allow it to sign the key endorsement deals that will keep it on top.

Nike’s brands have proven staying power, supporting our view that it can continue to earn economic profits for at least the next 20 years. Michael Jordan signed with Nike in 1984 and retired from basketball in 2003. Many millennials are not even old enough to have seen him play. Yet, Nike’s upscale Jordan brand produced $6.6 billion in (wholesale-equivalent) sales in fiscal 2023. While Jordan is Nike’s biggest star, James’ shoes have been big sellers for Nike since he was a teenager. He signed a new contract with Nike in 2015 that will reportedly pay him $30 million per year until 2048 (when he celebrates his 64th birthday). Nike, which ships about twice as many pairs of shoes worldwide as Adidas, has developed franchises with unusual longevity. We think Nike’s key brands support our view that it has a wide moat based on its brand intangible asset. 

We believe Nike’s innovations contribute to its brand and support our wide-moat view. Nike has been known for its innovative products ever since it introduced running shoes with pressurized air in their soles in the 1980s. Nike frequently releases new styles of running shoes. Recent editions to its large family of shoes include Epic React (foam cushioning), VaporMax (new style of Air), and shoes with ZoomX technology. Nike claims the ZoomX substance was developed for the aerospace industry and returns as much as 85% of energy to the runner. While it may be hard to prove this claim, Nike’s dominance in running shoes is clear as the category produces about $4 billion in sales for the company. Most of the world’s leading track and field athletes wear Nike shoes. Its innovations allow it to maintain premium pricing. Many Nike running shoes, such as the best-selling Air Zoom Pegasus, sell at prices over $100 per pair. Nike Air Vapor Max, which sell for about $200 per pair at Foot Locker and other stores, reportedly became the best-selling running shoe above $150 per pair within months of its launch in 2017. We believe Nike is the leader in sports performance technology, providing a persistent competitive edge.

We do not believe Nike has a moat based on a cost advantage. While Nike may have some cost advantage over competitors in sponsorships due to its status as the premier sportswear brand, we don’t view this as significant or maintainable. Moreover, while endorsements are great for brand building, they are difficult to quantify in terms of profit margins. While Nike’s low double-digit operating margins are very good, it is difficult to know if endorsements play a major role. It is possible that the firm simply has expense leverage due its size. Nike has limited advantage in product costs as virtually all its production is outsourced. Narrow-moat Shenzhou International, for example, is one of Nike’s largest suppliers but also produces apparel for narrow-moat Adidas, no-moat Puma, and others.

We do not believe Nike has a moat based on anything aside from its brand intangible asset. We do not think it has a moat based on efficient scale. While Nike’s financial resources and relationships with suppliers likely allow for production investment unavailable to others in the short term, any advantage in this area is likely to be transitory. Competitors can probably gain access to similar technologies. Moreover, much of apparel manufacturing remains manually intensive. We do not believe there is any network effect in the apparel business and switching costs are nonexistent. Competing products to Nike’s footwear and clothing are widely available.

Wide

Economic Moat

NIKE

Hurley is an American multinational corporation that is engaged in the design, development, manufacturing, worldwide marketing and selling of surf apparel and accessories. The company's headquarters is in Costa Mesa, California. Since 2002, Hurley has been owned by Nike, Inc.

Hurley

Converse is an American shoe company that primarily produces skating shoes and lifestyle brand footwear and apparel. Founded in 1908, it has been a subsidiary of Nike, Inc. since 2003. Converese is best known for their Chuck Taylor All-Stars line of sneakers.

NIKE, Inc. engages in the design, development, marketing, and sale of athletic footwear, apparel, accessories, equipment, and services. It operates through the following segments: North America, Europe, Middle East & Africa, Greater China, Asia Pacific & Latin America, Global Brand Divisions, Converse, and Corporate. The North America, Europe, Middle East & Africa, Greater China, and Asia Pacific & Latin America segments refer to the design, development, marketing, and selling of athletic footwear, apparel, and equipment. The Global Brand Divisions represent its NIKE Brand licensing businesses. The Converse segment designs, markets, licenses, and sells casual sneakers, apparel, and accessories. The Corporate segment consists of unallocated general and administrative expenses. The company was founded by William Jay Bowerman and Philip H. Knight on January 25, 1964, and is headquartered in Beaverton, OR.