In its latest financial year, the world’s largest manufacturer of shoes and sportswear demonstrated what long-term focus and investments can yield in terms of accelerating sales growth and increased margins. The management of Nike masters the unique combination of being extremely long-term oriented and innovative. At the same time, they remain conservative in relation to the balance sheet and are strongly focused on taking good care of the company’s shareholders via dividends and share buybacks.

You cannot mention Nike without also mentioning its founder, Phil Knight. Together with his former track coach from the University of Oregon, Bill Bowerman, Knight founded Blue Ribbon Sports in 1964, which would later become Nike. Phil Knight is no longer involved in the day-to-day management, but he continues to hold the voting majority. In addition to the Nike brand, the American giant also owns Converse and the action sports brand, Hurley.

Today, Nike’s revenue exceeds 36 billion US dollars – an impressive feat for a company which in its early days imported running shoes from Japan to the United States.

Nike has high brand value and is ranked by Forbes as being the 18th most valuable brand in the world. Its closest rival, Adidas, is ranked 68th. Nike invests significant sums in sponsoring clubs and national teams in order to protect and expand brand awareness. In addition, they are just as engaged in endorsing individual athletes such as the basketball star LeBron James and the football player, Cristiano Ronaldo, who both have life-long contracts with Nike. These endorsement deals act as a kind of window display for Nike’s products, and thus they help to preserve the brand’s value and appeal among consumers. In 2018, Nike invested almost 3.6 billion dollars in marketing, which Nike calls demand-creating investments. We believe this is a fitting term.

Nike’s size and the absence of debt provides the company with financial strength that allows it to sponsor the greatest sport stars at a level that none of its competitors can manage. The endorsement deals with LeBron James and Cristiano Ronaldo, after all, are estimated to have cost Nike more than two billion dollars. This may sound like a great deal of money, and it is, but Nike also gains significant returns in terms of sales of shoes and clothes bearing the athletes’ names.

One of the world’s largest sponsors

The Jordan brand is a good example of this. It is a collaboration that has lasted for more than 30 years between Nike and what is (probably) the best basketball player ever, Michael Jordan. The Jordan brand, offering products under the Jordan name – mainly basketball shoes – has annual revenues of three billion dollars. It is doubtful whether such a thing will happen again, but the sponsorships are indeed very profitable investments for Nike and its brand.

Nike’s passion for sports is not just found in the company’s products. Many of the company’s managers are also former athletes and are living by the words of Nike’s running-inspired slogan “there is no finish line” – you can always improve and push the limits. Phil Knight played a major role in creating this kind of winning culture that has evolved in Nike. The company is constantly focusing on improving its products so that they can meet the athletes’ needs – whether it be professionals or ordinary people. At Nike, all consumers are athletes.

Today, the culture is being maintained by CEO Mark Parker and the rest of the company’s management. Mark Parker has been with Nike for more than 30 years and has been CEO since 2006 – thereby being only the third CEO in Nike’s history.

Mark Parker and the rest of the management run Nike based on a long-term view – and we share this philosophy. The continuity in the top management provides the company with a better foundation for success, as management can focus on what is best for the company rather than meeting short-term targets at the expense of the company’s long-term opportunities. In the last few years, this has resulted in major changes to their sales channels.

Nike has begun to change its distribution strategy, which has previously been dominated by sales from department stores and sports chain stores. With the expectation of higher average sales prices from fewer products being sold at a discount, the company is focusing on carefully selected so-called strategic partners. Nike is aiming at having 40 strategic partners, and this is a huge reduction compared to the 30,000 sales partners they previously had. The tighter distribution will strengthen Nike’s control of its brand, and the higher average prices should assist in increasing the gross margin by around a half percentage point annually.

Fewer partners mean better control of prices

The objective is for the company’s products to transition from being part of a large product display wherein competing products are placed alongside Nike’s products to Nike having its own product section in the stores. Similarly, Nike’s products will have their own section on the partner’s online stores. Nike itself calls this transformation one of moving from an undifferentiated retail strategy to a differentiated retail strategy. In addition, Nike will increasingly manage the selection of shoes and clothes so that the different partners will receive different variants of the products. This will prevent the partners from being in direct competition with each other. The larger difference between the distributor’s products can result in a slight reduction in the scale of production.

This will ensure that more of the products are sold at full price, rather than being sold at discounts by the partners, and thus it will increase the earnings per shoe. The manufacturing costs for individual pairs of shoes do not depend on where or at what price they are sold, and therefore higher average sales prices will have a positive impact on the income levels.

The sales made via the strategic partnerships, Nike’s own sales from, their own flagship stores, and their app, are expected to change from amounting to approximately four out of ten sales dollars to eight out of ten in 2022. This has been done as a part of the company’s triple-double strategy, wherein Nike wants to double its innovation, double the speed to market and double the direct sales to consumers.

Nike is still a company that is focused on running – both in terms of running shoes and running clothes – and innovation is an important component in keeping its status as the leading manufacturer of such products. Nike has over 6,000 patents, which is around eight times as many as their closest rival, Adidas. Innovation can be through either new designs, materials, soles or platforms. For runners, Nike has developed a sole that is made with a long carbon fibre plate that increases stiffness to provide a sensation of propulsion in order to improve the running economy. The technology was introduced in the Nike Zoom VaporFly Elite shoe, with which marathon runners such as Eliud Kipchoge, Lelisa Desisa, and Zersenay Tadese attempted to break the magical two-hour barrier for a marathon.

North America is back on the growth track

From the beginning, the shoes were only available to the runners that were sponsored by Nike, but they have later been put on sale in extremely limited production runs for 600 dollars per shoe. Supply is sufficiently scarce that the shoes are now resold at prices of over 1,200 dollars per shoe.

Today, the technology is used in several of Nike’s best running shoes that can be bought by all consumers. For example, this includes Nike Zoom VaporFly 4%, where the 4 percent indicates that the runner can run 4 percent faster than before when using this shoe, all other things being equal. The shoes are only sold in limited amounts and wears down faster than normal running shoes. The shoes are estimated to only last for around 100-300 kilometres, and thus they need to be replaced more frequently – resulting in more sales for Nike. Innovation is expected to drive half the growth in sales, and management’s objective is for Nike’s total sales to reach 50 billion dollars in 2022. This is equivalent to maintaining an annual growth of just over eight percent from the 2018 financial year (which ended in June 2018).

The ability to innovate is reflected in sales. Nike is seeing accelerating levels of sales growth, and North America is back with sales growth rates in the high single digits after briefly dipping lower, and even into negative territory, in 2017. Outside of North America, Nike is seeing sales growth of more than ten percent, and particularly sales in China are growing rapidly with support from a fast-growing middle class. China is also Nike’s most profitable market, with an operating margin of 35 percent, compared to 25 percent in North America and 17 percent in Europe.

The sales are supported by the demand for shoes and clothes that combine sports and fashion, so-called athleisure. Athleisure is one of the fastest growing consumer product categories, wherein sports shoes and clothes do not only have to meet the performance requirements, the fashion element is just as important. Many of the shoes are bought for everyday use based on how they look rather than traditional running shoes.

Nike is about to break down the barrier between physical and digital commerce with their online sales and the expansion of their Nike app. With this app people can sign up and gain access to specific deals and shoes that are offered in limited amounts. They can also buy the Nike products directly through the app – Nike has succeeded in using that to get more members and at the same time making a higher proportion of people spend at higher levels than before. On average, members buy almost three times as much as non-members. The growing online sales and use of the app also provide Nike with data on its customers and their preferences. The company can use this data to optimise their marketing and improve its offering to the customers based on what shoes they are most interested in.

Innovative initiatives lead to less excess inventories

The digital sales from, the strategic partners’ online stores, and the sales from the Nike app are projected to amount to over half of Nike’s total sales in the future. Previously, the company expected sales from these channels to amount to around a third of total sales, but the number was revised upwards due to the early success of the initiative.

Customers can also use the app to reserve products, scan products they see to learn more about them, or use the app to pay, thereby avoiding having to stand in line in physical stores. The customer data gained from the app has breathed life into a new store concept that Nike calls ‘Nike Live’. With ‘Nike Live’, the purchasing history of customers and data from the app will be used to find the best places to open a store and to determine the selection of the store’s products.

These stores are intended to carry significantly less inventory than regular stores. Thus, Nike must be able to restock and adjust the product range quickly in order to best match the customers’ preferences at all times. In addition, Nike lets customers design their own version of the shoe so that it matches their personal style. The company has therefore developed new manufacturing technologies that allow for the shoes to reach their final design much later in the manufacturing
process compared to earlier.

In order to meet customers’ needs, Nike has the ambition to halve the ‘time to market’ in order to become faster at adjusting to customers’ purchasing patterns, and at restocking the inventory of the best-selling products. At the same time, the fact that the final design of the shoe is now completed later in the process also means that Nike does not need to have as much inventory as before. This optimisation will reduce production costs and at the same time improve the inventory management processes and thus the working capital. Simultaneously, the risk of having to sell shoes at a discount is reduced as the excess inventories will be smaller.

There are exciting opportunities in controlling a larger proportion of the value chain via increased sales from Nike’s own direct sales on, the Nike app, and their own flagship stores. Nike’s direct sales grew by 12 percent in 2018, while digital sales grew by 25 percent. It is estimated that Nike has a gross margin of around 60 percent on direct-to-consumer sales, compared to 40 percent when selling through retailers. There is a significant earnings potential in direct sales that would increase Nike’s already market-leading profitability and high returns on invested capital of over 45 percent. The increased proportion of direct sales is a contributing factor in Nike’s earnings being projected to grow faster than sales.

Direct sales become attractive to a company when it has a strong brand as this means that the consumer is loyal to the brand rather than the retailer. With direct sales, Nike receives a significantly larger share of the sales price than if the shoes were sold via a partner. Thus, increased direct sales will grow Nike’s sales and earnings.

Nike’s significant free cash flows of almost 5 billion dollars will also benefit from more direct sales and improvements in the working capital. Combined with a zero-debt situation, this will allow increasing distributions to shareholders either via dividends or share buybacks which, respectively, amount to almost 1 percent and 5 percent of the market value. In total, Nike aims to buy back shares for 15 billion dollars over the next 4 years.

Our faith in Nike’s management during the last few challenging years in North America has been more than validated. We are confident that management will continue to run Nike with a long-term perspective that takes advantage of the brand’s strengths and the company’s ability to innovate and understand consumers – and in doing so, they will make Nike a story of even more success.