In a year in which the Dow Jones Industrial Average performed extremely well, Nike Inc. (NYSE: NKE) performed very poorly, which made it the worst of the 30 index components in 2016. The Dow rose 13.42% to 19,762.6. Nike shares collapsed 18.67% to $50.83
Ironically, Nike was one of the more successful Dow stocks very late in the year. Its earnings for its fiscal second quarter, which ended on November 30, were announced December 20. They beat analysts’ expectations, both for revenue and earnings per share. The stock jumped over 2% on the day after the announcement.
Its results for revenue and net income:
Revenues for NIKE, Inc. increased 6 percent to $8.2 billion, up 8 percent on a currency neutral basis.
Revenues for the NIKE Brand were $7.7 billion, up 8 percent on a constant currency basis, driven by double-digit currency neutral growth in Western Europe, Greater China and the Emerging Markets as well as the Sportswear and Running categories.
Revenues for Converse were $416 million, up 5 percent on a currency neutral basis, driven by strong growth in North America.
Net income increased 7 percent to $842 million, while diluted earnings per share increased 11 percent to $0.50, reflecting revenue growth, selling and administrative expense leverage and a three percent decline in the weighted average diluted common shares outstanding, partially offset by lower gross margin.
The anxiety about Nike is based much more on the future than the present.
Nike’s role as the top maker of athletic shoes and apparel has been under siege by its primary rival, which is Germany’s Adidas. Adidas has its own brand and owns U.S.-based Reebok. Adidas is not only strong in Europe. It continues to make inroads in both America and China. China is a market that also has local competitors.
One thing Wall Street does not like about Nike is that its inventory control has been imperfect. It has had trouble matching future orders to production. In a sense, this shows that management has trouble anticipating market conditions and may be too optimistic about near-term prospects
The athletic apparel wars, particularly for shoes, have become an expensive battle for endorsements by athletes, which can get tens of millions of dollars for blessing a product. Under Armour Inc. (NYSE: UA) has become more aggressive in this arena, which makes the entire process more expensive for both companies as they occasionally get into bidding wars. According to website Nice Kicks:
Nike’s endorsement budget has grown substantially over the last decade. Dating back to 2007, the company was spending roughly $2.7 billion annually. In 2016, though, Nike has spent a whopping $9.4 billion in endorsements.
Last year, Nike shelled out $6.2 billion in total endorsements, which marks a 52% increase in dollars spent in just one year. In 2014 that number was just $4.7 billion, an even greater leap if viewed from a two-year timespan.
Nike is an extremely expensive business, and competition is certain to keep it that way.