"Twenty years ago it was uncommon for people to wear their favourite football team's shirt to go shopping, nowadays that is commonplace. Nike footwear was reserved for those folks who were on their way for a jog or a run, whatever you want to call it, nowadays there is a whole leisure wear segment attached to the brand."
To market, to market to buy a fat pig. I have seen everywhere I read that tomorrow, 100 years ago in the town of Sarajevo on the banks of the Miljacka river at the intersection of the Latin Bridge, the seeds were sown for the "Great War". You may know that in the hours before the shooting of the Archduke Franz Ferdinand and his wife Sophie, a bomb had been thrown at their convoy on the way to deliver a speech at the town hall. Gosh, he delivered the speech and then decided to scrap the rest of the program to visit those in hospital that had been wounded by the bomb thrown at them.
On the way there, to the hospital, the driver took a wrong route, there was a breakdown in communication and the second (of the six) assassins was successful in shooting the Archduke and in his trial he said he was not aiming for Sophie, but rather the Governor, a fellow by the name of Potiorek. Gavrilo Princip was his name, the assassin that is. The rest is history, my word it is darn complicated, for more reading check out Wikipedia: Causes of World War I.
37 million Civilian and Military deaths later, the war was over on the 11th day of the 11th Month in 1918. There are only two good things about wars, one, they end and two technology advances much quicker as there are very definite time constraints. i.e. if you do not get this project finished in the next five weeks we will die. Or some such other thing.
As Eddy Elfenbein said in his weekly newsletter we live in a better world now than then, although you would not say that if you lived in Norther Iraq, Syria or Eastern Ukraine, North West Pakistan, South Sudan or Somalia. Amongst a handful of other places, but nowadays there are better mechanisms to solve conflict. I would prefer if there was no violence what soever, but self preservation is at the core of all of us, which is why it makes it attractive to own companies that operate in the broader medical sector.
Europe is obviously very different now from 100 years ago, the Germans have pushed hard for continued trade across the continent. There is more cooperation across the continent than ever before, there is a shared currency and absolutely no borders. Many different languages, for sure. Apart from a few Baltic states and Switzerland, most of people want entry to the trade zone with over 500 thousand richer than the average global consumer. Europe might have been in turmoil 100 years ago, but they have averted a huge fiscal crisis from three odd years ago through to last year. That is humans making real progress, fewer conflicts leads to increased wealth and superior standards of living.
Nike reported their fourth quarter and full year numbers post the market last evening. Nigh-Key, not Nigh-ck. In Greek mythology Nike was the goddess of victory, her brothers were Kratos, Bia and Zelus. Other companies and organisations that use the same winged goddess include the first FIFA World Cup trophy, also known as the Jules Rimet trophy. That is quite apt, Nike and Adidas have been locked in mortal combat (not quite, but it is fun to think of it that way) around the football on the go currently.
Depending on whether your favourite team or team member is trying to undermine one another or actually eat their way to victory. Enough already, the man is dentally unstable. Anyhow, as per the Nike website: Five of 10 national teams wearing Nike kits will advance to the next round in Brasil. Five in, five out. The ones left are the USA, Brasil themselves, The Netherlands, France and Greece. I would say of those, two have a realistic chance, a third at an outside chance.
And whilst that tournament is on the go, a more upper crust one is taking place at postal code SW19. SW stands for South Western and Battersea, that broader area. The most famous district from a sporting point of view is Wimbledon. The very first person to endorse Nike was actually a tennis player, if you are 40 or older you would remember the great Ilie Nastase. Currently in the top tennis players Nike sponsors Li Na, Maria Sharapova, Serena Williams, Rafael Nadal and Roger Federer. C'mon Djoko, Uniqlo is NOT Nike.
And then of course Nike have a sponsorship for the entire NFL. There are 32 teams there, the average team is worth a whopping 1.17 billion Dollars, according to Forbes. Perhaps more, we have seen high prices for some US franchises lately. The whole league is worth around 37.44 billion Dollars. The entire market capitalisation on Nike is around 68 billion Dollars.
There are some things that are difficult to understand, but to bet against the American consumer (and their economy in general) is a nigh impossible business. And their sport is worth serious money. Which is why of course they struggle with the word football and soccer and cannot use it interchangeably. Perhaps now that their football soccer team has made it through to the next round for the first time, they can separate the two.
Why own Nike? Why would you want to be invested in this company? They have had their fair share of problems with regards to sweat shop allegations and it has not always been plain sailing. The investment thesis however is simple, if you can sell and market your brand with the power that Nike can globally and with your brand being the gold standard for athletic and footwear, your brand will continue to attract new customers.
Twenty years ago it was uncommon for people to wear their favourite football team's shirt to go shopping, nowadays that is commonplace. Nike footwear was reserved for those folks who were on their way for a jog or a run, whatever you want to call it, nowadays there is a whole leisure wear segment attached to the brand.
The clothing, the footwear and broader sporting equipment now carry a brand that is globally recognisable, because sporting teams like Manchester United and FC Barcelona, as well as Manchester City and of course some of the teams at the current World Cup. Association with a brand, or a specific player is key for Nike and their competitors. Association through soft luxury purchases, football shirts are hardly cheap! And neither are the shoes, running or tennis, or be they for casual wear too. Nike should continue to see their brands grow as well as entering into different segments of the sporting market. This investment falls squarely into that aspirational consumer theme that we believe has growth prospects across the globe.
Nike themselves on their investor relations website refer to themselves as a growth company. I am not too sure what the differentiator is, I would want to let the investment community decide. I guess a business of this size, growing global revenues in a tough consumer environment by 10 percent to 27.8 billion Dollars, that qualifies as a growth company. That means that you are on track to double sales roughly every seven years. Diluted earnings per share rose 11 percent to 2.97 Dollars, the stock closed at 76.86 Dollars, 25.91 times earnings. That is hardly cheap. The dividend yield currently is a mere 1.25 percent, but I guess growing at around ten percent per annum means it is still a better investment than short term government debt.
What underscores the point about the brand and awareness is that the company reported that the Young Athletes' (Kids') businesses performed well, alongside the women and mens segments. Buying your kids Nike shoes might seem like a waste of money to some, but the quality cannot be questioned. Whether your beloved is good enough, that is another question entirely! At the same time the company stays relevant, growing their ecommerce sales quickly as well as continuing to be cutting edge from a technology point of view. Their footwear pushes boundaries.
In the forward looking statements Nike said that future orders were 11 percent higher than this period last year, one of the big teams with big populations winning the world cup would be nice, perhaps a Brazil or dare I say it, the US making it far. The buyback program, 8 billion in total under the current mandate given to the board by shareholders has only topped 3.4 billion Dollars by the end of the financial year. That is as much as 11.7 percent of the current market cap, and of course the price was far cheaper than it is now, so many more shares in issue removed should be hugely earnings enhancing. Earnings are expected to grow in the high teens to early twenty percent for the next three years. Earnings revisions are likely should global growth pick up more than anticipated. We continue to buy Nike.
Home again, home again, jiggety-jog. Markets are lower here, US futures are also marginally lower. Not by much. US markets made a spectacular recovery last evening to end only marginally down. The Rand is steady, volatile perhaps is a good word. Even if Vix is not. Good luck to your football team over the weekend, as long as they wear Nike.
Sasha Naryshkine, Byron Lotter and Michael Treherne
Follow Sasha, Byron and Michael on Twitter
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