Assignment Form MBA Jan12

MASTER OF BUSINESS ADMINISTRATION

AWARDED BY NOTTINGHAM TRENT UNIVERSITY

ASSIGNMENT SUBMISSION FORM

Note: Students must attach this page to the front of the assignment before uploading to WECSERF.

For uploading instructions please see the help file online Name of Student: Vijay Subramaniam Student Registration Number: KL519 Module Name: Managing & Accounting for Financial Resources Module Number: WEC - T12012 Assignment Title: : Managing & Accounting for Financial Resources Submission Due Date: 12February 2012 Student’s Electronic Signature: Vijay Subramaniam Plagiarism is to be treated seriously. Students caught plagiarizing, can be expelled from the programme

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Table of Contents

1.0 Executive Summary 2 - 3

2.0 Introduction 4 – 5

3.0 Background of the Company 6 – 7

4.0 Definitions of Terms 8 - 11

5.0 Management and control of the working capital 12 - 15

5.1 Working Capital Strategies

5.2 Debt Structure

5.3 Equity Structure

5.4 Stocks

5.5 Bonds

6.0 Working capital policies that adopted by Nike 16 - 18

6.1 Design for Environment

6.2 Nike stated four long-term goals. By 2020

6.3 NikeGO Places

6.4 Climate Commitments

7.0 NIKE Historical Ratios 19 – 28

8.0 Key Working Capital Ratios 20 – 31

9.0 Weaknesses in the management of working capital NIKE 32 – 34

10. 0 Working Capital Cash Conversion Cycle of NIKE 35 – 37

11.0 Conclusion 38

12.0 Reference 39

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1.0 Executive Summary

Nike’s company strategy is a clever one. One that founder Phil Knight thought

of while still in school at Stanford. Instead of paying Americans to put together Nike’s

shoes, Knight thought that it would be a better idea to take manufacturing plants

overseas to places where labor is much cheaper than in the U.S., places like Taiwan

and South Korea. With 86% of its products being produced in one of those two

countries and Nike employing a large number of people who lived there, the countries

became richer and richer until Knight decided prices were too high to manufacture

there anymore.

He decided to move the factories to places in China like Indonesia where

countries were practically begging for foreign investment. Production was going well

until the early 1990s when labor strikes rose to 112 in 1991 and news began to leak

out about the terrible conditions Nike’s labor force was working in. The company was

using underage workers and underpaying them to the point that a family couldn’t even

survive off of the wages made at a Nike factory. From this point, Nike’s sales began to

slip and returned into the media’s spotlight numerous times in the 90s for their bad

labor practices.

Nike paints a picture of their company for the world to see their, inspiration

and innovation, as well as their commitment to serve everyone in the world. Through

a continuous effort by Nike to remain at the apex of technology and innovation, they

are the market leader by a significant margin. As a result of Nike pursuit of selling a

broad spectrum of products, they possess a formidable competitive advantage.

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Nike exhibits significant strength in market share, brand image and

recognition, as well as research and development. Through the use of intuition and

analysis I have concluded that opportunities exist for Nike to increase market share.

Specifically, I recommend horizontal integration, global expansion, European

concentration, and segmented marketing to target various generational demographical

opportunities. The focus will lie using various methods of segmentation to develop

the targeted markets and increase market share.

This company strives for excellence. Nike is an enormous corporation that

continues to do well, even in this questionable economy. They are relentless about

innovating to reach their full potential. Despite a few highs and lows within the

company they continue to produce high quality sport-inspired equipment.

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2.0 Introduction

Working capital management is a very important component of corporate

finance because it directly affects the liquidity and profitability of the company. It

deals with current assets and current liabilities. Working capital management is

important due to many reasons. For one thing, the current assets of a typical

manufacturing firm accounts for over half of its total assets. For a distribution

company, they account for even more. Excessive levels of current assets can easily

result in a firm’s realizing a substandard return on investment. However firms with

too few current assets may incur shortages and difficulties in maintaining smooth

operations (Horne and Wachowicz, 2000).

Efficient working capital management involves planning and controlling

current assets and current liabilities in a manner that eliminates the risk of inability to

meet due short term obligations on the one hand and avoid excessive investment in

these assets on the other hand (Eljelly, 2004). Many surveys have indicated that

managers spend considerable time on day-to-day problems that involve working

capital decisions. One reason for this is that current assets are short-lived investments

that are continually being converted into other asset types (Rao 1989). With regard to

current liabilities, the firm is responsible for paying these obligations on a timely

basis. Liquidity for the ongoing firm is not reliant on the liquidation value of its

assets, but rather on the operating cash flows generated by those assets (Soenen,

1993). Taken together, decisions on the level of different working capital components

become frequent, repetitive, and time consuming.

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Working Capital Management is a very sensitive area in the field of financial

management (Joshi, 1994). It involves the decision of the amount and composition of

current assets and the financing of these assets. Current assets include all those assets

that in the normal course of business return to the form of cash within a short period

oftime, ordinarily within a year and such temporary investment as may be readily

converted into cash upon need. The Working Capital Management of a firm in part

affects its profitability.

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3.0 Background of the Company

Bill Bowerman and Phil Knight founded Nike Inc. as Blue Ribbon Sports in

1962. The partners began their relationship at the University of Oregon where

Bowerman was Knight’s track and field coach. While attending Stanford University,

Knight wrote a paper about breaking the German dominance of the U.S. athletic shoe

industry with low-priced Japanese shoes. In an attempt to realize his theory, Knight

visited Japan and engineered an agreement with the Onitsuka Tiger company, a

manufacturer of quality athletic shoes, to be their sole distributor in the United States.

In 1962, Knight received the first shipment of 200 pairs of Tiger shoes to his

parent’s garage in Oregon. The shoes were bought by Blue Ribbon Sports (BRS), the

name of the partnership between Knight and Bowerman that they formed with only

$1,000 in capital. Knight peddled Tiger’s shoes at local track meets grossing $8,000

of sales in their first year. In 1966, Bowerman, who had previously designed shoes for

his university athletes, worked with Tiger to design the Cortez running shoe. The shoe

was a worldwide success for the Onitsuka Tiger Company and was sold at the first

BRS store. In 1971, BRS, with creditor support, started manufacturing their own line

of shoes. Later that year, the first BRS shoe was introduced. The shoe was a soccer

shoe that bore the Nike brand name, referring to the Greek Goddess of Victory, and

the Swoosh trademark. A student designed the Swoosh trademark for a paltry fee of

$35. The Swoosh was meant to symbolize a wing of the Greek Goddess.

1972 marked the breakup of the BRS/Tiger relationship. BRS soon changed its

name to Nike, Inc. and debuted itself at the 1972 Olympic trials. In 1973, Steve

Prefontaine was the first prominent track star to wear Nike shoes. The late 70’s and

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early 80’s also saw John McEnroe, Carl Lewis, and Joan Benoit sporting Nike shoes.

Nike popularity grew so much that in 1979 they claimed 50% of the U.S. running

market. A year later with 2,700 employees, Nike went public selling 2 million shares

on the New York Stock Exchange.

The 1980’s were marked by the signing of Michael Jordan as a product

spokesperson, revenues in excess of $1 billion, the formation of Nike International

Ltd., and the "Just Do It" campaign. Nike also expanded its product line to include

specialty apparel for a variety of sports. In 1990, Nike surpassed the $2 billion mark

in consolidated revenue with 5,300 employees worldwide. In addition, we opened the

Nike World Campus in Beaverton, Oregon.

In 1991, Nike pushed revenues to $3 billion, up from $2 billion the prior year.

This mark would continue to grow throughout the 90’s, with revenues in 1999

reaching $8.8 billion. These revenues grew based on improvements in shoe

technology and successful marketing campaigns. International revenues fueled a great

portion of this growth with an 80% increase in 1991 from the prior year. In 1992

international revenues topped $1 billion for the first time and accounted for over one-

third of our total revenues. Such growth continued throughout the 1990's as we

continued to focus our marketing efforts on major sporting events like the World Cup,

and the next generation of celebrity endorsers, such as Tiger Woods, Lance

Armstrong, and the players of women's professional basketball (WNBA). At the end

of the 90’s, Nike’s goal, as stated in our company web site, is to become a truly global

brand.

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4.0 Definitions of Terms

Before beginning the glossary of financial terms and definitions, let me first

define the scope of this glossary. Finance is a broad superset of many sub topics,

namely accounting, banking, business, credit, insurance, stocks, etc. As it was impos-

sible to replicate a whole financial dictionary in one article, the term finance has been

split up in the same categories mentioned above. We have independent glossaries for

all the above and the links for them will be provided at the end of this article. Finan-

cial Terms - Glossary of Financial Terms and Definitions' mainly contains all the gen-

eral finance terms and finance words that do not fall in any one specific subset. It in-

cludes all possible terms belonging to the categories of 'investment finance', 'corporate

finance', 'mutual funds', 'financial policies', 'financial economics' and 'market instru-

ments'.

AAA - A rating agency rating that is given to the best quality of debt obligation, usu-

ally given if the possibility of principal as well as interest payments default is very

low.

AAGR - Average Annual Growth Rate - The arithmetic mean (average) of the growth

of investment value (portfolio value), over a period of years, to yield a particular rate

that will give growth information at first glance.

AAR -Average Annual Return - The percentile metric used to measure historical re-

turns on an investment or portfolio and to evaluate the quality of potential invest-

ments.

Bond Option - When an option contract is made with bonds as the underlying asset,

the contract is termed as a bond option contract.

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Bonus Share - When a company decides to allot additional shares to already existing

shareholders, instead of a dividend payout, it is termed as a bonus share issue.

Capital - Capital is a vague term that usually refers to the financial resources and as-

sets of a company including the likes of land and buildings and plant and machinery.

Corporate Tax - It is a tax or a levy instilled upon a company, and the amount of the

tax will depend on the levels of profit achieved by the firm.

Credit Crunch - Credit crunch refers to a financial scenario wherein investment capi-

tal becomes very difficult to obtain. The price of debt products rises up considerably

as the banks and lenders become very cautious and conservative.

DCF - Discounted Cash Flow is a valuation method used to estimate the profitability

of a particular investment option. DCF analysis uses future free cash flow projections

and discounts them, using weighted average cost of capital, to get the present value

used to analyze the competence of investment.

Debt Equity Ratio -Debt equity ratio is the measurement of the company's financial

position which is calculated by dividing the total liabilities and the shareholder's equi-

ty. It estimates or measures the proportion of debt and equity the company is using,

for financing its assets.

Equity Income - Income that is earned through investments in stocks is termed as

equity income. In the mutual funds context, equity incomes are incomes earned from

investments in high quality companies with a history of rich and reliable dividend dis-

tributions.

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Foreclosure - A foreclosure entails the seizure and sale of property stipulated in the

mortgage loan contract of a debtor who has been unable to pay his principal or inter-

est on time.

Guaranteed Bond - A guaranteed bond is a bond issued by one firm, and the pay-

ment of interest and principal on the bond is guaranteed by another firm

Hedge - Hedge means to invest in a low risk investment option so that the risk of ad-

verse price movement for a high risk asset is reduced.

Income Bond - Income bond is a type of bond which only promises to repay the face

value of the bond. The coupon payments on this type of bond depend on earnings of

the issuing company.

Initial Public Offering (IPO) - Initial public offering is when a business entity offers

a share of its ownership to the general public for the first time.

LIBOR - An acronym for London Interbank Offered Rate, which is the standard rate

for calculating rates for adjustable-rate loans. LIBOR is based on the rate of interest at

which borrowing and lending of unsecured funds are carried out by banks among each

other.

Mutual Fund Liquidity Ratio - The cash relative to total assets ratio for a mutual

fund that is published monthly by the Investment Company Institute is called mutual

fund liquidity ratio

Net Present Value Rule - This is an investment rule that states that, an investment

can only be accepted if its net present value (NPV) is greater than 0. An NPV less

than 0 signify that the investment will actually decrease shareholder's wealth instead

of increasing it.

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Pari-passu - This is a Latin term which is translated as 'without partiality'. This term

is used to describe two securities or obligations that have equal rights to payments.

Return On Average Equity (ROAE) - The adapted version of the return on equity

(ROE) where the shareholder's equity is changed to average shareholder's equity is

known as Return On Average Equity (ROAE)

Share Capital - The cash or other considerations that help raise funds by issue of

shares is known as share capital. The share capital increases every time the company

sells new shares to public in return for cash.

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5.0 Management and control of the working capital

5.1 Working Capital Strategies

The following content provided will include information regarding Nikes Inc. cash

management strategies, which will include more in depth information from the

company. In addition, working capital recommendations will be provided to senior

management base on next the pro-forma financial statements. Financial statements are

a vital factor of any business organization; they show where a company’s money

came from, where it went, and where it is now, according to Securities and Exchange

Commission website (2008). In addition, four main financial statements consist of the

balance sheet, income statement, cash flow statement, and statement of shareholders’

equity.

These four financial statements will be evaluated from Nike Inc. and more in

depth information will be included from information on the previous paper which will

be link to the working capital strategies. Furthermore, a detail working capital

recommendation to senior management will be included and the impact of Nike Inc.

revenue increase of their working capital.

5.2 Debt Structure

In fiscal 2008, Nike met or exceeded their financial goals. Revenues grew 14% to

$18.6 billion, net income grew 26% to $1.9 billion, and delivered diluted earnings per

share of $3.74, a 28% increase versus fiscal 2007. These reported results included

combined gains from the sale of Starter Brand and NIKE Bauer Hockey businesses of

$35.4 million, net of tax, in fiscal 2008 and the gain recognized on the sale-leaseback

of the Oregon Footwear Distribution Center of $10.0 million, net of tax, in fiscal

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2007, one-time tax benefits of $105.4 million and $25.5 million recognized in fiscal

2008 and 2007, respectively, operational losses of $13.3 million, net of tax, from

Umbro, which was acquired in the fourth quarter of fiscal 2008, and a $9.6 million

gain, net of tax, from the Converse arbitration ruling settlement in fiscal 2007. Nike

estimates that the combination of favorable translation of foreign currency-

denominated profits from international businesses and the foreign currency losses

included in other (expense) income, net resulted in a year-over-year increase in

consolidated income before income taxes of approximately 6%. (SEC, 2008)

5.3 Equity Structure

Nike is focused on building its international portfolio and pursues growth

opportunities. Nike will focus on athletic equipment and aiming for the non-athletic

customer. In 2007, Nike purchased Converse, which has allowed the company to

appeal to emerging markets in Brazil, China, and Russia. Nike increased Converse

sales from $1.5 to $2 billion (29% increase) and most of the growth drives sales in the

emerging markets. Since US revenue for Nike remains flat, the company is looking to

reach more of the international market. Nike plans to invest 11% of revenue in

marketing and this expense will help in promoting strong brands and maintain product

recognition.

In 2006, Nike spent $1.74 billion in advertising, 11.6% of revenue. This

advertising led to Nike's operating margin of 8.80%. Nike is not the most profitable

company in the footwear industry that title belongs to Puma. Puma has a margin of

9.55% on $4.1 in revenue. Puma had to put 15.23% of revenue towards advertising.

With Nike being not as profitable as Puma, this disadvantage points out the

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importance of other profitability-enhancing ventures, such as moves towards increase

retail distribution. Nike is planning to generate revenue by appealing more for the

low-performance footwear market in the United States and Europe. This means that

Nike will emphasize on Converse and Hurley, which have sneakers not intended for

athletic use. By utilizing the many opportunities for growth this can improve the

stockholders equity for the coming years (WikInvest, 2008).

5.4 Stocks

Although slowly on the rise, NIKE’s stock took a harsh blow in 2008 with the

biggest drop they had seen in seven years. Down 9.1% since 2001, NIKE stock closed

at $60.33 on Monday September 8, 2008. Sales are up, however, and stock has seen a

22% total rise over the last year (Market Watch, 2008). NIKE will be announcing its

financial results for the first quarter fiscal year 2009 on September 24, 2008 after the

close of stock market trading hours. NIKE stock is expected to see a slight rise in

price giving investors hope that sales surges in the Asian and European markets, as

well as money spent on innovation and operations, will give further rise to NIKE

stock NIKE, Inc, 2008).

Following through with NIKE’s stock repurchase program, should NIKE see

at least a 20% rise in stock prices in fiscal year 2009, just as they saw a 22% rise in

2008, NIKE will be well on its way to competing its four year stock repurchase goal

set forth by NIKE’s Board of Directors in 2006 (Nike, Inc, 2008). This will also allow

NIKE to raise quarterly dividends paid to its shareholders. A 20% increase will bring

NIKE 46,375,269 shares closer to its goal with a total of approximately $2.43 billion.

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This may also allow NIKE to raise its quarterly stock dividend payable to roughly

.28¢ per share.

5.5 Bonds

The function of bonds can determine the liquidity of the company in order to

finance or invest to increase revenues and to justify the implementation of new

innovative projects. Cash outflows such as dividends or increased drawings of stock

and bonds will have the propensity to remove liquidity from NIKE. NIKE must

consider a more aggressive means to financing capital investments. In figure 1, the

chart demonstrates NIKE’s ability to raise working capital through the issuance of

bonds.

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6.0 Working capital policies that adopted by Nike

Mention the global athletic footwear giant, Nike, and most people would

immediately think of the famous “swoosh” that adorns all of their gear. What is not so

well known is that behind the scenes, Nike’s product design teams now focus on

creating innovative and sustainable products before the “swoosh” goes on. Using

sport as a tool for positive change, Nike believes that a strong corporate responsibility

effort will be good for business.

Many corporations are reporting their sustainability efforts now that corporate

responsibility (CR) reporting is gaining more press. Corporate stakeholders are also

demanding more transparency. “Green washing” is defined by Webster’s Dictionary

as the "the practice of promoting environmentally friendly programs to deflect

attention from an organization's environmentally unfriendly or less savory activities.”

Some corporations may be accused of “green washing” when they attempt to present

themselves in an environmentally responsible way but do not truly address their

problems or challenges in a sustainable way. Nike has undertaken a number of

initiatives that demonstrate active support of their new corporate responsibility

mission statement, and these initiatives deserve recognition. Some are highlighted

below.

6.1 Design for Environment

Nike first became involved with The Natural Step in 1997. The Natural Step (TNS) is

a framework grounded in natural science that serves as a guide for businesses,

communities, educators, government entities, and individuals on the path toward

sustainable development. In 1998, Nike adopted the TNS framework as the

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foundation for sustainability programs and goals. Also in 1998, Nike began working

with McDonough Braungart Design Chemistry (MBDC) to determine the chemical

composition of its products. Both the materials and processes being used to

manufacture their shoes were analyzed to assess their environmental effects.

This analysis was then used to outline a plan to eliminate all dangerous

chemicals from its manufacturing processes. This work furthered Nike’s steps toward

a sustainable business model. Since then, Nike has continued to pursue goals which

include a commitment to ecological intelligence and an awareness of the impact of

their products on the natural world.

6.2 Nike stated four long-term goals. By 2020

Nike would aim to:

• Eliminate the concept of waste in product design, using materials, energy and

resources that can be readily recycled, renewed or reabsorbed back into nature.

• Eliminate all substances that are known or suspected to be harmful to human health

or the health of natural systems.

• Close the loop and take full responsibility for its products at all stages of the life

cycle, including the end of a product’s useful life when consumers are likely to

dispose of it.

6.3 NikeGO Places

Nike took a look at how they could be more responsible for their product’s end of life,

incorporating the cradle-to-cradle philosophy of “waste.” They came up with an inno-

vative program, originally called Reuse-A-Shoe, now called NikeGO Places that was

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launched in 1993. They sought to collect worn-out athletic shoes, disassemble them

into their material components, and recycle those materials. Nike then uses the result-

ing materials to create a new life for them as athletic surfaces. This program also sup-

ports Nike’s goal to “Get kids moving and give them the means to do it” through their

NikeGO program.

Partner recycling organizations collect and store shoes until they have enough

to fill a 27-foot trailer (approximately 5,000 pairs). Nike then arranges for shipment to

its facility, where it grinds the components separately. Nike Grind Rubber from out-

soles and manufacturing byproduct goes into baseball and soccer fields as well as golf

products, weight room flooring and running tracks.

6.4 Climate Commitments

Nike has committed to reducing greenhouse gas emissions throughout its operations

worldwide. As stated in their 2001 CR report in a Climate Savers agreement with the

World Wildlife Fund (WWF) and the Center for Energy & Climate Solutions (CECS),

Nike’s goals were to:

• Reduce carbon dioxide (CO2) emissions from business travel and Nike-owned

facilities and services to 13 percent below 1998 levels by the end of 2005 by

pursuing energy conservation projects, purchasing green power and investing in

community energy efficiency projects.

• Create baselines for Nike’s major subcontracted footwear and apparel

manufacturing facilities by year-end 2003.

• Examine Nike’s supply chain from packaging to modes of transportation for

opportunities to improve logistics efficiency and reduce GHG from it.

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7.0 NIKE Historical Ratios

NIKE’s Return on Equity rose 36.41% between 1999 and 2000, while a shaky

position between 2000 and 2001 resulted in a fall in the return on equity gained from

the previous yr by 8.61% to stand at 16.88 in 2001. This position was reversed in the

following two years with return on equity rising by 3.14% between2001 and 2002 and

then 6.54% between 2002 and 2003.

Return on Assets steadily increased for NIKE from the period from 1999 to

2003 with an overall increase of 28.14% showing that NIKE continuously earned

more returns on the employment of its assets throughout the years.

Operating Margin also steadily grew from 1999 to 2003 with a slight drop by

2.37% in 2001 but then rose again by 0.94% and then 7.97% resulting in an overall

increase in operating margin from 1999 to 2003 of 19.36%.

Liquidity Indicators

NIKE’s liquidity fell between 1999 and 2000 by 25.66% but the company was

still able to meet its shortterm obligations with its current assets. After 2000 the com-

pany’s liquidity then steadily increased from 2000 to 2003 to highlight an overall in-

crease in liquidity of 2.65%

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The quick ratio also highlights a similar movement in liquidity. Liquidity dropped be-

tween 1999 and 2000 by 30.77% but then the company steadily improved its liquidity

throughout the following years to result in an overall increase in liquidity of 10.77%

as represented by the quick ratio.

In terms of the ratio of debt to equity in financing between 1999 and 2000

NIKE showed an increase in debt in its financing as compared to equity but then in

2000 the company showed a reversal in its position with more reliance on equity

compared to debt. 2001 to 2003 showed an increased use of debt compared to equity

in NIKE’s capital structure and therefore showed NIKE to be more leveraged at the

end of 2003.

Asset Management:

Revenues as a percentage of total assets dropped between 1999 and 2000 by

7.78% then improved by 5.84% in 2001 but then declined again in 2002 by 5.52%

and then improved in 2003 by 3.24% to stand at 1.59. Even with these fluctuations,

NIKE achieved positive gains on its total assets in the form of revenues for example

in 2003 for every $1 in total assets NIKE generated $1.59 in revenues.

Revenues as a percentage of working capital fluctuated throughout the years

moving up between 1999 and 2000, and then continuously fell between 2000 and

2003 by an overall 35.11%.The Interest covered figures showed improvement be-

tween 1999 and 2000, a drop between 2000 and 2001 but then a continuous increase

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from 2001 to 2003 showing that NIKE is able to cover its interest expenses 27.18

times.

Comparison Data for 2003

Financial Ratios:

Liquidity Ratios: Liquidity is a measure of a company’s ability to meet its short-term

obligations. A liquid asset is one that can be quickly converted into cash. Liquidity

ratios express the variability of liquid resources relative to potential claims.

Current Ratio: With this current ratio, Nike is able to cover its current liabilities 2.32

times with its current assets. Reebok’s ratio is slightly higher at 3.05 and Adidas is

slightly lower at 2.07. In comparison the industry is more liquid than Nike and the

market is less liquid. Focusing on its main competitors in the form of Reebok and

Adidas, Nike’s liquidity is at a viable position and the higher liquidity of Reebok and

the industry may mean that other companies are leaving its cash idle and not using it

to its full potential.

Quick/Acid Test Ratio: This means that with the exclusion of its most illiquid asset

in the form of inventory, Nike is still able to cover its current liabilities. The industry

to which NIKE belongs is more liquid with ADIDAS being less liquid than NIKE and

REEBOK being even more liquid than industry. The market as a whole stands at a

more balanced position with a 1 to 1 ratio.

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Leverage Ratios: A leveraged company uses more debt than equity including stock

and retained earnings in its capital structure.

Debt-to-Equity: Nike’s debt-to-equity ratio of 0.19 shows that Nike uses more equity

in its financing than Debt and is therefore not highly leveraged. Reebok and Adidas

are more leveraged but the industry as a whole shows capital structures that weigh

more on the equity side with a figure of 0.27 but still more leveraged than Nike. The

market as a whole however is highly leveraged, which shows that debt, outweighs eq-

uity in capital structure.

Operations Indicators for 2003

Activity Ratios: These ratios assess the efficiency with which the firm manages its

assets. More specifically, they describe how efficiently or intensively a firm uses its

assets to generate sales.

Inventory Turnover: This means that NIKE turned over its entire inventory 7.06

times. As long as a company is not running out of stock and thereby foregoing sales,

the higher this ratio is the more efficiently inventory is being managed. Inventory

turnover for REEBOK and ADIDAS is 9.89 and 5.38 times respectively. This high-

lights that REEBOK turns over its inventory much faster than NIKE and the industry

as a whole. The industry position is much lower at 3.70 and the market turns over its

inventory faster than the industry with a figure of 7.60. Even though NIKE is less liq-

uid than its closest competitor REEBOK this can be accounted for by NIKE’s wider

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and more extensive range of products in comparison to REEBOK and other competi-

tors.

Asset Turnover: Measures how efficiently a company uses its assets to generate

sales. NIKE uses its assets to generate sales better than ADIDAS, the industry as a

whole and much better than the market. REEBOK however utilizes its assets to gen-

erate sales approximately 10% better than NIKE does.

Average Collection Period: Highlights how effective the company’s credit, billing,

and collection procedures are. This shows that it takes NIKE approximately 61.59

days to receive its cash after making a sale. REEBOK and the industry takes 6.61 and

8.64 days less to receive its cash after making a sale.The market takes 5.6 days more

than the industry but takes 3.04 days less than NIKE to receive its cash.

Profitability Ratios for 2003:

Profitability Ratios: These ratios measure the efficiency with which a company uses

its resources and the more efficient a company is the higher its profitability. A number

of different ratios can be used to assess different aspects of profitability in relation to

a company’s performance.

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Gross Profit Margin: This calculation represents the amount of each dollar of reve-

nue that results in Gross Profit. Approximately forty-one percent of NIKE’s revenues

result on gross profit, Reebok’s figure is slightly less at 38.40% with ADIDAS, the

industry and the market reaping higher results.

Net Profit Margin: This represents the amount of each dollar of revenue that results

in Total Net Income. NIKE realizes a higher percentage of its revenue in total net in-

come compared to its main competitors, the industry and the market, with a net profit

margin of 7.55%. This turnaround between the positions realized with the gross profit

margin suggests that NIKE manages its expenses better than the other groups with

which it is compared.

Return on Total Assets: This measures the profit earned on the employment of as-

sets and this shows that NIKE earned 11.02% on its total assets. This shows a better

return when compared to its main competitors, the industry and a superior position

over the market which only earned 1.30% on its assets. For every dollar of assets in

NIKE the company generated approximately $0.11 in returns.

Return on Equity: Because shareholders benefit is the main goal, ROE is one of the

most important measurers of performance. According to this calculation NIKE an

18.55% return on its shareholders investments, that is, for every dollar of shareholder

investments NIKE was able to generate approximately $0.19. REEBOK was able to

generate less with a $0.15 return, but ADIDAS was slightly higher at $0.20. In com-

parison the industry as a whole generated $0.12 and the market was even lower at

$0.08.

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Return on Invested Capital: This represents the profits earned on the capital invest-

ed in the company and highlights a continuation of the trend realized by the previous

figures. NIKE was able to generate approximately $0.17 for every $1 of capital in-

vested in the company while, REEBOK was able to generate $0.11, ADIDAS $0.65,

the industry $0.10 and the market approximately $0.40. As such, NIKE was able to

generate or garner higher profits on the capital invested.

Risks: Risks are not inherently bad but left un-addressed can cause serious harm to a

company. Like all companies NIKE faces risk and these risks can stem both internally

and externally. From an internal standpoint the company itself is the focus and from

an external standpoint the industry in which the company operates is the source. Un-

der the umbrella of market risk lie foreign exchange risk, translation and interest rate

risk, all of which Nike undoubtedly faces due to its international stature.

Bad Publicity and False Advertisements: Even though NIKE has implemented a

new code of ethics in carrying out its business, there still remains some negative back-

lash from previous linkages to sweat shops and poor working conditions in factories

of its foreign suppliers. Any resurgence in this sort of negativity can lead to a drop in

consumer confidence and ultimately NIKE’s stock price as experienced in the past.

As with other companies in this position NIKE faces this threat but the company has

attempted to rectify the situation and should continue to foster good relationships with

its suppliers and continue checks of working conditions.

Some organizations not in favor of NIKE’s touted affiliations with poor work-

ing conditions continue to protest sporadically at NIKE store locations and also post

27

websites that make false advertisements about the company and try to gain the sup-

port of consumers through these means. Despite this, the company is still experienc-

ing growth and has taken a vigilant look at these groups.

Fashion Changes and changes in consumer tastes and preferences:

NIKE needs to stay on top of changes in consumer tastes and preferences as

evidenced by changes in fashion. NIKE faces the riskthat fashion trends may change

that fail to incorporate NIKE’s styles. To combat this NIKE, should position itself as

a trendsetter and not a trend follower, as well as, be responsive to its consumers. Like

all companies Pall Corporation faces risk and these risks can stem both internally and

externally. From an internal standpoint the company itself is the focus and from an

external standpoint the industry in which the company operates is the source. Under

the umbrella of market risk lie foreign exchange risk, translation and interest rate risk,

all of which Pall Corporation undoubtedly faces.

NIKE is exposed to foreign currency fluctuation as well as translations risk as

a result of international sales, production and funding activities. The company howev-

er realizes and accounts for this risk by hedging. According to the company’s annual

report, “our foreign currency risk management objective is to reduce the variability of

local cash flows as a result of exchange rate movements”. The company uses forward

exchange contracts and options to hedge certain anticipated but not yet firmly com-

mitted transactions as well certain firm commitments and the related receivables and

payables, including third party or inter-company transactions.

28

Investment Drivers:

The economy as experiencing an upswing and this has been translated to an

upswing in the athletic footwear, apparel and equipment segments of consumer prod-

ucts industry. Existing investment drivers include NIKE’s strong brand recognition,

differentiation of products, and high market share. These have translated in increased

earnings for the past three quarters and much of our valuation of this company is

based on expected future increases in earnings for the upcoming quarter and year.

Unlike many companies that remain sluggish in a stagnant economy NIKE

seems able to overcome these setbacks and still realize high earnings as well as pass

on dividends to its shareholders. NIKE also adopts innovative ideas with the use of

extensive research and development and technology. The Company continues to ven-

ture into new, but related areas by applying key management strategies in its ap-

proach. This approach, has proven to be successful in the past.

NIKE continuously searches for new opportunities for partnerships and alli-

ances that not only build brand loyalty and support but also generate sales. These

partnerships come in the form of relationships with buyers, suppliers as well as ath-

letes, which have proven to drive consumer purchases. Nikes propriety knowledge

pushes the company to the top of its industry while maintaining a competitive edge,

quality products at affordable prices. Two key events also occur soon. The Olympics

is an event that always pushes consumer desire to be more athletic but also patriotism.

These increases in positive feelings will ultimately spill over into support for NIKE

who sponsors an enormous amount of athletes and sports teams. Also, children, main-

ly teenagers accounted for the majority of sales recently, with this in mind along with

back to school shopping coming up around August this can also result in increases

29

sales as these teenagers demand the latest styles and products offered by NIKE. NIKE

also benefits from its first mover status by always being innovative and pushing itself

to take advantage of all opportunities that appear.

8.0 Key Working Capital Ratios

The following, easily calculated, ratios are important measures of working capital

30

utilization.

Ratio Formulae Result Interpretation

Stock

Turnover

(in days)

Average Stock

* 365/

Cost of Goods

Sold

= x

days

On average, you turn over the value of your

entire stock every x days. You may need to

break this down into product groups for

effective stock management.

Obsolete stock, slow moving lines will

extend overall stock turnover days. Faster

production, fewer product lines, just in time

ordering will reduce average days.

Receivables

Ratio

(in days)

Debtors * 365/

Sales

= x

days

It take you on average x days to collect

monies due to you. If your official credit

terms are 45 day and it takes you 65 days...

why ?

One or more large or slow debts can drag

out the average days. Effective debtor

management will minimize the days.

Payables

Ratio

(in days)

Creditors *

365/

Cost of Sales

(or Purchases)

= x

days

On average, you pay your suppliers every x

days. If you negotiate better credit terms

this will increase. If you pay earlier, say, to

get a discount this will decline. If you

simply defer paying your suppliers (without

agreement) this will also increase - but your

31

reputation, the quality of service and any

flexibility provided by your suppliers may

suffer.

Current

Ratio

Total Current

Assets/

Total Current

Liabilities

= x

times

Current Assets are assets that you can

readily turn in to cash or will do so within

12 months in the course of business.

Current Liabilities are amount you are due

to pay within the coming 12 months. For

example, 1.5 times means that you should

be able to lay your hands on $1.50 for every

$1.00 you owe. Less than 1 times e.g. 0.75

means that you could have liquidity

problems and be under pressure to generate

sufficient cash to meet oncoming demands.

Quick Ratio

(Total Current

Assets -

Inventory)/

Total Current

Liabilities

= x

times

Similar to the Current Ratio but takes

account of the fact that it may take time to

convert inventory into cash.

Working

Capital

Ratio

(Inventory +

Receivables -

Payables)/

Sales

As %

Sales

A high percentage means that working

capital needs are high relative to your sales.

Other working capital measures include the following:

32

Bad debts expressed as a percentage of sales.

Cost of bank loans, lines of credit, invoice discounting etc.

Debtor concentration - degree of dependency on a limited number of

customers.

Once ratios have been established for your business, it is important to track them over

time and to compare them with ratios for other comparable businesses or industry

sectors.

9.0 Weaknesses in the management of working capital NIKE The key weakness of Nike, Inc. resides in our financial status. While we are

not in financial trouble, we recognize that strengthening the financial well being of the

company can only assist our company in the short- and long-run. We have many areas

33

challenging our continued success such as increasing our profitability and bettering

our management of cash, accounts receivable, and debt. Nike suffered a blow to sales

and revenue sparked by bad publicity in 1997 about our international labor policies.

Since then, we have attempted to overcome the bad press by raising and enforcing

minimum age requirements for employees in overseas factories. Nike attempted to

regain its mid-90's momentum as shown in 1998’s recovery, but the loss of Michael

Jordan as our spokesman and the Asian financial crisis put a damper on gains that

year. During 1999, the company made some changes in its products and deeply cut

costs. These initiatives, in addition to the stabilization in the Asian financial picture,

will combine to fuel the recovery that Nike expects in the near future. Nike's recent

alliance with Fogdog Sports, an Internet sporting goods retailer, and our presence in

the 2000 Sydney Olympic games will also aid in sales growth.

Management of Cash - Weakness

Our company’s current ratio is 2.26, just slightly below the industry average of 2.28.

The current ratio, while not a major strength, shows that Nike is inline with the indus-

try concerning ease of converting assets to cash to cover short-term obligations. The

quick ratio of 1.43 is above the industry average of 1.17. Being slightly above the in-

dustry indicates that we could sell less of our inventory than what other companies in

the industry would have to sell to meet current obligations. Neither the current or

quick ratio exceeds the industry average substantially enough to be considered a true

strength. The fact that we are not leaders is ultimately a weakness.

Management of Inventories - Strength

Nike’s inventory turnover of 7.32 exceeds the industry average of 4.34. Re-

ducing inventory levels was a key initiative for Nike in fiscal year 1999. Due to our

ability to quickly turnover inventory, Nike benefits from greater cash flows, reduced

34

storage costs, and less spoilage. In addition, quick turnover reduces Nike’s inventory

of out-of-style shoes and clothing. Company management stated, "We put a consider-

able amount of effort into improving product buying power patterns and as a result the

composition and levels of inventory resulted in improved gross margins relative to a

year ago." Inventory levels are being reduced due to increased sales in the company's

own branch retail stores.

Management of Accounts Receivable - Weakness

Nike does permit sales in cash, cash equivalents and on credit. Our collection

procedures have been lax compared to others in the industry resulting in slow payers

and defaulting customers. Our collection period calculates to 63.17 days while the in-

dustry average is only 7.71 days. Steps are being taken to alleviate the problem of col-

lecting accounts receivable in a more timely fashion. We have just recently changed

our collection period from 90 days to 60 days as an attempt to encourage faster pay-

ment.

Management of Debt - Strength

Our debt-to-total-assets ratio is 15.36%, which is far below the industry aver-

age of 40.69%. Nike is not as leveraged as competitors in the industry and uses less

debt financing to finance firm operations. This can be interpreted as a strength as we

do not rely as heavily as our competitors on debt financing. However, our highly liq-

uid position gives us the ability to increase debt financing should we need or desire

additional capital for company operations, research and development, or other chang-

es as top management sees fit.

35

Management of Debt - Weakness

Despite the lower percentage of assets that are borrowed to finance Nike, our

times interest earned ratio is weaker than the industry average. Our ratio of 19.43 re-

flects the number of times funds available from earnings can cover interest payments.

The industry average of 21.88 indicates that the industry as a whole is in a slightly

better position to cover its interest charges.

Profitability - Weakness

Nike’s profitability is wavering in comparison to the industry average. Our

profit margin of 5.14% to the industry’s 5.69% is partially due to decreasing sales.

Though net income did increase from 1998 to 1999, this was in part due to a reduction

of our marketing budget by $100 million and terminating 7% of our employees. Our

return on equity of 13.54% in relation to the industry mean of 18.77 indicates that Ni-

ke is realizing a lower percentage of earnings on stockholders’ investment. Nike’s low

ROE can be linked to the dropping stock price as a reflection of stockholder confi-

dence in our company.

10. 0 Working Capital Cash Conversion Cycle of NIKE

The working capital cycle involves the steps a business normally takes from

the time it makes the first cash commitment toward providing a product or a service,

to the point when it receives cash payment for its sales. The firm orders and receives

the raw material, generating an account payable. It also hires additional employees to

produce the goods and, since workers generally aren't paid the moment their work is

performed, accrued wages are generated. Eventually NIKE, the product is sold which,

if the product is purchased using credit, generates an account receivable. Firms will

typically start the payment of their payables before collecting cash for receivables.

36

This produces a net cash outflow. An individual cycle ends when the full cash amount

for the sale is received. Each new transaction begins the cycle again.

The cash conversion cycle (CCC) is defined as the length of time between the

payment of the payables and the collection of receivables. During this cycle a NIKE

business' funds are unavailable for other purposes. Cash has been paid for purchases

but cash has not been collected from sales. Short-term financing may be needed to

sustain business activities for this period. Since there is always a cost to such financ-

ing, a goal of any business should be to minimize the cash conversion cycle. To

achieve this goal three terms must be clearly understood:

1 Inventory conversion period (ICP) refers to the length of time between pur-

chase of raw material, production of the goods or service, and the sale of the finished

product. Payable deferral period (PDP) is the time between the purchase of raw mate-

rial on credit and cash payments for the resulting accounts payable.

1 Receivable conversion period (RCP) is the time between the sale of the final

product on credit and cash receipts for the accounts receivable.

The cash conversion cycle may be calculated by using the following formula:

37

CCC = ICP + RCP - PDP For example, if it takes 35 days after orders are placed to

receive and process the raw material into finished product, the ICP is 35 days. Assum-

ing that 25 days after the arrival of raw material, the firm pays for them, the PDP is 25

days. Finally, if the firm receives cash payment for the sale of its product or service in

30 days, the RCP is 30 days. The CCC is thus 35+30-25, or 40 days.

As mentioned before, the CCC represents the time in which working capital is "tied

up" in covering production costs. If a business owner is able to shorten the CCC, the

need for external financing and the resulting interest expense will be smaller, thus

creating higher profits.

For example, assume a firm borrows working capital with a 10 percent simple

interest rate for 40 days. The effective interest rate would be 10.46 percent annually.

Borrowing $100,000 for this period would cost $1,162.22. However, if the firm short-

ens the cash conversion cycle to 20 days, the interest expense at the effective rate of

10.50 percent would only be $583.33.

The CCC may be shortened by reducing the ICP -- processing the raw material and

producing the goods as quickly as possible;

1 reducing the RCP -- speeding up collections

1 lengthening the payable conversion period -- slowing payments

38

These three strategies are best utilized by the small business owner who is fa-

miliar with sound inventory, receivables and payables management techniques as well

as the sources and costs of short-term financing. Figure 1 presents a few tips for

shortening the CCC through faster cash collection and slower cash disbursement. We

then examine techniques for managing the various components of current assets such

as cash, marketable securities, accounts receivable and credit management, and inven-

tories. Following this we'll examine the use of short-term liabilities as a means of fi-

nancing operations.

Short-term liabilities include:

1 accruals

1 accounts payable

1 short-term bank loans

1 short-term credit secured with accounts receivable and inventories

39

11.0 Conclusion

Nike, Inc. is a company rooted in competition. From equipping athletes with

the finest sports equipment in the world to continuously improving our own financial

performance, Nike dominates its competitors. Phil Knight and Bill Bowerman proba-

bly could not have imagined in 1962 to what degree their $500 investments would

yield in 2000. They did know that product quality and innovation would help athletes

to achieve greater goals. Nike still operates on this philosophy today. It is one that has

helped athletes and stakeholders alike to realize athletic and financial greatness. De-

spite a changing marketplace for athletic footwear, we will continue to expand our

product lines and marketing reach to become a more powerful global brand.

Part of Nike's strategy to revitalize the company was aimed at addressing their

revenues which had been fixed for four years and their net income which had fallen to

almost $220M. Additionally, Nike had been losing overall market share and the strong

dollar had adversely affected revenue. To address those issues, management was

planning to raise revenue by developing increased levels of athletic-shoe products in

the mid-priced segment. Push its well performing apparel line, and control expenses.

40

References

Green at Work Magazine. Reuse-A-Shoe Program Going Strong.

Nov/Dec 2003, from

http://www.greenatworkmag.com/magazine/newslines.html.

GreenBiz.com. Environmentally Responsible Business Travel, from

http://www.greenbiz.com/toolbox/.

GreenBiz.com. Nike Endorses Beyond-Compliance Aims. Nov. 9, 2000, from

http://www.greenbiz.com/news/.

The Irish Times. The eco industrial revolution.

http://www.wbcsd.org/.

MBDC.com. Just Doing It: Nike’s Track to Ecologically Intelligent Products .

Darcy Winslow, Dec. 2001, from

http://www.mbdc.com/features/feature_dec2001.htm.

NikeBiz.com. http://www.nike.com/nikebiz/. (see this website for CR reports)