Nike Case: an Investment Paper

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Nike Case: An Investment Paper

Time Context
Nike generated $ 2.45 billion in operating income on revenues of $ 19 billion in the fiscal year ended in May 2009. However, its stock price has stagnated or became inactive for the last two years and its future sales and earnings are likely to be adversely affected by increased competition from both established firms (like Reebok and Adidas) and upstarts (such as Underarmour). This business problem made Nike to consider an expansion into the fashion apparel business, producing high-priced casual clothing for teenagers and young adults.

Viewpoint
The business problem involves financial matter. The investment to fashion apparel business is considered a financial problem. This must be handled by a financial executive. Thus, the viewpoint used in this study will be of that a financial executive.

Central Problem
Nike is considering an expansion into the fashion apparel business, producing high-priced casual clothing for teenagers and young adults. The central problem is whether to accept or to reject this project. The acceptance or rejection of this project might somewhat affects Nike’s inactive stock price and its future sales and earnings.

Statement of Objectives
Must Objectives
❖ To estimate the operating income from the proposed apparel division investment to Nike over the next 12 years; ❖ To estimate the after-tax return on capital for the operating portion of the period – from Years 3 – 12; ❖ To estimate the after-tax incremental cash flows from the proposed apparel investment to Nike over the next 12 years; ❖ To estimate the net present value of the expansion project to Nike if the project is terminated at the end of the 12th year, and both working capital and investment in other assets can be sold for book value at the end of that year; ❖ To estimate the net present value of the expansion project, making reasonable assumptions about investments and cash flows after year 12 if the apparel division is expected to have a life much longer than 12 years and; ❖ To accept or to reject the expansion project.

Want Objectives
❖ To determine if the expansion project is feasible;
❖ To ascertain the profitability of the expansion project; ❖ To determine the excess of cash inflows from the expansion project; and ❖ To determine the acceptability and rejection of the expansion project.

Areas of Consideration
Strengths
❖ Nike is a very competitive organization. Nike continues to have the greatest market share in the U.S. branded athletic footwear. ❖ Nike is a global brand. Nike’s trademark, swoosh sign, and the slogan, “Just Do It”, is recognizable everywhere. ❖ Nike is strong at research and development, as is evidenced by its evolving and innovative product range. Nike primarily conducts marketing research on a continual basis to assist in maintaining the company’s position as the leader in athletic and sporting apparel business. Weaknesses

❖ The organization does have a diversified range of sports products. However, the income of the business is still heavily dependent upon its share of the footwear market. This may leave it vulnerable if for any reason its market share erodes. ❖ The retail sector is price sensitive. Retailers usually tend to offer a very similar experience to the consumers with another cheaper product, which in return tends to get squeezed as retailers try to pass some of the low price competition pressure onto Nike. Opportunities

❖ The brand is sternly defended by its owners who believe that Nike is not a fashion brand, however, a large number of consumers wear Nike products because they derive a fashion trend rather than to participate in a sport. Nike is a fashion brand which also creates opportunities for Nike. ❖ There are many international regions that still need tapping and there is need for sportswear and with Nike’s strong global brand recognition, it can...
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