AnInvestmentAnalysisCaseStudy:Nike

Format:Eachgroup willturninonereport

Decisionon Expansion:Acceptor Reject

Returnon capital:% value

NPV:$ value

IRR:% value

Withitsdominance oftheathleticshoeandsportingapparelbusinesses,Nike generated$2.81billioninoperatingincomeonrevenuesof$20.9billioninthefiscalyear thatendedinMay2011.Whileitsstockpricehasrebounded inthelastthreeyears(see Exhibit1),itssalesandearningsarebeingaffectedbyincreasedcompetition fromboth establishedfirms(like Reebok andAdidas) andupstarts(suchasUnderArmour).Exhibit

2summarizesNike'sincomestatementforthelast4years,andExhibit3summarizesits balancesheetfor thelast2 years.

Nike,whichcurrentlyviewsitselfasoperatinginthesportingwear(shoesand clothes) segment, is considering an expansion into the fashion apparel business, producing high-pricedcasualclothingforteenagers andyoungadults.Youhavebeen askedtocollectthedatatomaketheassessment andhavecomebackwiththefollowing information:

1. You estimatethatitwillcostNike$ 2.5 billiontoestablishapresenceinthis business.Ofthisamount, $1billionwillhavetobespentrightnowacquiringland, equipment andotherassetsneededforthebusiness.Therewillbeanadditional$1 billioninvestmentayearfromnow,andfinalinvestmentof$0.5billionattheendof

2 years.Thebusinesswillbeoperationalatthestartof thethirdyear.

2. Oftheinitialinvestmentof$2.5billion,$1.5billionisfullydepreciableover10 years starting in the third year, and will be depreciated using the straight line method.

3. Youhaveemployedamajormarket-testingorganizationtodoamarketstudy.

4. Thetotalmarketforcasualapparelisestimatedtobe$75billioncurrently,growing at 5%ayear.Nikeisexpectedtogaina2%marketshareinthefirstyearthatitenters themarket(whichisthethirdyear),andtoincreaseitsmarketshareby 0.5%ayearto reach5%ofthemarketintheninthyear. Beyondthatpoint,Nike'srevenuesare expectedtogrowatthesamerateastheoverallmarket.

5. Thepre-taxgrossprofitmargins(priortodepreciation, advertisingexpensesand allocationsof corporatecosts)areexpectedtobe23% of revenues.

6. Nikewillallocate5%ofitsexistinggeneralandadministrative coststothenew division.Thesecostsnowtotal$2billionfortheentirefirmand areexpectedto grow

5%ayearforthenext12years,irrespective ofwhetherNikeenterstheapparel business.Inaddition,itisexpected thatNikewillhaveanincrease of$50millionin generalandadministrativecostsinyear3whenthenewdivisionstartsgenerating revenues, andthatthisamount willgrowby 2% per year after that. Thelattercostisdirectly relatedtothenewdivisionsandwillbecharged tothemin additiontotheallocatedcorporateG&Acosts.

7. Whilethenewbusinesswillneeddistributionalsupport,it is anticipatedthatNikecan useexcesscapacityinitsexistingdistributionnetwork.

8. Nikespent$1billioninadvertisingexpensesinthemostrecentyearandexpects theseexpensestogrow4%ayearforthenext12years,ifthecasualappareldivision isnot created.Ifthe casualappareldivisionisaddedtothe company,totaladvertising expensesareexpectedto be7%higherthantheywouldhavebeenwithouttheapparel divisioneachyearfromyear3 (thefirstyearof salesfor thedivision)toyear12.

9. Theappareldivisionwillcreateworkingcapitalneeds,whichyouhaveestimatedas follows:

Thesaleofappareloncredittowholesalersandlargeretailerswillmake accountsreceivableamountingto5% of revenueseachyear.

Inventory(ofbothrawmaterialandfinishedgoods)willbeapproximately

10%ofthecostofgoodssold(notincludingdepreciation,allocationsor advertisingexpenses).

Alloftheseworkingcapitalinvestments willhavetobemadeatthebeginningofeach yearinwhichgoodsaresold.Thus,theworkingcapitalinvestment forthethirdyear willhavetobemadeatthebeginningof thethirdyear.

12. Nike'seffectivetaxrateis24%,

13. Nike's Required rate is 8%

AddedClarifications

1. Time:You canassumethatthecurrentyearhasjustendedandthatnow istime0.

Year1 beginstodayandtheendof year1 isayearfromtoday.

Exhibit 1: Nike-Stock Prices NKE US $ 1 108 . 72 +.8 D EquityGP DELAY 11:05 Vol 516,501 Op 108.89 B Hi 108.96 D Lo 108.07 D ValTrd 56061104 NKE US EQUITY Save Chart Hide GP - Line Chart Page 1/3 Range 09/30/08 - 03/01/12 Upper Trade Line Mov. Avgs Currency USD Period Lowe Mov. Avg Events Day Session Twich on 01/41/12 194.32 I Love in 12/27/04 (1.S] . . ...... -" .. .. Of; = * *101; I IOUT 1OUT Australia 61 2 9777 0600 Breall $511 3040 45tto "-"" 44 20 1310 150-0 ee -. 49 m1 9204 1210 Help Ke of asz nin Japan 01 3 3201 8900 Singapore 65 6212 1000 :Jtt 2000 Cxpu-teht ZOU Bloo_ _-re Fillonce \\. SH U"U It] GT-5.00 64U tu o 0J fto1 1011 11-20-41Exhibit 2: Nike's Income Statements Page EquityDES Hit 1 for more income statement information (FA IS) . INCOME STATEMENT ( Mil of USD Page 8 /10 NKE US NIKE INC -CI B S/2011 5/2010 5/2009 5[2008 Revenue 20862.00 19014.00 19176. 10 18627.00 Cost of Revenue 11354.00 10213.60 10571.70 10239. 60 Operating Expenses 6693.00 6326.40 6149. 60 5953.70 Operating Income 2815.00 2474.00 2454.80 2433.70 Interest Expense 34.00 36.40 40.30 40.70 For Exchange 1 (G) .00 . 00 . 00 Net non-op 1 (G) -63.00 -79.30 458.00 -109.90 Income Tax Expense 711.00 610.20 469.80 619.50 Income bef XO items 2133.00 1906.70 1486.70 1883. 40 XO L(G)pretax . 00 . 00 .00 00 Tax effect on XO items . 00 .00 .00 . 00 Minority Interests .00 .00 . 00 . 00 Net Income 2133.00 1906.7 () 1486.70 1883.40 Tot cash pref. dvd . 00 00 . 00 .00 Tot cash comm. dvd 569.00 514.80 475.20 432. 80 Diluted EPS Cont Ops 4.39 3.86 3. 82 3.53 Diluted EPS bef XO 4.39 3. 86 3.03 3.74 Diluted EPS 4.39 3. 86 3.03 3.74 # Shrs Diluted EPS 485.70 493.90 490.70 504.10 Japon II 3 3201 8900 Australlo 61 2 9777 8400 81"a&1 5511 3048 4500 Europe 44 zo 1330 7500 Gerunv 49 69 9204 1ZIO Home Kone 857 2971 61000 Sino @ore 65 6212 1000 U.9. 1 ZIZ 318 2000 Copwrleht 2012 Bloomberg Finonce L.P. SH 636135 EST Gtn-500 6653-161 0 ZB-feb-2012 13- 04-00Exhibit 3: Nike's Balance Sheets Page EquityDES Hit 1 for more balance sheet information (FA BS). BALANCE SHEET ( Mil of USD ) Page 9 /10 NKE US NIKE INC -CL B 5/2011 5/2010 5/2011 5/2010 Cash & Near Cash 1955.00 3079.10 Accounts Payable 1469.00 1254.50 Marketable sec 2583.00 2066.80 ST borrowings 387.00 146.00 Accounts & Notes R 3138.00 2649.80 Other ST liab 2102.00 1963.70 Inventories 2715.00 2040.80 Current Liabilitie 3958.00 3364.20 Other Current Asse 906.00 1122.70 Current Assets 11297.00 10959.20 LT Debt 276.00 445.80 Other LT Liabiliti 921.00 855.30 LT Investments & L .00 00 Noncur liabilities 1197.00 1301. 10 Total Liabilities 5155.00 4665.30 Depr fixed assets 4542.00 3990.00 Non-depr fixed ass 364.00 399.80 Preferred Equity 00 30 Accumulated Deprec 2791.00 2457.90 Minority Interest .00 00 Net fixed assets 2115.00 1931.90 Share cap & APIC 3947.00 3443.40 Retained earnings 5896.00 6310.30 Other Assets 1586.00 1528.20 Total Equity 9843.00 9754.00 Tot liab & equity 14998.00 14419.30 Total Assets 14998.00 14419.30 ST part of LT debt 200.00 7.40 Shares Outstanding 468.00 483.02 # treasury shares 00 00 Amt treasury stock 00 00 Australia 61 2 9777 8600 Brazil 5511 3048 4500 Europe 44 20 7330 7500 Germany 49 69 9204 1210 Hong Kong 052 2977 6000 Japan 81 3 3201 8900 Singapore 65 6212 1000 U.9. 1 212 310 2000 Copyright 2012 Bloomberg Finance L. P. 9N 636136 EST GMT-5 00 G653-161-0 20-Fob-2012 13:04: 00 * ST borrowings and LT borrowings represent interest bearing debt. The average maturity of this debt is 5 years