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Nike and Reebok Companies’ Investment Analysis Essay

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Updated: Jun 10th, 2022

Companies’ Synopsis

Nike

Nike is one of the largest footwear and sportswear suppliers in the USA. The organization operates in approximately 160 countries, and its workforce is composed of more than 44000 people. Nike’s total revenue was $20.862 billion in 2011 with total equity of $9.843 billion. Nowadays, the company is considered to be the leading sportswear and footwear in the world.

Phil Knight and Bill Bowerman founded Nike in 1964. It was initially Onitsuka Tiger’s distributor but in 1972 the company created its own brand. The offered production was in high demand with runners and athletes due to the fact that Nike’s footwear was very light and comfortable. In 1982, the company began its cooperation with an effective advertising agency that still help them work out a product promotion campaign. One of the most successful products of this collaboration is the famous Nike’s motto “Just Do It.”

The principal focus of Nike’s strategy is innovations’ implementation, sustainable development, and timely integration into the globalization processes. Nike’s target clients are young and middle-aged men and women who want to combine active lifestyle and comfort.

Among the main company’s competitors, one might point out Reebok and Adidas. In the meantime, Nike currently manages to hold its leading position with the help of its cost-effective management, and powerful promotion campaigns.

The company’s organizational structure can be referred to as the divisional type. Meanwhile, Nike also has functional departments. For example, there are such brands as Converse and Jordan that were created in relation to particular products while the functional department is still Nike. The decision-making is carried out by Nike’s CEO and the directors’ board. The company also has an operations department aimed at assuring consistent interconnection between the divisions.

The company’s departments are relatively free to perform decision-making; therefore, it might be assumed that the company pursues a laissez-faire leadership policy, at least on the top level.

Reebok

Reebok is one of the leaders among the world suppliers of sports and casual footwear, as well as fitness equipment.

The company was founded in 1979 by Paul B. Fireman. In 1982, they introduced special footwear for aerobic exercise. Due to the high-quality material and attractive design, the product became popular with athletes. Moreover, it was the first sports footwear designed specifically for females; thus, it managed to create a new market sector.

The main targeted customers are young and middle-aged women that lead an active lifestyle and care about their bodies. The company has a powerful advertising campaign, promoting its products through all the possible mass media sources. They engage such celebrities as Eva Mendes to advertise their specialties.

Reebok’s leadership style can be defined as delegating. In other words, the company has a relatively flattened hierarchy and delegates a large scope of responsibilities to the separate departments.

Profitability Ratios

One the basis of the companies’ income statements, three profitability ratios were worked out in order to provide detailed insights on their profitability from the investment standpoint.

Gross Profit Margin

Both companies show almost equal indexes relating to the gross profit margin. Thus, Reebok’s gross profit margin is 44%, while Nike has a 46% variable. It means that both companies manage to carry out a sustainable control of the cost of their inventories and the manufacturing of their products as well as to pass on the costs to the clients.

In the meantime, it might be recommended that Reebok performs a series of measures in order to raise its gross profit margin. There are two alternative solutions to complete this aim. First of all, Reebok can raise the cost of its products. In order to avoid undesirable consequences, the management should analyze the economic environment, the competitors’ activity, and the client base before implementing this measure. Secondly, the company might decrease the cost of the manufacturing process. Reebok might try to find a more beneficial supplier for materials or arrange favorable discounts with the already existing supplier.

Operating Profit Margin

The operating profit margin ratio differs quite significantly in the two companies. Thus, Reebok’s operating profit margin is 6%, whereas Nike’s variables are 7.8%. These variables provide valuable insights on the scope of the thrown off cash after the companies meet all the expenses. It might be, consequently, concluded that Nike has productive cost control and, it can be assumed that its sales are increasing faster than costs. It also means that that the company has worked out a low-cost operating strategy.

It is also critical to note that Reebok’s operating profit margin can improve in case its sales revenue grows excessively. Otherwise, the company can reduce its fixed costs so that they comprise a smaller percentage of total costs – the operating profit margin will essentially increase.

Net Profit Margin

The variables for the net profit margin in Nike and Reebok differ slightly with Nike showing a 5% net profit margin, and Reebok – 4%. It means that both companies convert approximately 4-5% of their sales into profits as long as all the expenses are met. Meanwhile, both companies can increase their variables by either reducing expenses or increasing the sales’ revenue.

News Events

Latest news on Nike’s performance have positive connotations and give grounds to presume that the company is profitable from the investment standpoint. According to authoritative sources, Nike shows sustainable profit growth. Thus, Reuters reports that the launch of the new products, for basketball players, runners, and other sportsmen, has assisted Nike to draw the customers’ attention to the higher-priced products, whereas the athletic sector shows consistent, effective performance in the relevant sector. It is likewise, reported that the company’s revenue from the home market gained 9.4% at the end of 2015. As a consequence, Reuters’ analysts assess Nine’s earnings to be of about 86% share and the revenue – $7.81 billion (Iyer, 2015). Another positive news concerning Nike refers to the company’s performance in the East market. Thus, Reuters reports that the scope of orders in the fast-growing market of China increased by 34%, that is the largest increase within the past two years. According to the analysts’ estimations, general sales in China region rose up by 24% (Swamynathan, 2015).

In the meantime, the latest data reported on Reebok’s performance does not provide much assurance for beneficial investment. Hence, the company, which showed sustainably high sales, being one of the most popular US sports footwear distributors in the 1980s, began to show a steady decline after being bought by Adidas. According to experts’ assessments, Reebok’s sales have reduced by more than a third since 2005. Despite the fact, that the CEO denies the company’s plans to sell Reebok because of its worsened performance, investors might still have reasonable questions concerning Reebok’s profitability (Mahlich, 2015).

Moreover, potential investors might, likewise, come across some concerning news that jeopardizes the company’s image. According to Reuters, a popular sports footwear maker, Skechers Inc, reported on filling a lawsuit against the company, accusing the latter of infringing of patents that belong to Skechers’ Go Walk shoes. The company stated that they sought compensation and a punitive damage as well as injunctive relief. Their suit was carried out in the U. District Court in California. Skechers also emphasized the fact that they would essentially take similar measures towards any retailer that distributed Reebok’s Walk Ahead shoes (Chakrabarty, 2014).

Income Statement Analysis

Nike

Nike’s income statement for the past two years has positive connotations for potential investors. Thus, the company’s revenues rose from 2013 to 2014 and continued growing from 2014 to 2015. On the whole, the company raised its revenues by 4,000,000 dollars. Their net results for the period from 2013 to 2014 and from 2014 to 2015 are, likewise, positive. Nike’s operating income also increased by 1,000,000 dollars. The company’s income before income taxes also rose. Within the past two years, it increased from 3,272,000 dollars to 4,205,000 dollars.

The company’s gross profit increased from 11,034,000 to 14,067,000 within the past two years (Nike Inc. Income Statement, 2015).

Reebok

The data from the Reebok’s income statement for the past two years provides favorable implications for potential investors, although its performance is less effective than Nike’s. Thus, from 2013 to 2015, the company’s revenues rose by 2,000$. Their net results for the relevant period did not show significant growth. Thus, the company’s net sales increased by only 500,000 dollars. The highest variables might be observed in the footwear segment – the company managed to increase its sales in the relevant segment by 2,000,000 dollars. A positive tendency can, likewise, be viewed in the apparel sector – its sales grew by 1,000,000 dollars in the past two years. In the meantime, the hardware product line shows a decline in its performance – the relevant sales decreased by 300,000 dollars. It is critical to note that despite the fact that Reebok shows consistent development and sales’ increase, its progress is relatively insignificant contrary to the associated company Adidas (Adidas. Five Year Statement, 2015).

Analysis

The examination of the companies’ income statements shows that Nike’s progress is more considerable than Reebok’s. Nike shows sustainable variables’ increase in all the segments, whereas Reebok’s success refers to particular aspects of its performance. It is, consequently, recommended that the company reconsiders its financial management in the hardware segment that has shown an insignificant decline in profit within the past two years.

Balance Sheet Analysis

Nike

Nike’s balance sheet data for the past two years has favorable implications for potential investors. Thus, the company’s total assets increased from 2013 to 2014 and continued increasing from 2014 to 2015. On the whole, the total assets have risen by 4,000,000 dollars. Their total liabilities results for the period from 2013 to 2014 and from 2014 to 2015 are, also, positive. Nike’s total liabilities have grown by 2,000,000 dollars. The company’s stockholder equity, likewise, increased. Within the past two years, it has grown from 11,081,000 dollars to 12,295,000 dollars (Nike Inc. Balance Sheet, 2015).

The vertical analysis of Nike’s balance sheet is represented in the table below (the dominator is the total assets variables).

$ Totals Percent
Current Assets 15,976,000 74
Total Assets 21,600,000 100
Total Liabilities 8,893,000 41
Total Stockholder Equity 12,707,000 59

Reebok

Reebok’s balance sheet data for the past two years provides less favorable variables than Nike’s report. In the meantime, the company still shows sustainable progress despite the fact that its extent is not considerable. Within the period of the past two years, the company’s total assets increased by 1,700,000 dollars. Their total liabilities results for the period from are, likewise, relatively positive. Reebok’s total liabilities have grown by 500,000 dollars. The company’s stockholder equity did not show any significant rise. Thus, within the past two years, it has grown from 5,666,000 dollars to 5,489,000 dollars (Adidas. Five Year Statement, 2015).

The vertical analysis of Reebok’s balance sheet is represented in the table below (the dominator is the total assets variables).

$ Totals Percent
Current Assets 3,113,000 23
Total Assets 13,343,000 100
Total Liabilities 3,003,000 22
Total Stockholder Equity 5,666,000 42

The examination of the companies’ balance sheets has shown that Reebok’s current assets make up the same percentage as the company’s total liabilities. Various the correlation between the relevant variables is more than significant in Nike company with 74% of current assets and only 41% of total liabilities, the relevant indexes for Reebok are almost equal (23% – current assets; 22% – total liabilities). It might be, consequently, suggested that the company tries to reduce the scope of its liabilities in order to improve the general financial health. This aim might be, likewise, achieved by enlarging the current assets of the company.

Reference List

(2015).

Chakrabarty, S. (2014). Skechers Sues Reebok for Patent Infringement. Reuters. Web.

Iyer, R. (2015). Nike Sales Rise 4.1 Percent as Demand Jumps in North America. Reuters. Web.

Mahlich, G. (2015). REFILE-Reebok Heads Back to the Gym with New German Marketing Blitz. Reuters. Web.

. (2015).

(2015).

Swamynathan, Y. (2015). Nike’s futures orders surge as demand in China, North America soars. Reuters. Web.

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