Still a growth company? – Nike | Summer Series

Bryce: [00:00:22] Welcome to the Equity Mates Summer Series proudly brought to you by Sharesies 12 episodes. We're deep diving into some of the most exciting, interesting and well known companies in Australia and the US. Each episode we're also joined by an expert to help us unpack the key metrics the bull case and the bear case for each company. My name is Bryce and as always, I'm joined by my equity buddy Ren. How are you going? 

Alec: [00:00:43] I'm very good, Bryce. Good to be here for the summer series. 

Bryce: [00:00:45] Yes. Means we're on holidays. So today we are diving into Nike and we are lucky enough to be joined by expert Bob Desmond from Claremont Capital, who pitched this stock as his high conviction idea for 2023 at the Sewn Hearts and Minds Investment Conference in November 2022. So super stoked to have him on the summer series is proudly supported by Sharesies and Ren two reasons we love Sharesies our kick off first invest with no minimum you can buy shares or portions of shares on the Sharesies platform from just $0.01 and read something that you've been talking about and that is auto invest. 

Alec: [00:01:24] That's right. It's easy and approachable platform where you can auto invest across America, Australia and New Zealand's market. You can dollar cost averaging, you can set it up, you can do it across individual stocks and ETFs. It's like it's almost like a build your own ETF functionality where you put what you want in, allocate your percentages, say how much you wanna spend, get on with your life the. 

Bryce: [00:01:48] Way you go. Love it so download the shares is app or visit ww dot shares is dot com dot our you to learn more and if you did want to sign up, they do have a promo code that is not exclusive to Equity Mates. It's publicly available and Equity Mates don't get anything in return, but you do get $10 in your account if you sign up. The promo code is grow promotion terms and conditions apply. So and let's kick on. 

Alec: [00:02:13] Let's do it. Final disclaimer we are licenced, but we're not aware of your personal financial circumstances. Labour's Bob when he joins us. All information on this show is for education and entertainment purposes only. Any advice is general in nature. Bryce. Nike, let's go. 

Bryce: [00:02:31] I mean, everyone would have heard of Nike. Yes, but it is it is a company that has come across our radar a number of times this year. So we've decided that we're going to have a bit of an exploration of it for the next 20 minutes or so before we get Bob in. But the Investor Relations website caught our attention and this is where we want to start. 

Alec: [00:02:50] Nike is a growth company. Yes, in big all caps, letters over a photo of Serena Williams at the top of their Investor Relations page. Yeah, you got it. It's a growth company. 

Bryce: [00:03:05] Fin.

Alec: [00:03:05] Move on. Yeah. I don't know who they're trying to convince their investors or themselves, but would you think of it as a growth company? 

Bryce: [00:03:12] I mean, we're going to have a look at some of the numbers in a moment. And in terms of share price, you could argue that it is a growth company, but I wouldn't picture it given the size of it, given the history of it. I don't put it in the bucket of this growth company. 

Alec: [00:03:26] Yeah, well, I mean, any $150 billion company was a growth company at some stage. Yeah. The question is, is it a growth company? 

Bryce: [00:03:33] Let's answer that. I think at the end of the episode, once they get through it all. 

Alec: [00:03:37] Okay. Well, I think where I was trying to go there is I think most people wouldn't think of Nike as a growth company. They would think of it as the world's biggest apparel and sportswear maker. That probably grows revenue at between four and 6% a year and maybe gross profit at between five and 8% a year. 

Bryce: [00:03:55] Sounds about right. 

Alec: [00:03:56] Yeah, yeah. Let's talk about the company and say if that perception is right. All right. 

Bryce: [00:04:01] Well, you did say it, the world's biggest sportswear and apparel brand. And if you haven't read the biography of Phil Knight Shoe Dog, it's a must read, in my opinion, in terms of business books. It doesn't go through the full story of Nike, but it was founded in 1964, originally called Blue Ribbon Sports Importing Shoes from Japan. That kind of blew up in the early seventies. So they converted it to Nike in 1971. So they are celebrating their 50th anniversary this year. 

Alec: [00:04:31] The swoosh was first used by Nike on the 18th of June, 1971. Well, there you go. What the. 

Bryce: [00:04:37] And well, that's right. Because I think it had anyway, he had the he had the swoosh still doing that, still getting shoes from Japan, as I understand it. And then that contract ended in 72. Right. So he took it on. Anyway, read the book, the Just Do It campaign that they're so well known for kicked off in 1988 and the rest is history ran down now the world's largest. 

Alec: [00:04:59] Yeah real marketing story with Nike there is no finish line was one of their early taglines then just do it the Nike swoosh one of the most famous designs, trademarks, logos. It's a pretty incredible story. Sure. Doug is up there with the best one of the best business books outside. You seem to bang on about ride of a lifetime. 

Bryce: [00:05:23] Actually, dogs better. 

Alec: [00:05:24] Really? So, you know, there's. There's marketing there with the logo, marketing with the. The slogan. But really, the Nike story is an athlete story. 

Bryce: [00:05:43] Yeah. Endorsements. Yeah. First kicked off with their major endorsement in 1984 with Michael Jordan. That is what absolutely elevated them because at the start of the day, they were doing athletes shoes and they were doing running shoes and all sorts. And then the big signing was Michael Jordan in 1984. That that really kicked things off. They had the Tiger endorsement in 1996 and also a Rory McIlroy endorsement in 2012, I think, to the tune of $250 million. 

Alec: [00:06:13] Why is Rory that valuable? 

Bryce: [00:06:15] I don't know. Rory McIlroy. $250 million over ten years. Tiger only got 100 over ten years. So Rory you have. 

Alec: [00:06:24] all you got a hundred in his prime pre scandal. 

Bryce: [00:06:27] Well, Tiger's endorsement kicked off in 96, I guess inflation adjusted all those ones. That was probably worth a fair bit. But Rory came in 2012 with 269. 

Alec: [00:06:37] Rory. Yeah. Was it like, let's get the next kid sort of thing?

Bryce: [00:06:41] Well, this was only ten years ago, so and Rory's been kicking for 15 plus, so. He's absolutely nailed it. I think he's the second highest endorsed player behind Michael Jordan. 

Alec: [00:06:52] So, Bryce, I've got a quiz question for you. Forbes have compiled a list of the world's highest paid athletes, 100 highest paid athletes. How many of them do you think Nike sponsor? 

Bryce: [00:07:04] I'm going to say very close to all. 196.

Alec: [00:07:10] You think 96 of the hundred. 

Bryce: [00:07:12] Well, what do you think? 

Alec: [00:07:13] Like a day to some puma and stuff. A doing yeah. Good blank look cost you like the other. 

Bryce: [00:07:18] I looked at how many they had, how many endorsements they have around the world and they've got well over 650, I think, in 140 countries. So could point maybe, I don't know, 60, 51, 51. 

Alec: [00:07:30] 51 of 100.There you go. Now, follow up question. Do you want to guess who else gets a podium finish? So if Nike is number one with 51 of the top 100 athletes, according to Forbes. Who's number two?

Bryce: [00:07:44] Uniqlo. Yeah, there is. I saw that. Federer um it's got to be Adidas. 

Alec: [00:07:52] Yeah to I guess how many do I have. 

Bryce: [00:07:54] So there's what are remaining 49 left. 

Alec: [00:07:56] Good maths.

Bryce: [00:07:57] I would say. 

Alec: [00:07:58] 2216. Okay ladies. And then third joining us. Third. 

Bryce: [00:08:03] Puma, Under Armour. 

Alec: [00:08:05] Under Armour. 

Bryce: [00:08:06] Nailed it. Under Armour. 

Alec: [00:08:07] With. 

Bryce: [00:08:07] A six. Okay. 

Alec: [00:08:09] So you can see that the tails off. 

Bryce: [00:08:11] Tails off. Yes. Yes. Well, the marketing budget, which we'll touch on a bit later for Nike, dwarfs those of their following companies. 

Alec: [00:08:19] Now, one other quick question and then we'll move on. But I think this just really gives you an indication of how big Nike is. Not the most people know an indication NBA like shoes is probably where a lot of people think about Nike's dominance these days. Jordan brand, all of that. 442 NBA players this these numbers from 2014 so it's a bit old but 442 NBA players, how many of them do you think when Nike shoes? 

Bryce: [00:08:49] Well, I know that in 2015, they they became the official uniform of the NBA. So in some ways, before that, they all were Nike. 

Alec: [00:08:56] They wear Nike clothes. Yeah. 

Bryce: [00:08:58] How many of the how many wear shoes?

Alec: [00:09:01] 442 NBA players. 

Bryce: [00:09:02] Wear Nike shoes. 

Alec: [00:09:03] When Nike shoes. 

Bryce: [00:09:04] It's got to. 

Alec: [00:09:05] Be keep in mind that there's like heaps of different shoe brands or like, you know. 

Bryce: [00:09:10] Yeah, I'm going to say 360. 

Alec: [00:09:14] Okay, 284. Okay, so 64%. 

Bryce: [00:09:18] But it's still pretty solid half. Yeah, at least 50%. Well, in 2022, Ren Nike spent $1.5 billion on endorsements of these players. So significant money going into it. Anyway, let's keep moving the company today. 

Alec: [00:09:34] So about 3% of their total revenue goes to player payments. That's actually not that much.

Bryce: [00:09:40] Well, their total marketing budget I think is north of 4 billion. 

Alec: [00:09:44] Yeah. So about 10% bit less than 10% of their revenue. It's actually kind of reasonable when you think about how much coverage they have. And yeah, it's brand presence. 

Bryce: [00:09:53] They how it works for them anyway well played the company today according to brand finance it is the 49th most valuable brand in the world. I would have expected it to be a little bit higher. 

Alec: [00:10:02] Same I would have given the top ten. 

Bryce: [00:10:04] $32.3 billion is the value of Nike to the company according to brand finance. And then they don't just have Nike. They've got a number of brands underneath it. They acquired Hurley International in 2000 and to converse in 2003 and then the Jordan brand, amongst others, is is quite extensive. So I call Brand House. 

Alec: [00:10:30] I call House of Brands. 

Bryce: [00:10:32] House of Brass.

Alec: [00:10:34] I call ball on this 49. What would they. 49/49. 

Bryce: [00:10:39] Yeah. 

Alec: [00:10:39] Number ten is Verizon a brand financed.

Bryce: [00:10:42] Yeah. Valued at what. 

Alec: [00:10:44] 70 Bill? 

Bryce: [00:10:46] Wow.

Alec: [00:10:46] Like Nike is more valuable than that. I would you'd have to say Costco is for 40 like Nike's more valuable than Costco, surely. Give me give me some give me some. I could find a list. I have the list. I'm looking at the international commercial bank of China is number eight. Okay. But I mean, it's probably big in China. Why? Why number nine? I would say Nike probably more brand value than wow, Walmart number five, like. 

Bryce: [00:11:17] Walmart's pretty big. 

Alec: [00:11:18] Well, that's big. But like their brand brands big. Yeah. I hope. Pricewaterhouse Coopers. 

Bryce: [00:11:28] Paid over you say. 

Alec: [00:11:29] Oh, no, they're behind Nike. Yeah, yeah. 

Bryce: [00:11:31] Anyway, let's keep going. 

Alec: [00:11:34] Let's talk about this for a bit. We all know what the company is today on some of these summer series episodes will spend a little bit more time breaking down what the company is. But Nike has Nike. The question for us as investors is where does Nike see its future? What if we were going to invest in Nike today? Why would we be doing it? What's the company going to do with the money? 

Bryce: [00:11:56] How does it give itself the growth tag? 

Alec: [00:11:59] Yeah, just printed on its Investor Relations website. I guess the question is how does it go from 160 billion to 300 billion? I mean, it goes back in time 12 months before its share price got cut in half. Yes. Well, not quite cut in half, but you get the point.

Bryce: [00:12:17] Yeah. And it's been a story that is not unfamiliar, but it's one that is paying starting to pay dividends for them. And that is their trends that the transition from retailers as their main distribution, third party retailers to direct to consumer. Yes. And this is where amongst other things, they are starting to reap the rewards and head from that 160 bill to put. Generally 300 or whatever it may be. Yes. This is where their growth tag comes. So what do we mean by that? 

Alec: [00:12:49] So traditional retail is Nike manufactures the shoes. They sell it into a foot locker in the US, an athlete's foot or a rebel sports in Australia. AJ Day in the UK is that. 

Bryce: [00:13:04] Chinese are here as well. 

Alec: [00:13:05] Yeah. Fair enough. Yeah. They sell to a retailer and that gets sold to a customer on average. And this isn't relevant to Nike, but on average, a shoe manufacturer makes about 22% gross margin. That's a number that we just found. Rough, rough, 22% gross margin. So you sell shoes for 100 bucks that Nike makes $22 and then they have to take all of their costs out, pay their staff with that $22 on average, according to Forbes. When a retailer goes when a manufacturer goes direct to customers, so they cut out the Foot Locker or the athlete's foot or the rebel sport, and they say, just come to the Nike website and buy it online. On average, the gross margin is 50%. So it means that from the hundred dollar shoes, Nike walks away with $50, which then they pay their staff and their marketing budget. And so it's just a lot it's a more profitable way to sell your stuff, essentially. So Nike are trying to make that transition like every other retailer. The good news for Nike is they've got such a strong brand that it's going to be a lot easier for them than a lot of other companies. In the most recent quarter, Nike sold 12 and a half billion dollars worth of stuff $12.7 billion of revenue, 5.1 billion were direct to consumer. 

Bryce: [00:14:29] Well-played Nike. 

Alec: [00:14:30] So almost half. Yeah, well, between a third and a half. 

Bryce: [00:14:34] That is certainly improving year on year. And we will hear a little bit more from from Bob on this in the second half of this episode, because it's certainly part of his investment case for Nike. But this is a trend that we're seeing not only with Nike but around the world with retailers as they I think I don't even know I'm pretty sure you're going to have to fact check me. We're going to need a Google here, but I'm pretty sure you can't buy Nike on Amazon anymore. 

Alec: [00:14:59] That's not something you can link to Google. You could just go on Amazon, so let's do it live. I'm on Amazon. I've searched Nike. There's heaps of Nike swoosh. But maybe it's not directly from Nike. Maybe it's from like third party brands. But yeah, I'm looking at pages and pages of Nike stuff. 

Bryce: [00:15:21] Okay, so maybe you're right, Ren, but I definitely remember. Yeah, Nike cuts ties with Amazon. Nike cuts ties with Amazon back in 2019, early 2020. So maybe it's through other distributors that are selling this on Nike. But Nike themselves have cut ties with Amazon as being a distribution outlet. So yeah. 

Alec: [00:15:41] The first place that Nike sees its future is direct to consumer. The second place, which we're not really going to talk about, is they dabbled in the metaverse last year. Do remember that? Yeah. They bought that company artefact. 

Bryce: [00:15:56] And made shoes. 

Alec: [00:15:57] Wonder what that went down. And then I guess the third thing that Nike is sort of sees itself on the wave that it's trying to ride and has been riding for maybe a decade or so. Is that shift from sportswear to fashion? Yeah. People wear Nike clothes a lot more than just exercising these days. 

Bryce: [00:16:22] Yeah. So they apparently last week they launched a new platform called Dot Swoosh that gives customers a leading edge user experience via a web3 platform. The new initiative targets brand loyalists after the company's acquisition of Design Studio Artefact, which specialises in creating digital artefacts and converging the latest gaming tech in making collectables in December 2021. So it looks like they're still playing in that space, and I'm sure we can pick Bob's brains on that. But yeah, interesting to say that that's they're doubling down in some way. But let's turn to the numbers, Ren, because we started this episode saying that, you know, market cap 177 billion, do the numbers reflect a growth company due to the revenue numbers reflect a growth company? Just the change in revenue year on year reflect we saw where we are. 

Alec: [00:17:15] So let's start with market cap, $166 billion. That's down about a third year to date. They've been sold off meaningfully in this market sell off. Even with that sell off, there's still up 77% in the past five years. And to just sort of talk about how that's happened, they were up 200% to November 2021. Growth company numbers down 50% from November 2021 to September 2022.

Bryce: [00:17:41] Growth company numbers. 

Alec: [00:17:43] And then. Up 30% in a month or two months. 

Bryce: [00:17:46] That's growth company.

Alec: [00:17:49] So, yeah, you could say they're building our interactive Web three platform for creators right. 

Speaker 1: [00:17:57] Across the company. 

Alec: [00:17:58] Great company rhetoric. 

Bryce: [00:18:01] So market cap at 166 billion, revenue at 46.7 billion. Five years ago, their revenue was 34.4 billion.

Alec: [00:18:10] Yes, up 36% in the past five years. It is remarkably consistent for a company this big. The past five years, this is in compound annual growth rate. This is just year on year up 6%. Up seven and a half percent. Down 4.4% over the year.

Bryce: [00:18:27] No surprise. 

Alec: [00:18:28] Up 19.1%.

Bryce: [00:18:30] As everyone went out to buy exercise gear to get back on. Could be. 

Alec: [00:18:36] Could be. And then up 4.9%. 

Bryce: [00:18:40] Yes. Churning out some pretty safe numbers. 

Alec: [00:18:42] Yeah. Those don't strike me as growth. 

Bryce: [00:18:45] No, no. So take on growth company from market cap, but not quite the the Afterpay revenue numbers that you're saying. 

Alec: [00:18:55] It's like any company that says they're a growth company aren't a growth company. You know, it's like any company, any person that says they're cool isn't cool. Yes. Any person that says they're a good driver is is. 

Bryce: [00:19:06] A good driver. Yeah. Any company that says their growth company isn't a growth company. But what about profit?

Alec: [00:19:12] They're profitable. 

Bryce: [00:19:13] Nice.

Alec: [00:19:13] Not like a growth company. 

Bryce: [00:19:15] True. 

Alec: [00:19:16] So 6 billion in profit five years ago. Four and a bit four and a quarter billion in profit. So up 43% in the past five years. 

Bryce: [00:19:22] So just a rounded out then when it's been sold off. But they're generating pretty consistent revenue over the last five years, you know, averaging what feels like about 5% or thereabouts, 6% and profit up 43% in the last five years. Numbers that you would expect to see from a company with 166 billion market cap feels like it's pretty safe.

Alec: [00:19:42] Yeah. Yeah. So I guess, you know, the question is, if they execute on this direct to consumer strategy, if they can improve that gross margin as a result, what happens to that profit number? It's growing faster than their revenue number, already 36% over the past five years for revenue, 43% over the past five years for profit. So that's good to say. The question is if they can take that 5 billion of 12 billion of direct to consumer and make it eight of 12, then that profit number should grow faster than the revenue number. Yeah, and that was really the basis of Bob's thesis at the Hearts and Minds conference. Yeah. Before we get to him, the question we've been asking every time. Prystowsky Ethical, unethical Nike Oh, is does this fit your ESG score? The loosest ESG scoring going around? 

Bryce: [00:20:40] It is a pretty loose ESG screen. This Nike does fit my ESG screen. 

Alec: [00:20:47] Well, it's like you said, it was loose. 

Bryce: [00:20:51] It's very loose. That's because I'm more of a negative screener than a positive screener. And this doesn't fit in my negative screen as much as oil, weapons, major tobacco. 

Alec: [00:21:03] So sweatshops are way. 

Bryce: [00:21:05] No sweatshops and not soy. And I know that look, I know ESG has been a problem that has surrounded a number of companies that we had speaking about in the summer series. And Nike is hands down. One of them are sweatshops, fast fashion. You know, there's a lot a lot surrounding Nike. But the way that I approach ESG is not quite as hardline as some other people I recognise it has challenges, but they are, I guess, publicly trying to address many of them. So for me it does. What about you? 

Alec: [00:21:39] Nike is so hard. 

Bryce: [00:21:41] It is, yeah. 

Alec: [00:21:42] I think a lot of people wouldn't have Nike in their screens. You mentioned some of the labour issues, the fast fashion. There's challenges with the amount of like resource use and stuff like that and environmental record. And then on the other side, you also have Christian groups boycotting Nike because they release those little Lil Nas X shoes with the drop of blood in them to remove. Though, there was controversy with them around the Tokyo Olympics because of the shoes that they were making anyway. There's heaps of stuff. There's stuff with their record in China and the NBA anyway. 

Bryce: [00:22:24] There's a there's been issues.

Alec: [00:22:26] But I guess my point is, whatever your political views or your views on different issues, there's probably a way that Nike's pissed you off. Yeah.

Bryce: [00:22:37] Yeah.

Alec: [00:22:38] But I also agree that Nike doesn't. Nike for me. Doesn't register as high as companies that are destroying the climate. Yeah. 

Bryce: [00:22:48] All right. Well, let's leave it there then, and turn to a brief look on industry and some of the major competitors before we do get Bob in to hear his investment thesis. Now, massive industry. Let's focus on the footwear and activewear. So in 2022, the global footwear market and this was way bigger than I thought, to be honest. But $381.9 billion is the size of the global footwear market, expected to hit half a trillion by 2027. So I'm going to put on an extra almost hundred odd billion in the next five years, reasonable growth, reasonable 2020 build year and the active market activewear market and this surprised me even even more is $319 billion in 2022. So so some massive markets that Nike is playing in. And to put it into context against some of their major competitors, you said at the top of the show of the 100 athletes, there are sort of three players outside of Nike who are sponsoring and endorsing athletes. We said Adidas, we said Under Armour. Adidas is their closest in terms of revenue. Adidas generated €21.23 billion in revenue in 2021. Puma a fair way off the pace, 7.9 billion. And then Under Armour 5.6 billion. So Under Armour splashing a bit of cash relative to their revenue if they're how many they have in eight years. 

Alec: [00:24:21] But it could have been towards the end of the list. True. 

Bryce: [00:24:24] Yeah, 20,000 here and there. 

Alec: [00:24:25] Yeah. The thing is, though, like if your Under Armour and you're looking at Nike and Adidas, not so much Puma, you you can probably think you could take Puma. 

Bryce: [00:24:36] I think so. So surprising that. 

Alec: [00:24:38] The whole Adidas and plus are it's fascinating. Yeah. We'll leave that for another day. Two brothers on different sides of the river. If you're Under Armour, you have to spend. Yeah, you have to secure that first company. And just like Jordan made Nike Under Armour need to find the their Jordan. Yeah. Like I see. That's how you got there. Yeah. Yeah. And then there's also a number of Chinese brands that are trying to sign up, especially NBA stars, and give them shoe deals and stuff like that landing. Like we haven't got their numbers in here, but it's a competitive space. So I guess the question is, can Nike hold. 

Bryce: [00:25:15] A do Under Armour pivot and start sponsoring and endorsing video game athletes? 

Alec: [00:25:21] No, I don't think that's on brand for them. 

Bryce: [00:25:25] They need someone. 

Alec: [00:25:27] You think they need someone? Here's a list of Under Armour athletes. Okay. Steph Curry, heard of it. Well played. Tom Brady out of it. 

Bryce: [00:25:35] He's fast going out of his forces is going out of fashion. 

Alec: [00:25:38] Jordan space. Yeah yeah that's true. Clayton Kershaw picture NBA. 

Bryce: [00:25:45] Okay. No, dunno.

Alec: [00:25:46] Is pitcher MLB.

Bryce: [00:25:48] Okay? 

Alec: [00:25:49] Yeah. 

Bryce: [00:25:49] They've got some guys. 

Alec: [00:25:50] Cam Newton is not so much there anymore. 

Bryce: [00:25:53] So they need to go bigger. 

Alec: [00:25:54] I think the thing is it's Under Armour is still very American. Yeah. You don't really see them go global in the same way that Nike have. 

Bryce: [00:26:04] Yeah. But it is a great story. Great company. 

Alec: [00:26:06] Well, Bryce, I think let's put a pin in it. Let's throw to an ad break and then let's get Bob on because he's going to be able to help us really understand the investment case for Nike and also the Bear case. How would you sum it up? 

Bryce: [00:26:19] I like doing this exercise where you take these massive companies that have been in existence for 50 plus years. It's not surprising, but it's nice to unpack and understand how they how they face the challenge of constant innovation to keep growing and understanding how these massive companies, you know, through through management, through technology, through changing business model, try and reinvent themselves sort of decade after decade. And it's just a nice reminder that you can still get and I'm not saying by any stretch of the imagination this is a buy, hold or sell, but you don't need to find those hidden gems when you do have some companies like this reinventing themselves, what. 

Alec: [00:27:04] Can it get to the investment case? Another question was how you do sum up the company reinventing itself. 

Bryce: [00:27:13] I'm sorry I misread misheard the question, but. 

Alec: [00:27:18] How do you how would you sum up the company? 

Bryce: [00:27:20] I would sum it up as a large company. 

Speaker 1: [00:27:26] Okay. All right. 

Alec: [00:27:27] Well, that's how I that's. 

Bryce: [00:27:28] How I well. 

Alec: [00:27:29] That's how Nike, the biggest sportswear brand in the world, trying to cut out the middleman and sell directly to us. Let's go to Bob. 

Bryce: [00:27:36] Before we jump to a break. A reminder, Nike is listed on the new york stock exchange. The ticker is nke. And you can access. The US stock market plus the Australian and New Zealand markets on the shares is platform with no investment. Minimum shares is is helping to create financial empowerment for everyone. Their vision is to give someone with $5 the same investment opportunities as someone with 5 million. All investing involves risk. This is not a recommendation and you should perform your own research, promotes and sees apply. Now, we're going to take a very quick break, and we'll be right back to discuss Nike with Bob Desmond, head of Clermont Global. 

Speaker 1: [00:28:13] One, two, three. Bring it back. Hey, it's another delightful day here in vacation land. 

Bryce: [00:28:21] So that part of the episode where we are joined by an expert to help us chat through the investment case for Nike. And it is our pleasure to welcome Bob Desmond, head of Clermont Global. Bob, welcome. 

Bob: [00:28:31] Thank you. Thanks for having you on. 

Alec: [00:28:32] We want to start with Nike as an investment, and we're really interested in this idea of what matters and what doesn't. Price and I have retail backgrounds in retail, same store sales and sales per square metre. Some of the metrics that retailers really watch. So when you're analysing Nike, what are some of those metrics that you're looking at quite closely? 

Bob: [00:28:52] I think the first one I'd start with is Nike. If you just look consistently at organic sales growth, it's actually very few consumer products companies that have delivered what they have. So if you look over time, over the last 22 years, a takeover out of it, one down year by the financial crisis -2%. So consistent earnings, sales growth over time. So it's amazing, you know, what they've delivered over time. But for us I think if you want to drill it down to a number, you know, their marketing budget is $4 billion a year. So Nike is always going to outspend anyone else and so they're probably spending about 50% more than Adidas. So we're not going to get into bidding wars. So and that allows them to partner, you know, Michael Jordan, obviously the best thing that ever happened to Nike, but Tiger Woods, Serena Williams, even in Australia we had Warnie just an amazing roster of athletes. So that marketing budget is crucial from the beginning just to really solidify that competitive advantage. And then also I think if you look at Nike, the key thing we are looking at now is direct to the consumer. How much of the business is sold directly to consumers and how much is going to third party channel? And that's been a huge shift. And I can go into that now. We can go to Layla's after you guys. 

Bryce: [00:30:09] Let's jump into it in a second. I just want to unpack a bit of jargon. You said organic sales and for someone with no retail background or anything like that, what does that actually translate to if you're looking at a balance sheet and I guess as opposed to non organic sales. [00:30:23][13.3]

Bob: [00:30:23] So it's just sales excluding acquisitions and currency movements. So a lot of companies can puff up their sales growth when actually they've got the core business is actually struggling. And so this year is well core business is struggling. So let's go and do some acquisitions. Yeah. And then very quickly you can get into trouble because what we want to businesses that have such a great core business and the CEO is just focussing on that and making it stronger and stronger and stronger and building deepening competitive advantage. I mean, you look over time like Nike's return on invested capital, you know, it's around mid twenties and that's nearly all been organic. So this is a company that's consistently printing heaps of cash and then just keeps reinvesting. Well, you wouldn't want to reinvest back in the business when you're earning mid-twenties returns on your capital. 

Alec: [00:31:06] We do want to ask about one acquisition artefact, but let's put a pin in that and get to what really matters here, which is the transition that Nike is making from third party channels to direct to consumer. So we spoke about it briefly before the break, but give us an overview of where they are in that transition and what you're watching to see if that transition is being successful. So.

Bob: [00:31:30] You know, if you look back to 2015, it was around 20% direct to consumer and the bulk, bulk of that was through their own stores. Today we sitting around 42%, slightly ahead of selling through their own apps and direct to consumer online and they own stores, they buy their estimates. By 2025 they're going to be over 60%. So the beauty for us then is now you think of those stores and you know with your background you'd understand this. You go to those stores, third party retailers who poorly designed stores, not curated, very nicely selling. You know, you've got some some guys just trying to make a sales target, selling stuff on on discount, not really knowledgeable about the product. Now if you can sell that through your own store and a beautifully curated stores, I don't know if you've been to some of the stores in London or New York. If you go to the one in London, if you're in London, go to the one on Oxford Street, it's so cool. It's like five floors every floor. There's a deejay spinning discs. I mean, this is such a buzz in the store, you know, it just it was packed when I went there. The salespeople are so knowledgeable, so passionate about the brand, you know, rather than some sleepy wholesaler in the burbs somewhere. And then and then even more important now than the physical stores is the the online universe. So I don't know if you're aware, but in the Nike app University is over 300 million members now in that universe. So if you think of the data you're getting from that, so, you know, everyday people, not me, but other people are pulling on their running shoes and looking at that Nike logo. But not only are they doing that now, are they online sharing that information with their friends? How far have you run all that stuff and will boasting about fit there and all that goes online and that for Nike is incredible source of data. So now they know so much about you and then they can say, okay, now we can, you know, deliver you the right product, right place, right time. And they have all that data. And you say, you know, increasingly Nike is actually becoming just as important as their digital marketing and the technology.

Alec: [00:33:37] And just before we move off from the third party to direct to consumer, give us an idea of the gross margin difference.

Bob: [00:33:44] Yeah, it's actually a very good point. So even so in terms of the competitive advantage, so not only are we deepening the competitive advantage and effectively controlling the consumer and the point of sale. And the other thing as well as if you can control the distribution, much less of the goods are sold at discount, which is terrible for brands like you think of LVMH. They will burn stuff, they will burn stuff rather than sell a discount because they control all their stores. And so Nike, you don't give these people discounting discounting the brand, messing up the brand. So when they sell direct to consumer, they're making twice, twice the dollars than they do selling through a wholesaler. So you're making more money. You control the point of sale. You're getting all this data. I mean, it's an incredible story. And it's still we're at 40% now. We think over the next five, ten years, we'll get to 60 or 70%.

Alec: [00:34:32] Yeah. Well. 

Bob: [00:34:33] So I've always said if you if you've got a brand strong enough to sit on someone's phone because it's only roughly, they say, 40 apps that can sit on your phone. So that's just a really good indication that Nike will be every athlete will have that app on their phone. They'll be tracking their running. They'll be looking at it. Yeah, yeah. 

Alec: [00:34:49] We were joking about that, that, you know, for a brand like Nike, they can really go hard with direct to consumer because their brand is so strong everywhere. But, you know, if you're a third tier clothing retailer. Yeah, yes. 

Bob: [00:35:00] You'd struggle. New Balance is not going to make it a. 

Alec: [00:35:03] Nothing against New Balance. 

Bryce: [00:35:07] But I'm sure Adidas and Puma and Under Armour are all pursuing similar sort of strategies and looking at what not only Nike, but many retailers around the world are doing. It's not like it's a new concept that only Nike doing. What are the parts of the investment bull case, I guess do you look at that adds to competitive advantage for Nike? 

Bob: [00:35:29] What's the first thing I said, obviously that no one's going to outspend them in terms of creating demand so they can spend more than anyone else? Consistency. I think the innovation is key. So Nike, because they've got such a wide range of products, they have a lot of products that they can innovate around. Like Adidas got very, very reliant on Kanye West, which hasn't worked out so well for them. And the Yeezys, you know, Stan Smith in the past was, you know, so much less reliant. They really focussed on a couple of key franchises. So for example, like in the last year and we have owned Adidas in the past and it didn't work. We didn't weren't they very long? And basically what we saw happening is they were lack of innovation. They were losing share, they were cutting the marketing budget, you know, whilst Nike, it's just it's you just got a broader range of products and better innovation. So I think that's a huge advantage. Just the stable they've got and the scale that they've got, they can innovate. And so that's a a key one and obviously the share losses and share gains. So that's crucial for us as well. 

Bryce: [00:36:28] Yeah, right. Well I guess that then brings us to the the flipside, which is the bear case. So, you know, we always like to understand if something goes wrong, what are you sort of most concerned about and the outcome of that? So if you are thinking about the Bear case for Nike, what would that be?

Bob: [00:36:45] It's all those things I just mentioned, right? So cutting marketing budgets is a terrible thing to see. Lack of innovation and new products coming through. I mean, Adidas is a bit of a mess at the moment. So interestingly, Adidas, if you actually I think the management story is quite interesting at Nike. I don't know if you know the management story. So the red shoe dog. Right. Right. So, you know, Phil Knight is actually still on the board. I mean, he's you know, he's just getting on now, but he's been there since 1968. The executive chairman, Mark Parker, he's been there since 1979. And then the CEO is a bit of a novice. He's only been there since 2000, but before that, he was running eBay, PayPal and service now. So he's got a bit of pedigree, a. 

Bryce: [00:37:24] Bit of a novice. He's been there 22 years.

Bob: [00:37:25] Yeah. Sorry, sorry. I got 20, 20. So it's hard to say. But then interestingly on the board, you've got Tim Cook. So Tim Cook, the CEO of Apple, he's been there since 2005. And actually, if you look at the business models, they're very similar. So if you look at Nike, you know, they cool products, innovate, rap, a whole heap of marketing dollars, create this hype around the product design company. But at the back end they outsource the production. So CapEx to sales is only 2%. So the capital intensive part, the commoditize capital intensive but has been outsourced exactly the same as Apple does. So I think with that management team that they've got, I think you've just got people who are just thinking longer term. So when you're looking at Adidas Casper Austria haven't had a very good pedigree in came from Henkel but. His mindset was more around getting margins up and then he started cutting marketing and more around efficiencies. I felt, well, it's Nike is more around revenue, competitive advantage, driving growth. And so those are the key things we kind of why we prefer it over. I mean obviously things that would be the case losing share, cutting marketing budget, more goods sold on discount, lack of innovation. Those are all the things that flat and all the things that were flagged in EDS and why we cut the position very quickly. 

Alec: [00:38:44] You did say a buzzword there that we were laughing about before driving growth, the the front line, the top line of Nike's investor relations website. Nike Inc is a growth company. They want you to know it's a growth culture. 

Bob: [00:38:59] Laser focussed going to be the one to you if. 

Alec: [00:39:01] We get a bit cynical. You know, any company that says they're a growth company can't be a growth company. 

Bob: [00:39:05] Well, I can tell you, I mean, Nike's if you look over, you know, mentioning that sales growth even over the last decade has grown 12% per annum, even in the last quarter led to 10% organic sales growth. So and they they're going to be at that high single digit organic growth into double digits consistently. 

Alec: [00:39:20] Yeah, it is unbelievable. And we were looking at some form market forecasts because you look at a company like Nike, you know, it's come off about a third this year, but it's still $160 billion market cap. And you wonder how big it can be. But the forecast for the apparel market, in the footwear market just going to just keep growing and like meaningful sizes. 

Bob: [00:39:40] Yeah, no, it's it's and they've also got pricing power, as always, taking a little bit of price as well. So you've got that I mean, I don't think there's a consumer goods company that has delivered what what they have over time. And I think if I look at Nike in five or ten years, it's going to look probably like LVMH did ten years ago. It's a different kind of. But the numbers. Yeah, so LVMH used to be a sort of 18% margin business. And that's where, you know, we want Nike to get into the high teens because you're not controlling distribution, you're not controlling pricing, you're not controlling discounting, you know, and and you're getting those, those EBA dollars that you're giving away before. 

Alec: [00:40:16] It's might be easier to get 18% margin with a Louis Vuitton handbag than with a, you know, a Nike shirt.

Bob: [00:40:22] That yeah, they have to spend a lot of money.

Alec: [00:40:24] Louis Vuitton Yeah, true.

Bob: [00:40:26] So if you look at the games. Louis Vuitton This is higher than the Nike. I think if I might have this wrong, but if I remember from memory, I think Louis Vuitton is in the 65 area and I think Nike's in the high forties. But then they don't have to spend in terms of dollars as much as they've done. And that you call it. They're not like for, like I'm just talking about in terms of financial characteristics, you know, we want margins now 11%, but they're very depressed at the moment because we've had a huge amount of Red Cross. There's probably 300 basis points of red costs. Those are going to fall away. And then we've had discounting because there's excess of inventory in the channel because supply chains were so bad. So that's going to fall away. So the margins are probably understated by about three or 400 basis points at the moment as we stand. So those will normalise. And then every year you've got this tailwind of probably 100 basis points of margin uplift just from the shift to direct to consumer. 

Alec: [00:41:17] So one thing with Nike is that they're seeing some pretty good competitors come to market. So Lululemon is an incredible story in its own right, Under Armour, quite us focussed, but building a meaningful business. And over in China we've heard a little bit about Li Ning, is it. Yeah. How do you think about those competitors? Obviously, Nike still outspending them all when it comes to marketing and has the majority of athletes signed. But yeah, how do you think about some of those competitors coming through? 

Bob: [00:41:46] My experience with some of those brands is they blow hot and cold. Like, you know, things come to market, they hot for a couple of years and then they fall away. And then you get the next odd thing for a couple of years. It's a bit like in fast food, like Maccas is just the anchor in that space and then you get various fast food brands. They come and they go. And my experience in that space over time, you based off going with the number one because the end of the day, the advantages of scale and marketing is always going to give them that that anchor hold on the market. And sure, there are people that can pick off at the edges, but for them to sustain the competitive advantage, they have to be so good on their marketing and they missed one product or one, you know, I mean, even the last good example, I mean that them and Nike dominate that thing, but you make one slight misstep and you can be you you can be blown off quite quickly. So over time, generally, there's always better off going with the number one. 

Bryce: [00:42:38] Yeah. So but before we just close out with sort of you on long term plans, you did pitch this as part of your own hearts and minds at pitch at the conference in November 2022. And that's a pitch that is designed, I guess, for a 12 month time horizon, a very hard thing to do. 

Bob: [00:42:56] Very hard. And I did not advise, you. 

Bryce: [00:42:59] Know, that's now it's very clear sort of the long term investment thesis here. But are there any short term catalysts that you expect to happen over the 12 months, or is it just that you're pitching this and you expect to see not? Not only this year but over the next five perform. 

Bob: [00:43:16] So for us, everything is long term, always. We always think on a five year basis. So it's very simple. We go, What's the business earning in five years? What do we think the multiple will be? And then we net present value to today and then what's what's the differential there? Compliance? I'm allowed to say what it is, but the gap's big enough for us to say there's a decent margin of of safety. You know, your viewers can do it their own way. And we use a discount rate of 8%. And that's how we work out what we think a business is worth. And so 12 months is not kind of how we think, but I think in the next 12 months, I think you're going to see a couple of things that we know supply chains are healing, so the cost of freight is falling so that supply chains will heal and that will come through the numbers over. Suddenly I think people are going to realise, you know, this is these are depressed. They're not going to be selling heaps of inventory on discount because that, you know, everyone was double ordering and so they've been trying to normalise those channels. So those two things will fall away and I think they'll be taking share from any that's I mean all that it looks like this year they've got in probably is better than the last one I think but they're going to have to get their act together. So I think you're going to see good organic sales growth. You're going to see the margin recovery and things saying people are going to start going hold on. These earnings are actually quite understated because when we look at it, we go this is I mean, I think reported margin markets, estimated margin in 2023 is around 11. If you actually make some of those adjustments, it could easily be 15. So the earnings actually quite understated. And then once you get through five years time, you know, I think you'll see that competitive advantage coming, coming through and people will go actually. I mean, it's the type of business you look at and you go, I can just lay the compound over time. It prints heaps in cash, it's reinvesting it mid twenties. It's got long term growth drivers, it's got terrific management. It's has been cheaper, to be honest. So earlier this year it was super cheap. I think the stock at halved from its eyes things up and really annoying because when we thought about doing Nike and by the time the conference came along, the stock had moved about 15%. So that was a bit irritating. But I think a lot of a lot of the other presenters had that as well today. So that's that's kind of how we look at it.

Bryce: [00:45:17] Yeah. Awesome. Didn't didn't Adidas get the excess of Puma. 

Bob: [00:45:21] Yes. 

Bryce: [00:45:22] Which doesn't correct us even the relationship. Those two. Yeah, yeah, yeah. Sharing. Yeah. Yeah. Anyway. 

Alec: [00:45:28] Well, Bob, we want to say massive. Thank you for taking the time. We want to close out by looking long term. You know we've spoken about how Nike prints cash reinvest you want to say compound over time. If management are successful, what will it compound into in 1020 years? 

Bob: [00:45:45] If we it all works according to plan ten years I'd like to see 60 or 70% so direct to consumer margins in the high teens, up to 20%. That does the probably the two key key numbers. And if that happens, then I'll be very happy.

Alec: [00:46:01] So one thing you didn't say there was a web3 enabled community. What do you reckon about what was it, dot.

Bryce: [00:46:09] Dot, dot, dot. 

Alec: [00:46:10] Push. Yeah. And then artefact. The thing that they bought last year, the NFT sneakers. Do they factor into your business case at all? 

Bryce: [00:46:21] And if you're not worried about it, Zuckerberg pivot. 

Bob: [00:46:24] Oh, no. I think he's got his hands full with a pivot at the you mean.

Bryce: [00:46:30] Does Nike try. 

Bob: [00:46:31] And stock is they've occasionally done a few things and every time they bought it you know every time they've sort of just sort of drifted a little bit away, they just go, you know, what we've got is actually way better than anything else that's out there. And I just come back to the core business. They've sort of done a bit of pivoting. But I think if if they went off and did some really big shift in strategy, we would sit back and go, Whoa, yeah, what's going on there? And I would probably that would be enough for us to say. I mean, you know, like when you saw Facebook suddenly pivot. Yeah, change the name is like, well, what's going on?

Alec: [00:47:04] Yeah, yeah. You just be stoked if you were the guys that were making digital sneakers and then Nike come knocking on your door, it's like, Great, yeah, you can acquire us. 

Bob: [00:47:12] So, yeah, that wasn't, wasn't, wasn't a big part of the thesis. 

Bryce: [00:47:17] Well, that does bring us to the end of our episode. A reminder that whilst we are licenced, everything that you heard today is general advice only and you should seek professional advice. All information on this show is for education and entertainment purposes only. And also a massive thanks to shares for supporting this episode. For more info on them, head to shares is dot com dot our. You bet Bob it's been an absolute pleasure have thoroughly enjoy understanding a bit more about Nike, the investment case both good and bad. So thank you so much for your time. 

Bob: [00:47:48] Thanks, Bryce. Thanks Ren. Pleasure being on.