{"id":4750,"date":"2021-08-23T22:00:11","date_gmt":"2021-08-23T20:00:11","guid":{"rendered":"https:\/\/thefinanceghost.com\/?p=4749"},"modified":"2021-08-23T22:00:11","modified_gmt":"2021-08-23T20:00:11","slug":"nike-vs-foot-locker-2","status":"publish","type":"post","link":"https:\/\/thefinanceghost.com\/index.php\/2021\/08\/23\/nike-vs-foot-locker-2\/","title":{"rendered":"Nike vs. Foot Locker"},"content":{"rendered":"

I<\/span> love Twitter. If you are serious about growing your investing knowledge and skills base, you would be nuts not to be on Twitter. The FinTwit community is outstanding and the amount of information and analysis available is incredible.<\/p>\n

It also gives me a great platform to really engage with my readers and followers. For example, I enjoyed this question posed to me:<\/p>\n

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I didn\u2019t screenshot the graphs that came with the tweet as it would\u2019ve been a mission for you to see properly. The other company being referred to is Nike.<\/p>\n

In Ghost Mail this week, I used this idea to run my readers through the high-level approach I take to analysing companies and comparing them to one another. If you still aren\u2019t a subscriber to Ghost Mail (which is completely free), you can fix that situation at this link<\/a><\/span><\/strong> and significantly improve your inbox every Tuesday morning at 6:15am.<\/p>\n

This article is the output of that process, including the initial financial analysis. It should be a useful read for you even if you didn\u2019t read Ghost Mail this morning.<\/p>\n

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What do these companies do?<\/strong><\/h4>\n

Unless you\u2019ve lived under a rock your entire life, you should know what Nike does. Many people don\u2019t know how to pronounce the name properly (pro tip: it doesn\u2019t rhyme with bike)<\/em>, but everyone knows the famous swoosh mark.<\/p>\n

As an aside, the story of how Nike was started is called Shoe Dog. It\u2019s a brilliant book and I highly recommend reading it.<\/p>\n

Foot Locker is an international shoe and apparel retailer. Foot Locker sells Nike products alongside Reebok, New Balance and all the usual suspects. Think of it as a global version of your favourite local sneaker store.<\/p>\n

Although the end customer is essentially the same person, the business models aren\u2019t perfectly comparable. Nike is one level up in the value chain \u2013 the company designs and manufactures products, whereas Foot Locker just distributes them. Nike also sells directly to end users, disintermediating the likes of Foot Locker and thus taking the wholesale and retail profit margins for itself on a portion of its sales. This is a critical point for you to remember.<\/p>\n

Nike\u2019s recent performance<\/strong><\/h4>\n

Nike has a year-end of May for some odd reason. That\u2019s not the only unusual thing about the financials, as you\u2019ll find out shortly.<\/p>\n

In the year to May 2021, Nike grew its sales revenue by 19%. Gross profit margin came in at 44.8%, 140bps higher than the previous year (i.e. the comparable period was 43.4% because 140bps means 1.4% – I\u2019m just using the correct terminology).<\/em><\/p>\n

Hysterically, the next line item on the income statement is \u201cdemand creation expense\u201d which is what happens when brand people are allowed to use the same kitchen as the finance team. I can only assume that this means marketing and selling expenses.<\/p>\n

I promise I\u2019m not making this up. See for yourself:<\/p>\n

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It must have been cheaper to create demand in the past year, as that expense dropped 13%. Overheads only grew 4% despite the strong sales growth, so profit margins have grown sharply in the past year.<\/p>\n

For some reason, there\u2019s no operating profit sub-total. You would calculate this by subtracting selling and administrative expenses from gross profit. In the 2021 financial year, that would be $19,962 – $13,025 = $6,937. Dividing this number by revenue gives us operating profit margin of 15.6%. In the prior year, it was just 8.3%.<\/p>\n

At this stage, you might be tempted to close this article and place your bid for shares. Considering the global Covid disruptions last year, I always recommend comparing to 2019 as well.<\/p>\n

Here\u2019s a snapshot from Nike\u2019s 2020 annual report:<\/p>\n

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Operating profit margins aren\u2019t shown above but you can calculate them in the same way I demonstrated for 2021. We can summarise the operating profit margins as follows:<\/p>\n