Nike, Inc.: Cost of Capital

8 Pages Posted: 21 Oct 2008 Last revised: 10 Apr 2019

See all articles by Robert F. Bruner

Robert F. Bruner

University of Virginia - Darden School of Business

Jessica Chan

University of Virginia - Darden School of Business

Sean Carr

University of Virginia - Darden School of Business

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Abstract

On July 5, 2001, Kimi Ford, a portfolio manager at NorthPoint Group, a mutual-fund management firm, pored over analyst write-ups of Nike, Inc., the athletic-shoe manufacturer. Nike's share price had declined significantly from the beginning of the year. Ford was considering buying some shares for the fund she managed, the NorthPoint Large-Cap Fund, which was invested mostly in Fortune 500 companies, with an emphasis on value investing. Ford had read all the analyst reports that she could find about the June 28 meeting, but the reports gave her no clear guidance. She decided instead to develop her own discounted cash flow forecast to come to a clearer conclusion.

Excerpt

UVA-F-1353

Rev. Mar. 8, 2018

Nike, Inc.: Cost of Capital

On July 5, 2001, Kimi Ford, a portfolio manager at NorthPoint Group, a mutual fund management firm, pored over analysts' write-ups of Nike, Inc., the athletic-shoe manufacturer. Nike's share price had declined significantly from the beginning of the year. Ford was considering buying some shares for the fund she managed, the NorthPoint Large-Cap Fund, which invested mostly in Fortune 500 companies, with an emphasis on value investing. Its top holdings included ExxonMobil, General Motors, McDonald's, 3M, and other large-cap, generally old-economy stocks. Although the stock market had declined over the last 18 months, the NorthPoint Large-Cap Fund had performed extremely well. In 2000, the fund earned a return of 20.7%, even as the S&P 500 fell 10.1%. At the end of June 2001, the fund's year-to-date returns stood at 6.4% versus −7.3% for the S&P 500.

Only a week earlier, on June 28, 2001, Nike had held an analysts' meeting to disclose its fiscal-year 2001 results. The meeting, however, had another purpose: Nike management wanted to communicate a strategy for revitalizing the company. Since 1997, its revenues had plateaued at around $ 9 billion, while net income had fallen from almost $ 800 million to $ 580 million (see Exhibit 1). Nike's market share in U.S. athletic shoes had fallen from 48%, in 1997, to 42% in 2000. In addition, recent supply-chain issues and the adverse effect of a strong dollar had negatively affected revenue.

At the meeting, management revealed plans to address both top-line growth and operating performance. To boost revenue, the company would develop more athletic-shoe products in the mid-priced segment—a segment that Nike had overlooked in recent years. Nike also planned to push its apparel line, which, under the recent leadership of industry veteran Mindy Grossman, had performed extremely well. On the cost side, Nike would exert more effort on expense control. Finally, company executives reiterated their long-term revenue-growth targets of 8% to 10% and earnings-growth targets of above 15%.

. . .

Keywords: cost of capital, investment analysis, valuation

Suggested Citation

Bruner, Robert F. and Chan, Jessica and Carr, Sean, Nike, Inc.: Cost of Capital. Darden Case No. UVA-F-1353, Available at SSRN: https://ssrn.com/abstract=909715

Robert F. Bruner (Contact Author)

University of Virginia - Darden School of Business ( email )

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HOME PAGE: http://faculty.darden.edu/brunerb/

Jessica Chan

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Sean Carr

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4812 (Phone)

HOME PAGE: http://www.batteninstitute.org

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