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The following content provided will include information regarding Nikes Inc. cash management strategies, which will include more in depth information from the previous group paper. In addition, working capital recommendations will be provided to senior management base on next year’s in the pro-forma financial statements.
Working Capital Strategies Paper
Financial statements are a vital factor of any business organization; they show where a company’s money came from, where it went, and where it is now, according to Securities and Exchange Commission website (2008). In addition, four main financial statements consist of the balance sheet, income statement, cash flow statement, and statement of shareholders’ equity. These four financial statements will be evaluated from Nike Inc. and more in depth information will be included from information on the previous paper which will be link to the working capital strategies. Furthermore, a detail working capital recommendation to senior management will be included and the impact of Nike Inc. revenue increase of their working capital.
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In fiscal 2008, Nike met or exceeded there financial goals. Revenues grew 14% to $18.6 billion, net income grew 26% to $1.9 billion, and delivered diluted earnings per share of $3.74, a 28% increase versus fiscal 2007. These reported results included combined gains from the sale of Starter Brand and NIKE Bauer Hockey businesses of $35.4 million, net of tax, in fiscal 2008 and the gain recognized on the sale-leaseback of the Oregon Footwear Distribution Center of $10.0 million, net of tax, in fiscal 2007, one-time tax benefits of $105.4 million and $25.5 million recognized in fiscal 2008 and 2007, respectively, operational losses of $13.3 million, net of tax, from Umbro, which was acquired in the fourth quarter of fiscal 2008, and a $9.6 million gain, net of tax, from the Converse arbitration ruling settlement in fiscal 2007. Nike estimates that the combination of favorable translation of foreign currency-denominated profits from international businesses and the foreign currency losses included in other (expense) income, net resulted in a year-over-year increase in consolidated income before income taxes of approximately 6%. (SEC, 2008)
Nike is focused on building its international portfolio and pursues growth opportunities. Nike will focus on athletic equipment and aiming for the non-athletic customer. In 2007, Nike purchased Converse, which has allowed the company to appeal to emerging markets in Brazil, China, and Russia. Nike increased Converse sales from $1.5 to $2 billion (29% increase) and most of the growth drives sales in the emerging markets. Since US revenue for Nike remains flat, the company is looking to reach more of the international market. Nike plans to invest 11% of revenue in marketing and this expense will help in promoting strong brands and maintain product recognition. In 2006, Nike spent $1.74 billion in advertising, 11.6% of revenue. This advertising led to Nike's operating margin of 8.80%. Nike is not the most profitable company in the footwear industry that title belongs to Puma. Puma has a margin of 9.55% on $4.1 in revenue. Puma had to put 15.23% of revenue towards advertising. With Nike being not as profitable as Puma, this disadvantage points out the importance of other profitability-enhancing ventures, such as moves towards increase retail distribution. Nike is planning to generate revenue by appealing more for the low-performance footwear market in the United States and Europe. This means that Nike will emphasize on Converse and Hurley, which have sneakers not intended for athletic use. By utilizing the many opportunities for growth this can improve the stockholders equity for the coming years (WikInvest, 2008).
Although slowly on the rise, NIKE’s stock took a harsh blow in 2008 with the biggest drop they had seen in seven years. Down 9.1% since 2001, NIKE stock closed at $60.33 on Monday September 8, 2008. Sales are up, however, and stock has seen a 22% total rise over the last year (MarketWatch, 2008).
NIKE will be announcing its financial results for the first quarter fiscal year 2009 on September 24, 2008 after the close of stock market trading hours. NIKE stock is expected to see a slight rise in price giving investors hope that sales surges in the Asian and European markets, as well as money spent on innovation and operations, will give further rise to NIKE stock NIKE, Inc, 2008).
Following through with NIKE’s stock repurchase program, should NIKE see at least a 20% rise in stock prices in fiscal year 2009, just as they saw a 22% rise in 2008, NIKE will be well on its way to competing its four year stock repurchase goal set forth by NIKE’s Board of Directors in 2006 (Nike, Inc, 2008). This will also allow NIKE to raise quarterly dividends paid to its shareholders. A 20% increase will bring NIKE 46,375,269 shares closer to its goal with a total of approximately $2.43 billion. This may also allow NIKE to raise its quarterly stock dividend payable to roughly .28¢ per share.
The function of bonds can determine the liquidity of the company in order to finance or invest to increase revenues and to justify the implementation of new innovative projects. Cash outflows such as dividends or increased drawings of stock and bonds will have the propensity to remove liquidity from NIKE. NIKE must consider a more aggressive means to financing capital investments. In figure 1, the chart demonstrates NIKE’s ability to raise working capital through the issuance of bonds.
Figure 1 Bonds.
YEAR 2008 2007
Totals (in millions) 447.4 440.4
Less current Maturities 6.3 30.5
Final Outcome 441.1 409.9
To accumulatively generate a 20% increase with other financial investments, more bonds should be issued. NIKE’s equity is strong at 25.4 percent in relation to return on assets. (See Figure 2)
Figure 2 Return on Equity versus Return on Assets
“The fair value of the company’s long-term debt, including current portion, is approximately 450.0 million at May 31, 2008 and 443.2 million at May 31, 2007” (NIKE, Inc., 2008, p.20). The relationship between equity and debt conveys NIKE’s capacity to increase bond investments, since that allows for ample leverage. The working capital from 2004 to 2008 clearly solidifies leverage for NIKE to be more aggressive in the issuance of bonds. Corporate bonds can “provide steady income for investors” in addition to preserving NIKE’s principle (Harper, D., 2008).
Figure 3 Working Capital
Working Capital Recommendations and Impact of Revenue Increase
Working capital recommendations refers to an increase of financial investments through the issuance of stocks and bonds. This will increase monies to use for restructuring and isolating new potential footwear for the market place. Increase quantity with a low-performance footwear versus high-end athletic foot wear will generate revenue appealing to a new market in the United States and Europe. This will increase sales, volume, and inventory that can obtain that 20 percent increase as recommended.
NIKE has a versatile style of generating innovative techniques to increase revenues through working capital strategies. As monies from financial investments are allotted for new marketing projects to isolate more marketable—affordable athletic footwear, the propensity to increase revenues will appear. With the slow economy, it makes since to market a practical athletic shoe the public can enjoy.
Harper, D. (2008). An introduction to credit risk. Retrieved September 9, 2008 from http://www.investopedia.com
MarketWatch. (2008). Nike has biggest drop since 2001 on growth outlook. Retrieved September 8, 2008 from http://www.marketwatch.com/news/story/nike-has-biggest-drop-
NIKE, Inc. (2008). Securities and Exchange Commission 10K-2008. Retrieved on September 9, 2008 from http://www.sec.gov/archives
NIKE, Inc. (2008). NIKE, Inc. Announces First Quarter Fiscal 2009 Earnings and Conference Call. Retrieved September 8, 2008 from http://invest.nike.com/phoenix.zhtml?c= 100529&p=irol-newsArticle&ID=1194870&highlight=
Nike, Inc. (2008). Stock Information. Retrieved September 1, 2008 from http://invest.nike.com/phoenix.zhtml?c=100529&p=irol-sec
Securities and Exchange Commission website. (2008). Beginners Guide to Financial Statements.
Retrieved September 5, 2008, from http://www.sec.gov
WikInvest. (2008). Nike (NKE). Retrieved September 9, 2008, from: Investing Simplified Web