The Flash and Nike: Speed and Control
Updated: Nov 14, 2020
Have you seen The Flash TV show? Barry Allen is a crime scene investigator with the Central City Police Department. Barry has a well paid stable job with a pension then one day he is struck by lightning during a freak storm and falls into a coma. Months later he awakens with the power of super speed (about 700 mph) which he uses to fight criminals, including others who have also gained superhuman abilities. He becomes the Flash. The Flash is one of DC Comics' most popular characters. On several occasions, the Flash has raced against Superman, these races often resulted in ties.
Who is actually the fastest man in the world? That title belongs to Jamaican Usain Bolt. Bolt bagged a total of eight Olympic gold medals and numerous world championship gold medals in his career. He holds world records in the 100m and 200m distance, winning three consecutive gold medals and dominating the Olympics (2008, 2012 and 2016). Everyone wants to know who is the fastest man in the world that is why he is so popular. Bolt is the greatest sprinter of all time.
If I was Barry I would have joined the U.S. Olympic Team as a sprinter. The police job is stable but sprinters can make a lot of money. As of 2020, Usain Bolt's net worth is estimated to be $90 million, making him one of the highest paid Olympians of all time. Despite being retired, he still makes serious money off endorsement deals. One of his biggest endorsements is from Puma that pays him $10 million annually.
Speaking of running shoes. Do you know who Phil Knight is?
Knight was a middle distance runner at the University of Oregon in the late 1950's. During his Masters of Business Administration at Stanford University, he wrote a research paper on why shoes should be manufactured out of Japan (instead of Germany), where the labor costs were cheaper but quality was still high. He went on to become a Certified Public Accountant and worked at PricewaterhouseCoopers, one of the largest accounting firms in the world. He even worked as an accounting professor at Portland State University.
Interesting fact: Adidas and Puma were German companies started by two brothers, who hated each other with a passion, dominated the shoe market at the time.
While working full time he kept thinking about his research paper and his travels around the world. When he visited Japan, he met with company executives who produced Tiger sneakers. Tiger shoes were very popular in Japan but nobody heard of them in the United States.
He finally decided to launch Blue Ribbon Sports in 1962 and began importing Tiger running shoes from Japan. Knight had no money in the beginning and had to borrow money from his father. It wasn't easy but he got the business going.
Phil Knight began selling Tiger Sneakers out of the Trunk of his car at high school and college track meets and sales took off. Sales hit $300,000 in 1969. As sales exploded he ran into cash flow issues. In his book "Shoe Dog", he states that "The accountant in me saw risk, the entrepreneur saw the possibility." His bankers felt his rate of growth was too fast. Phil's lack of equity was an issue. Phil responded by saying "That is the price of business growth, you don't tell a runner in a race that he's running too fast". That didn't work and the bank dropped him as a client. Phil was desperate and finally got financing from Nissho, a Japanese trading company that was doing $100 billion in sales at the time. They loved growth companies with big upside.
"An entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down." - Reid Hoffman
Blue Ribbon Sport couldn't import Tiger shoes after a legal fight so it rebranded itself as Nike in 1972 and began making & selling their own shoes. Nike was the Greek goddess of victory. Phil and his team realised the new brand needed its own logo. Nike's "swoosh" logo, now considered one of the most recognized logos in the world, was commissioned for US$35 from a graphic design student at Portland State University. The same university Phil taught accounting at. When asked what the swoosh meant, Phil replied, "It's the sound of someone going past you." Nike shoes came in orange shoe boxes, when white or blue were standard colors then. Phil felt orange was the boldest colour in the rainbow and that the shoe boxes would pop on the shelves of the sporting goods stores.
Nike's sales rose 50 percent in 1973 to $4.8 million. Nike shoes were now manufactured in Japan, Taiwan, Korea and Puerto Rico. The speed at which Nike was growing was incredible.
As Nike continued to grow, Phil hired mostly accountants and lawyers. According to 'Shoe Dog', "That was our priority, and accountants and lawyers had at least proved that they could master a difficult subject. And pass a big test," Knight wrote. "Most also demonstrated basic competence. When you hired an accountant, you knew he or she could count. When you hired a lawyer, you knew he or she could talk".
You see this in Nike's financial statements. Since 2005 Nike gross profit margin has averaged 45%. As mentioned in our previous post the higher the gross profit margin the better. This explains how profitable the business model is. The entrepreneur will ask, "Does it make sense to import running shoes from Asia and sell them in North America?" Phil Knight did his analysis and knew it made financial sense.
Adidas is Nike's main competitor. Adidas had dominated the shoe market for decades before Nike showed up. Adidas is like Eobard Thawne (Reverse-Flash), the archenemy of the Flash. Nike's market cap is $204 billion almost four times bigger than Adidas. Under Armour is worth just under $6 billion. This puts in perspective of just how huge Nike is compared to its competitors. Nike's gross profit margins are higher than its competitors. They have sales but they keep a close eye on their production costs.
When you begin investing in stocks it's a good idea to compare financial ratios of competitors and companies in other sectors. Your money can be invested anywhere so don't limit your investment options to one industry or sector. For example, Ford gross profit margins average 13% which are much lower than Nike's. Let's see why that is important if you are an investor:
Nike Market Cap: $204 billion
Ford Market Cap: $32 billion
2019 Income Statements
Revenue: $39 billion $156 billion
Gross Profit: $17.5 billion $21 billion
Gross Profit Margin: 45% 13.5%
Nike is worth six times more than Ford even though Ford's revenue (sales) is four times higher than Nike's. You always have to look past sales. It's Nike's high profit margin that gets investors attention.
As go further down the income statement you need to subtract all the selling, general and administrative expenses associated with the business. This shows how the executive team decides to spend the money. For example, Ford executives might decide to spend billions of dollars a year on making and distributing Fast and Furious rip off movies with Ford cars instead of Dodges thinking it might increase sales. Nike could decide to pay Kanye West a billion dollars a year to wear their shoes. These decisions are made by people in boardrooms. If companies don't watch their expenses they can become like runaway trains. It won't end well.
This is why the company's EBIT number is important. Earnings Before Interest and Taxes measures the profit a company generates from its operations. It is often used as a way to value a business. You get:
2019 Nike EBIT: $4.8 billion
2019 Ford EBIT: $574 million
It is more profitable to sell Air Jordan's then Ford Mustangs and F150's. The difference is literally in the billions.
This is why most investors avoid companies like Ford. The sales are there but the profits are not. This helps explain why Ford stock is worth the same as it was in 2005: $8 a share. Also a small reduction in sales can wipe out profits.
Nike stock was trading around $10 a share back in 2005. It paid a dividend of $0.12 a share. Most investors thought there was no room left to grow. Michael Jordan, basketball superstar and the face of Nike, retired in 2003. Jordan helped transform Nike from a scrappy underdog into one of the largest, most valuable consumer brands in the world. The funny thing is Nike wasn't his first choice. He wanted to sign with Adidas initially.
Air Jordan lineup is popular and profitable because of the branding power behind them. They're marketed as luxury goods but targeted to everyone from elementary aged school kids to seniors working out in gyms. The Jordan brand had revenue of $3.1 billion in the fiscal year ending May 2019. According to Forbes, Michael Jordan made $130 million in 2019 off the Air Jordan brand. Jordan's shoe money alone is more than the $127 million in total earnings of Lionel Messi, who ranked as the world's highest paid athlete this year. Michael Jordan makes more money sitting at home than current athletes who are at the top of their game. It's been 17 years since Jordan shot a basketball in a NBA game.
Celebrity endorsements have been key to Nike's ongoing success. After Jordan they struck big again by signing athletes like Tiger Woods, Kobe Bryant, and Lebron James in the early stages of their career.
Nike stock price is $128 a share today. The annual dividend is now $1 a share. I wonder what the top investment bankers who thought Nike just couldn't grow when it was at $10 a share 15 years ago must be thinking when they see the current stock price.
There is another important point to know about Nike and Ford. Both companies have dual-class share structures. Class A and class B. Usually the public would get class B's which carry one vote per share. The founders and inner circle would get class A's getting more votes per share and end up selecting most of the board of directors at a company. It's all about controlling the company.
Institutional investors, think pension funds, do not like dual-class share structures because the original owners maintain control of the company with a small ownership position. The problem with most investors, even institutional ones, is they sometimes think short-term and might sell shares if the stock price drops. Herd mentality is very real in the suspender snapping investment world. Dual-class share structures will always be attractive to entrepreneurs because they think long term and make investments in the business accordingly. They rarely pay attention to short-term noise. If they did they never would have started their businesses to begin with. Examples of companies that have dual class structures where the original owners are still running the companies are Estee Lauder, Facebook, Google (Alphabet Inc.), Berkshire Hathaway, Ford and Square.
Ford is an interesting example. The company was started by legendary businessman Henry Ford in 1903 and revolutionized assembly line production for the automobile. The Ford family today has minority ownership but the majority of the (voting) power effectively giving them control. Ford Executive Chairman Bill Ford Jr. the great grandson of the founder, alone hold's 20% of the company's shares. Family dynasties running large companies don't have good track records. Ford has had serious operational challenges and the stock price hasn't moved since 2005. You can't give Ford stock away. There are a lot of people running divisions at Ford who have the same last name.
Phil Knight's greatest fear with Nike's growth was losing control. That is why he avoided going public in the early years. The problem was he needed to fix Nike's cash flow problem once and for all and he had an opportunity to do it. Phil wanted to raise enormous sums of money, turbocharge Nike's growth, but ensure he kept control. Nike's board of directors are stacked with people Phil Knight trusts, including his son Travis, and is intended to ensure that the company maintains his vision.
Phil owned 46% of Nike when it went public on December. 2, 1980. Phil Knight's net worth jumped to $178 million on that day. Today Phil Knight's net worth is over $45 billion. He can buy out Ford and still have $15 billion left over. So far it has worked out well for Nike and its shareholders.
The Flash trained at a S.T.A.R Labs facility called the Speed Lab. This high tech room had a tunnel and treadmill to train Barry. In the room were a series of computers designed to monitor Barry's vitals and speed. Basically looked like what a current Nike or Adidas research running facility might look like. In the lab, Barry learned to increase his superhuman speed while maintaining control.
Phil Knight used a low cost strategy to ensure Nike was profitable. This ensured his company could grow sales at a record pace while he still kept control. What good is speed if you have no control? Ford Mustangs are powerful cars that are rear wheel drive but they lose control if you accelerate too quickly on slick surfaces and if the driver loses focus. What worked for Phil Knight was that he was a runner like the Flash. Runners know that when you focus on the finish line and give it 100%, everything around you becomes a blur. It all becomes about speed and control.
"The cowards never started and the weak died along the way. That leaves us, ladies and gentleman." - Phil Knight