MASTER OF BUSINESS ADMINISTRATION AWARDED BY NOTTINGHAM TRENT UNIVERSITY ASSIGNMENT SUBMISSION FORM

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Name of Student: Vijay Subramaniam Student Registration Number: KL519

Module Name: Managing & Accounting for Financial Resources Module Number: WEC - T12012 Assignment Title: : Managing & Accounting for Financial Resources Submission Due Date: 12February 2012 Students Electronic Signature: Vijay Subramaniam

Plagiarism is to be treated seriously. Students caught plagiarizing, can be expelled from the programme

Assignment Form MBA Jan12

Table of Contents 1.0 Executive Summary 2.0 Introduction 3.0 Background of the Company 4.0 Definitions of Terms 5.0 Management and control of the working capital 5.1 Working Capital Strategies 5.2 Debt Structure 5.3 Equity Structure 5.4 Stocks 5.5 Bonds 6.0 Working capital policies that adopted by Nike 6.1 Design for Environment 6.2 Nike stated four long-term goals. By 2020 6.3 NikeGO Places 6.4 Climate Commitments 7.0 NIKE Historical Ratios 8.0 Key Working Capital Ratios 9.0 Weaknesses in the management of working capital NIKE 10. 0 Working Capital Cash Conversion Cycle of NIKE 11.0 Conclusion 12.0 Reference 19 28 20 31 32 34 35 37 38 39 16 - 18 2-3 45 67 8 - 11 12 - 15

1.0 Executive Summary Nikes company strategy is a clever one. One that founder Phil Knight thought of while still in school at Stanford. Instead of paying Americans to put together Nikes shoes, Knight thought that it would be a better idea to take manufacturing plants overseas to places where labor is much cheaper than in the U.S., places like Taiwan and South Korea. With 86% of its products being produced in one of those two countries and Nike employing a large number of people who lived there, the countries became richer and richer until Knight decided prices were too high to manufacture there anymore.

He decided to move the factories to places in China like Indonesia where countries were practically begging for foreign investment. Production was going well until the early 1990s when labor strikes rose to 112 in 1991 and news began to leak out about the terrible conditions Nikes labor force was working in. The company was using underage workers and underpaying them to the point that a family couldnt even survive off of the wages made at a Nike factory. From this point, Nikes sales began to slip and returned into the medias spotlight numerous times in the 90s for their bad labor practices.

Nike paints a picture of their company for the world to see their, inspiration and innovation, as well as their commitment to serve everyone in the world. Through a continuous effort by Nike to remain at the apex of technology and innovation, they are the market leader by a significant margin. As a result of Nike pursuit of selling a broad spectrum of products, they possess a formidable competitive advantage.

Nike exhibits significant strength in market share, brand image and recognition, as well as research and development. Through the use of intuition and analysis I have concluded that opportunities exist for Nike to increase market share. Specifically, I recommend horizontal integration, global expansion, European concentration, and segmented marketing to target various generational demographical opportunities. The focus will lie using various methods of segmentation to develop the targeted markets and increase market share.

This company strives for excellence. Nike is an enormous corporation that continues to do well, even in this questionable economy. They are relentless about innovating to reach their full potential. Despite a few highs and lows within the company they continue to produce high quality sport-inspired equipment.

2.0 Introduction Working capital management is a very important component of corporate finance because it directly affects the liquidity and profitability of the company. It deals with current assets and current liabilities. Working capital management is important due to many reasons. For one thing, the current assets of a typical manufacturing firm accounts for over half of its total assets. For a distribution company, they account for even more. Excessive levels of current assets can easily result in a firms realizing a substandard return on investment. However firms with too few current assets may incur shortages and difficulties in maintaining smooth operations (Horne and Wachowicz, 2000).

Efficient working capital management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet due short term obligations on the one hand and avoid excessive investment in these assets on the other hand (Eljelly, 2004). Many surveys have indicated that managers spend considerable time on day-to-day problems that involve working capital decisions. One reason for this is that current assets are short-lived investments that are continually being converted into other asset types (Rao 1989). With regard to current liabilities, the firm is responsible for paying these obligations on a timely basis. Liquidity for the ongoing firm is not reliant on the liquidation value of its assets, but rather on the operating cash flows generated by those assets (Soenen, 1993). Taken together, decisions on the level of different working capital components become frequent, repetitive, and time consuming.

Working Capital Management is a very sensitive area in the field of financial management (Joshi, 1994). It involves the decision of the amount and composition of current assets and the financing of these assets. Current assets include all those assets that in the normal course of business return to the form of cash within a short period oftime, ordinarily within a year and such temporary investment as may be readily converted into cash upon need. The Working Capital Management of a firm in part affects its profitability.

3.0 Background of the Company Bill Bowerman and Phil Knight founded Nike Inc. as Blue Ribbon Sports in 1962. The partners began their relationship at the University of Oregon where Bowerman was Knights track and field coach. While attending Stanford University, Knight wrote a paper about breaking the German dominance of the U.S. athletic shoe industry with low-priced Japanese shoes. In an attempt to realize his theory, Knight visited Japan and engineered an agreement with the Onitsuka Tiger company, a manufacturer of quality athletic shoes, to be their sole distributor in the United States.

In 1962, Knight received the first shipment of 200 pairs of Tiger shoes to his parents garage in Oregon. The shoes were bought by Blue Ribbon Sports (BRS), the name of the partnership between Knight and Bowerman that they formed with only $1,000 in capital. Knight peddled Tigers shoes at local track meets grossing $8,000 of sales in their first year. In 1966, Bowerman, who had previously designed shoes for his university athletes, worked with Tiger to design the Cortez running shoe. The shoe was a worldwide success for the Onitsuka Tiger Company and was sold at the first BRS store. In 1971, BRS, with creditor support, started manufacturing their own line of shoes. Later that year, the first BRS shoe was introduced. The shoe was a soccer shoe that bore the Nike brand name, referring to the Greek Goddess of Victory, and the Swoosh trademark. A student designed the Swoosh trademark for a paltry fee of $35. The Swoosh was meant to symbolize a wing of the Greek Goddess.

1972 marked the breakup of the BRS/Tiger relationship. BRS soon changed its name to Nike, Inc. and debuted itself at the 1972 Olympic trials. In 1973, Steve Prefontaine was the first prominent track star to wear Nike shoes. The late 70s and

early 80s also saw John McEnroe, Carl Lewis, and Joan Benoit sporting Nike shoes. Nike popularity grew so much that in 1979 they claimed 50% of the U.S. running market. A year later with 2,700 employees, Nike went public selling 2 million shares on the New York Stock Exchange.

The 1980s were marked by the signing of Michael Jordan as a product spokesperson, revenues in excess of $1 billion, the formation of Nike International Ltd., and the "Just Do It" campaign. Nike also expanded its product line to include specialty apparel for a variety of sports. In 1990, Nike surpassed the $2 billion mark in consolidated revenue with 5,300 employees worldwide. In addition, we opened the Nike World Campus in Beaverton, Oregon.

In 1991, Nike pushed revenues to $3 billion, up from $2 billion the prior year. This mark would continue to grow throughout the 90s, with revenues in 1999 reaching $8.8 billion. These revenues grew based on improvements in shoe technology and successful marketing campaigns. International revenues fueled a great portion of this growth with an 80% increase in 1991 from the prior year. In 1992 international revenues topped $1 billion for the first time and accounted for over onethird of our total revenues. Such growth continued throughout the 1990's as we continued to focus our marketing efforts on major sporting events like the World Cup, and the next generation of celebrity endorsers, such as Tiger Woods, Lance Armstrong, and the players of women's professional basketball (WNBA). At the end of the 90s, Nikes goal, as stated in our company web site, is to become a truly global brand.

4.0 Definitions of Terms Before beginning the glossary of financial terms and definitions, let me first define the scope of this glossary. Finance is a broad superset of many sub topics, namely accounting, banking, business, credit, insurance, stocks, etc. As it was impossible to replicate a whole financial dictionary in one article, the term finance has been split up in the same categories mentioned above. We have independent glossaries for all the above and the links for them will be provided at the end of this article. Financial Terms - Glossary of Financial Terms and Definitions' mainly contains all the general finance terms and finance words that do not fall in any one specific subset. It includes all possible terms belonging to the categories of 'investment finance', 'corporate finance', 'mutual funds', 'financial policies', 'financial economics' and 'market instruments'. AAA - A rating agency rating that is given to the best quality of debt obligation, usually given if the possibility of principal as well as interest payments default is very low. AAGR - Average Annual Growth Rate - The arithmetic mean (average) of the growth of investment value (portfolio value), over a period of years, to yield a particular rate that will give growth information at first glance. AAR -Average Annual Return - The percentile metric used to measure historical returns on an investment or portfolio and to evaluate the quality of potential investments. Bond Option - When an option contract is made with bonds as the underlying asset, the contract is termed as a bond option contract.

Bonus Share - When a company decides to allot additional shares to already existing shareholders, instead of a dividend payout, it is termed as a bonus share issue. Capital - Capital is a vague term that usually refers to the financial resources and assets of a company including the likes of land and buildings and plant and machinery. Corporate Tax - It is a tax or a levy instilled upon a company, and the amount of the tax will depend on the levels of profit achieved by the firm. Credit Crunch - Credit crunch refers to a financial scenario wherein investment capital becomes very difficult to obtain. The price of debt products rises up considerably as the banks and lenders become very cautious and conservative. DCF - Discounted Cash Flow is a valuation method used to estimate the profitability of a particular investment option. DCF analysis uses future free cash flow projections and discounts them, using weighted average cost of capital, to get the present value used to analyze the competence of investment. Debt Equity Ratio -Debt equity ratio is the measurement of the company's financial position which is calculated by dividing the total liabilities and the shareholder's equity. It estimates or measures the proportion of debt and equity the company is using, for financing its assets. Equity Income - Income that is earned through investments in stocks is termed as equity income. In the mutual funds context, equity incomes are incomes earned from investments in high quality companies with a history of rich and reliable dividend distributions.

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Foreclosure - A foreclosure entails the seizure and sale of property stipulated in the mortgage loan contract of a debtor who has been unable to pay his principal or interest on time. Guaranteed Bond - A guaranteed bond is a bond issued by one firm, and the payment of interest and principal on the bond is guaranteed by another firm Hedge - Hedge means to invest in a low risk investment option so that the risk of adverse price movement for a high risk asset is reduced. Income Bond - Income bond is a type of bond which only promises to repay the face value of the bond. The coupon payments on this type of bond depend on earnings of the issuing company. Initial Public Offering (IPO) - Initial public offering is when a business entity offers a share of its ownership to the general public for the first time. LIBOR - An acronym for London Interbank Offered Rate, which is the standard rate for calculating rates for adjustable-rate loans. LIBOR is based on the rate of interest at which borrowing and lending of unsecured funds are carried out by banks among each other. Mutual Fund Liquidity Ratio - The cash relative to total assets ratio for a mutual fund that is published monthly by the Investment Company Institute is called mutual fund liquidity ratio Net Present Value Rule - This is an investment rule that states that, an investment can only be accepted if its net present value (NPV) is greater than 0. An NPV less than 0 signify that the investment will actually decrease shareholder's wealth instead of increasing it. 11

Pari-passu - This is a Latin term which is translated as 'without partiality'. This term is used to describe two securities or obligations that have equal rights to payments. Return On Average Equity (ROAE) - The adapted version of the return on equity (ROE) where the shareholder's equity is changed to average shareholder's equity is known as Return On Average Equity (ROAE) Share Capital - The cash or other considerations that help raise funds by issue of shares is known as share capital. The share capital increases every time the company sells new shares to public in return for cash.

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5.0 Management and control of the working capital 5.1 Working Capital Strategies The following content provided will include information regarding Nikes Inc. cash management strategies, which will include more in depth information from the company. In addition, working capital recommendations will be provided to senior management base on next the pro-forma financial statements. Financial statements are a vital factor of any business organization; they show where a companys 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.

5.2 Debt Structure In fiscal 2008, Nike met or exceeded their 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

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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 currencydenominated 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)

5.3 Equity Structure 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

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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).

5.4 Stocks Although slowly on the rise, NIKEs 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 (Market Watch, 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 NIKEs 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 NIKEs 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.

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This may also allow NIKE to raise its quarterly stock dividend payable to roughly .28 per share.

5.5 Bonds 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 NIKEs ability to raise working capital through the issuance of bonds.

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6.0 Working capital policies that adopted by Nike Mention the global athletic footwear giant, Nike, and most people would immediately think of the famous swoosh that adorns all of their gear. What is not so well known is that behind the scenes, Nikes product design teams now focus on creating innovative and sustainable products before the swoosh goes on. Using sport as a tool for positive change, Nike believes that a strong corporate responsibility effort will be good for business.

Many corporations are reporting their sustainability efforts now that corporate responsibility (CR) reporting is gaining more press. Corporate stakeholders are also demanding more transparency. Green washing is defined by Websters Dictionary as the "the practice of promoting environmentally friendly programs to deflect attention from an organization's environmentally unfriendly or less savory activities. Some corporations may be accused of green washing when they attempt to present themselves in an environmentally responsible way but do not truly address their problems or challenges in a sustainable way. Nike has undertaken a number of initiatives that demonstrate active support of their new corporate responsibility mission statement, and these initiatives deserve recognition. Some are highlighted below.

6.1 Design for Environment Nike first became involved with The Natural Step in 1997. The Natural Step (TNS) is a framework grounded in natural science that serves as a guide for businesses, communities, educators, government entities, and individuals on the path toward sustainable development. In 1998, Nike adopted the TNS framework as the

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foundation for sustainability programs and goals. Also in 1998, Nike began working with McDonough Braungart Design Chemistry (MBDC) to determine the chemical composition of its products. Both the materials and processes being used to manufacture their shoes were analyzed to assess their environmental effects.

This analysis was then used to outline a plan to eliminate all dangerous chemicals from its manufacturing processes. This work furthered Nikes steps toward a sustainable business model. Since then, Nike has continued to pursue goals which include a commitment to ecological intelligence and an awareness of the impact of their products on the natural world.

6.2 Nike stated four long-term goals. By 2020 Nike would aim to: Eliminate the concept of waste in product design, using materials, energy and resources that can be readily recycled, renewed or reabsorbed back into nature. Eliminate all substances that are known or suspected to be harmful to human health or the health of natural systems. Close the loop and take full responsibility for its products at all stages of the life cycle, including the end of a products useful life when consumers are likely to dispose of it.

6.3 NikeGO Places Nike took a look at how they could be more responsible for their products end of life, incorporating the cradle-to-cradle philosophy of waste. They came up with an innovative program, originally called Reuse-A-Shoe, now called NikeGO Places that was

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launched in 1993. They sought to collect worn-out athletic shoes, disassemble them into their material components, and recycle those materials. Nike then uses the resulting materials to create a new life for them as athletic surfaces. This program also supports Nikes goal to Get kids moving and give them the means to do it through their NikeGO program.

Partner recycling organizations collect and store shoes until they have enough to fill a 27-foot trailer (approximately 5,000 pairs). Nike then arranges for shipment to its facility, where it grinds the components separately. Nike Grind Rubber from outsoles and manufacturing byproduct goes into baseball and soccer fields as well as golf products, weight room flooring and running tracks.

6.4 Climate Commitments Nike has committed to reducing greenhouse gas emissions throughout its operations worldwide. As stated in their 2001 CR report in a Climate Savers agreement with the World Wildlife Fund (WWF) and the Center for Energy & Climate Solutions (CECS), Nikes goals were to: Reduce carbon dioxide (CO2) emissions from business travel and Nike-owned facilities and services to 13 percent below 1998 levels by the end of 2005 by pursuing energy conservation projects, purchasing green power and investing in community energy efficiency projects. Create baselines for Nikes major subcontracted footwear and apparel manufacturing facilities by year-end 2003. Examine Nikes supply chain from packaging to modes of transportation for opportunities to improve logistics efficiency and reduce GHG from it.

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7.0 NIKE Historical Ratios

NIKEs Return on Equity rose 36.41% between 1999 and 2000, while a shaky position between 2000 and 2001 resulted in a fall in the return on equity gained from the previous yr by 8.61% to stand at 16.88 in 2001. This position was reversed in the following two years with return on equity rising by 3.14% between2001 and 2002 and then 6.54% between 2002 and 2003. Return on Assets steadily increased for NIKE from the period from 1999 to 2003 with an overall increase of 28.14% showing that NIKE continuously earned more returns on the employment of its assets throughout the years. Operating Margin also steadily grew from 1999 to 2003 with a slight drop by 2.37% in 2001 but then rose again by 0.94% and then 7.97% resulting in an overall increase in operating margin from 1999 to 2003 of 19.36%.

Liquidity Indicators

NIKEs liquidity fell between 1999 and 2000 by 25.66% but the company was still able to meet its shortterm obligations with its current assets. After 2000 the companys liquidity then steadily increased from 2000 to 2003 to highlight an overall increase in liquidity of 2.65%

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The quick ratio also highlights a similar movement in liquidity. Liquidity dropped between 1999 and 2000 by 30.77% but then the company steadily improved its liquidity throughout the following years to result in an overall increase in liquidity of 10.77% as represented by the quick ratio. In terms of the ratio of debt to equity in financing between 1999 and 2000 NIKE showed an increase in debt in its financing as compared to equity but then in 2000 the company showed a reversal in its position with more reliance on equity compared to debt. 2001 to 2003 showed an increased use of debt compared to equity in NIKEs capital structure and therefore showed NIKE to be more leveraged at the end of 2003.

Asset Management:

Revenues as a percentage of total assets dropped between 1999 and 2000 by 7.78% then improved by 5.84% in 2001 but then declined again in 2002 by 5.52% and then improved in 2003 by 3.24% to stand at 1.59. Even with these fluctuations, NIKE achieved positive gains on its total assets in the form of revenues for example in 2003 for every $1 in total assets NIKE generated $1.59 in revenues. Revenues as a percentage of working capital fluctuated throughout the years moving up between 1999 and 2000, and then continuously fell between 2000 and 2003 by an overall 35.11%.The Interest covered figures showed improvement between 1999 and 2000, a drop between 2000 and 2001 but then a continuous increase

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from 2001 to 2003 showing that NIKE is able to cover its interest expenses 27.18 times. Comparison Data for 2003 Financial Ratios:

Liquidity Ratios: Liquidity is a measure of a companys ability to meet its short-term obligations. A liquid asset is one that can be quickly converted into cash. Liquidity ratios express the variability of liquid resources relative to potential claims.

Current Ratio: With this current ratio, Nike is able to cover its current liabilities 2.32 times with its current assets. Reeboks ratio is slightly higher at 3.05 and Adidas is slightly lower at 2.07. In comparison the industry is more liquid than Nike and the market is less liquid. Focusing on its main competitors in the form of Reebok and Adidas, Nikes liquidity is at a viable position and the higher liquidity of Reebok and the industry may mean that other companies are leaving its cash idle and not using it to its full potential.

Quick/Acid Test Ratio: This means that with the exclusion of its most illiquid asset in the form of inventory, Nike is still able to cover its current liabilities. The industry to which NIKE belongs is more liquid with ADIDAS being less liquid than NIKE and REEBOK being even more liquid than industry. The market as a whole stands at a more balanced position with a 1 to 1 ratio.

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Leverage Ratios: A leveraged company uses more debt than equity including stock and retained earnings in its capital structure.

Debt-to-Equity: Nikes debt-to-equity ratio of 0.19 shows that Nike uses more equity in its financing than Debt and is therefore not highly leveraged. Reebok and Adidas are more leveraged but the industry as a whole shows capital structures that weigh more on the equity side with a figure of 0.27 but still more leveraged than Nike. The market as a whole however is highly leveraged, which shows that debt, outweighs equity in capital structure.

Operations Indicators for 2003

Activity Ratios: These ratios assess the efficiency with which the firm manages its assets. More specifically, they describe how efficiently or intensively a firm uses its assets to generate sales. Inventory Turnover: This means that NIKE turned over its entire inventory 7.06 times. As long as a company is not running out of stock and thereby foregoing sales, the higher this ratio is the more efficiently inventory is being managed. Inventory turnover for REEBOK and ADIDAS is 9.89 and 5.38 times respectively. This highlights that REEBOK turns over its inventory much faster than NIKE and the industry as a whole. The industry position is much lower at 3.70 and the market turns over its inventory faster than the industry with a figure of 7.60. Even though NIKE is less liquid than its closest competitor REEBOK this can be accounted for by NIKEs wider 23

and more extensive range of products in comparison to REEBOK and other competitors.

Asset Turnover: Measures how efficiently a company uses its assets to generate sales. NIKE uses its assets to generate sales better than ADIDAS, the industry as a whole and much better than the market. REEBOK however utilizes its assets to generate sales approximately 10% better than NIKE does.

Average Collection Period: Highlights how effective the companys credit, billing, and collection procedures are. This shows that it takes NIKE approximately 61.59 days to receive its cash after making a sale. REEBOK and the industry takes 6.61 and 8.64 days less to receive its cash after making a sale.The market takes 5.6 days more than the industry but takes 3.04 days less than NIKE to receive its cash.

Profitability Ratios for 2003:

Profitability Ratios: These ratios measure the efficiency with which a company uses its resources and the more efficient a company is the higher its profitability. A number of different ratios can be used to assess different aspects of profitability in relation to a companys performance.

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Gross Profit Margin: This calculation represents the amount of each dollar of revenue that results in Gross Profit. Approximately forty-one percent of NIKEs revenues result on gross profit, Reeboks figure is slightly less at 38.40% with ADIDAS, the industry and the market reaping higher results.

Net Profit Margin: This represents the amount of each dollar of revenue that results in Total Net Income. NIKE realizes a higher percentage of its revenue in total net income compared to its main competitors, the industry and the market, with a net profit margin of 7.55%. This turnaround between the positions realized with the gross profit margin suggests that NIKE manages its expenses better than the other groups with which it is compared.

Return on Total Assets: This measures the profit earned on the employment of assets and this shows that NIKE earned 11.02% on its total assets. This shows a better return when compared to its main competitors, the industry and a superior position over the market which only earned 1.30% on its assets. For every dollar of assets in NIKE the company generated approximately $0.11 in returns.

Return on Equity: Because shareholders benefit is the main goal, ROE is one of the most important measurers of performance. According to this calculation NIKE an 18.55% return on its shareholders investments, that is, for every dollar of shareholder investments NIKE was able to generate approximately $0.19. REEBOK was able to generate less with a $0.15 return, but ADIDAS was slightly higher at $0.20. In comparison the industry as a whole generated $0.12 and the market was even lower at $0.08.

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Return on Invested Capital: This represents the profits earned on the capital invested in the company and highlights a continuation of the trend realized by the previous figures. NIKE was able to generate approximately $0.17 for every $1 of capital invested in the company while, REEBOK was able to generate $0.11, ADIDAS $0.65, the industry $0.10 and the market approximately $0.40. As such, NIKE was able to generate or garner higher profits on the capital invested.

Risks: Risks are not inherently bad but left un-addressed can cause serious harm to a company. Like all companies NIKE faces risk and these risks can stem both internally and externally. From an internal standpoint the company itself is the focus and from an external standpoint the industry in which the company operates is the source. Under the umbrella of market risk lie foreign exchange risk, translation and interest rate risk, all of which Nike undoubtedly faces due to its international stature.

Bad Publicity and False Advertisements: Even though NIKE has implemented a new code of ethics in carrying out its business, there still remains some negative backlash from previous linkages to sweat shops and poor working conditions in factories of its foreign suppliers. Any resurgence in this sort of negativity can lead to a drop in consumer confidence and ultimately NIKEs stock price as experienced in the past. As with other companies in this position NIKE faces this threat but the company has attempted to rectify the situation and should continue to foster good relationships with its suppliers and continue checks of working conditions. Some organizations not in favor of NIKEs touted affiliations with poor working conditions continue to protest sporadically at NIKE store locations and also post

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websites that make false advertisements about the company and try to gain the support of consumers through these means. Despite this, the company is still experiencing growth and has taken a vigilant look at these groups.

Fashion Changes and changes in consumer tastes and preferences: NIKE needs to stay on top of changes in consumer tastes and preferences as evidenced by changes in fashion. NIKE faces the riskthat fashion trends may change that fail to incorporate NIKEs styles. To combat this NIKE, should position itself as a trendsetter and not a trend follower, as well as, be responsive to its consumers. Like all companies Pall Corporation faces risk and these risks can stem both internally and externally. From an internal standpoint the company itself is the focus and from an external standpoint the industry in which the company operates is the source. Under the umbrella of market risk lie foreign exchange risk, translation and interest rate risk, all of which Pall Corporation undoubtedly faces. NIKE is exposed to foreign currency fluctuation as well as translations risk as a result of international sales, production and funding activities. The company however realizes and accounts for this risk by hedging. According to the companys annual report, our foreign currency risk management objective is to reduce the variability of local cash flows as a result of exchange rate movements. The company uses forward exchange contracts and options to hedge certain anticipated but not yet firmly committed transactions as well certain firm commitments and the related receivables and payables, including third party or inter-company transactions.

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Investment Drivers: The economy as experiencing an upswing and this has been translated to an upswing in the athletic footwear, apparel and equipment segments of consumer products industry. Existing investment drivers include NIKEs strong brand recognition, differentiation of products, and high market share. These have translated in increased earnings for the past three quarters and much of our valuation of this company is based on expected future increases in earnings for the upcoming quarter and year. Unlike many companies that remain sluggish in a stagnant economy NIKE seems able to overcome these setbacks and still realize high earnings as well as pass on dividends to its shareholders. NIKE also adopts innovative ideas with the use of extensive research and development and technology. The Company continues to venture into new, but related areas by applying key management strategies in its approach. This approach, has proven to be successful in the past.

NIKE continuously searches for new opportunities for partnerships and alliances that not only build brand loyalty and support but also generate sales. These partnerships come in the form of relationships with buyers, suppliers as well as athletes, which have proven to drive consumer purchases. Nikes propriety knowledge pushes the company to the top of its industry while maintaining a competitive edge, quality products at affordable prices. Two key events also occur soon. The Olympics is an event that always pushes consumer desire to be more athletic but also patriotism. These increases in positive feelings will ultimately spill over into support for NIKE who sponsors an enormous amount of athletes and sports teams. Also, children, mainly teenagers accounted for the majority of sales recently, with this in mind along with back to school shopping coming up around August this can also result in increases

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sales as these teenagers demand the latest styles and products offered by NIKE. NIKE also benefits from its first mover status by always being innovative and pushing itself to take advantage of all opportunities that appear.

8.0 Key Working Capital Ratios The following, easily calculated, ratios are important measures of working capital

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utilization. Ratio Formulae Result Interpretation On average, you turn over the value of your entire stock every x days. You may need to Average Stock Stock * 365/ Turnover Cost of Goods (in days) Sold extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days. It take you on average x days to collect monies due to you. If your official credit Receivables Debtors * 365/ Ratio Sales (in days) days One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days. On average, you pay your suppliers every x Creditors * Payables 365/ Ratio Cost of Sales (in days) (or Purchases) simply defer paying your suppliers (without agreement) this will also increase - but your days get a discount this will decline. If you =x this will increase. If you pay earlier, say, to days. If you negotiate better credit terms =x why ? terms are 45 day and it takes you 65 days... days Obsolete stock, slow moving lines will =x effective stock management. break this down into product groups for

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reputation, the quality of service and any flexibility provided by your suppliers may suffer. Current Assets are assets that you can readily turn in to cash or will do so within 12 months in the course of business. Current Liabilities are amount you are due Total Current to pay within the coming 12 months. For Current Ratio Assets/ Total Current Liabilities $1.00 you owe. Less than 1 times e.g. 0.75 means that you could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands. (Total Current Assets =x Quick Ratio Inventory)/ times Total Current Liabilities (Inventory + Working Receivables Capital Payables)/ Ratio Sales Other working capital measures include the following: Sales capital needs are high relative to your sales. As % A high percentage means that working convert inventory into cash. account of the fact that it may take time to Similar to the Current Ratio but takes =x example, 1.5 times means that you should times be able to lay your hands on $1.50 for every

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Bad debts expressed as a percentage of sales. Cost of bank loans, lines of credit, invoice discounting etc. Debtor concentration - degree of dependency on a limited number of customers.

Once ratios have been established for your business, it is important to track them over time and to compare them with ratios for other comparable businesses or industry sectors.

9.0 Weaknesses in the management of working capital NIKE The key weakness of Nike, Inc. resides in our financial status. While we are not in financial trouble, we recognize that strengthening the financial well being of the company can only assist our company in the short- and long-run. We have many areas 32

challenging our continued success such as increasing our profitability and bettering our management of cash, accounts receivable, and debt. Nike suffered a blow to sales and revenue sparked by bad publicity in 1997 about our international labor policies. Since then, we have attempted to overcome the bad press by raising and enforcing minimum age requirements for employees in overseas factories. Nike attempted to regain its mid-90's momentum as shown in 1998s recovery, but the loss of Michael Jordan as our spokesman and the Asian financial crisis put a damper on gains that year. During 1999, the company made some changes in its products and deeply cut costs. These initiatives, in addition to the stabilization in the Asian financial picture, will combine to fuel the recovery that Nike expects in the near future. Nike's recent alliance with Fogdog Sports, an Internet sporting goods retailer, and our presence in the 2000 Sydney Olympic games will also aid in sales growth. Management of Cash - Weakness Our companys current ratio is 2.26, just slightly below the industry average of 2.28. The current ratio, while not a major strength, shows that Nike is inline with the industry concerning ease of converting assets to cash to cover short-term obligations. The quick ratio of 1.43 is above the industry average of 1.17. Being slightly above the industry indicates that we could sell less of our inventory than what other companies in the industry would have to sell to meet current obligations. Neither the current or quick ratio exceeds the industry average substantially enough to be considered a true strength. The fact that we are not leaders is ultimately a weakness. Management of Inventories - Strength Nikes inventory turnover of 7.32 exceeds the industry average of 4.34. Reducing inventory levels was a key initiative for Nike in fiscal year 1999. Due to our ability to quickly turnover inventory, Nike benefits from greater cash flows, reduced 33

storage costs, and less spoilage. In addition, quick turnover reduces Nikes inventory of out-of-style shoes and clothing. Company management stated, "We put a considerable amount of effort into improving product buying power patterns and as a result the composition and levels of inventory resulted in improved gross margins relative to a year ago." Inventory levels are being reduced due to increased sales in the company's own branch retail stores. Management of Accounts Receivable - Weakness Nike does permit sales in cash, cash equivalents and on credit. Our collection procedures have been lax compared to others in the industry resulting in slow payers and defaulting customers. Our collection period calculates to 63.17 days while the industry average is only 7.71 days. Steps are being taken to alleviate the problem of collecting accounts receivable in a more timely fashion. We have just recently changed our collection period from 90 days to 60 days as an attempt to encourage faster payment.

Management of Debt - Strength Our debt-to-total-assets ratio is 15.36%, which is far below the industry average of 40.69%. Nike is not as leveraged as competitors in the industry and uses less debt financing to finance firm operations. This can be interpreted as a strength as we do not rely as heavily as our competitors on debt financing. However, our highly liquid position gives us the ability to increase debt financing should we need or desire additional capital for company operations, research and development, or other changes as top management sees fit.

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Management of Debt - Weakness Despite the lower percentage of assets that are borrowed to finance Nike, our times interest earned ratio is weaker than the industry average. Our ratio of 19.43 reflects the number of times funds available from earnings can cover interest payments. The industry average of 21.88 indicates that the industry as a whole is in a slightly better position to cover its interest charges. Profitability - Weakness Nikes profitability is wavering in comparison to the industry average. Our profit margin of 5.14% to the industrys 5.69% is partially due to decreasing sales. Though net income did increase from 1998 to 1999, this was in part due to a reduction of our marketing budget by $100 million and terminating 7% of our employees. Our return on equity of 13.54% in relation to the industry mean of 18.77 indicates that Nike is realizing a lower percentage of earnings on stockholders investment. Nikes low ROE can be linked to the dropping stock price as a reflection of stockholder confidence in our company. 10. 0 Working Capital Cash Conversion Cycle of NIKE The working capital cycle involves the steps a business normally takes from the time it makes the first cash commitment toward providing a product or a service, to the point when it receives cash payment for its sales. The firm orders and receives the raw material, generating an account payable. It also hires additional employees to produce the goods and, since workers generally aren't paid the moment their work is performed, accrued wages are generated. Eventually NIKE, the product is sold which, if the product is purchased using credit, generates an account receivable. Firms will typically start the payment of their payables before collecting cash for receivables.

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This produces a net cash outflow. An individual cycle ends when the full cash amount for the sale is received. Each new transaction begins the cycle again. The cash conversion cycle (CCC) is defined as the length of time between the payment of the payables and the collection of receivables. During this cycle a NIKE business' funds are unavailable for other purposes. Cash has been paid for purchases but cash has not been collected from sales. Short-term financing may be needed to sustain business activities for this period. Since there is always a cost to such financing, a goal of any business should be to minimize the cash conversion cycle. To achieve this goal three terms must be clearly understood: 1 Inventory conversion period (ICP) refers to the length of time between pur-

chase of raw material, production of the goods or service, and the sale of the finished product. Payable deferral period (PDP) is the time between the purchase of raw material on credit and cash payments for the resulting accounts payable. 1 Receivable conversion period (RCP) is the time between the sale of the final

product on credit and cash receipts for the accounts receivable. The cash conversion cycle may be calculated by using the following formula:

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CCC = ICP + RCP - PDP For example, if it takes 35 days after orders are placed to receive and process the raw material into finished product, the ICP is 35 days. Assuming that 25 days after the arrival of raw material, the firm pays for them, the PDP is 25 days. Finally, if the firm receives cash payment for the sale of its product or service in 30 days, the RCP is 30 days. The CCC is thus 35+30-25, or 40 days. As mentioned before, the CCC represents the time in which working capital is "tied up" in covering production costs. If a business owner is able to shorten the CCC, the need for external financing and the resulting interest expense will be smaller, thus creating higher profits. For example, assume a firm borrows working capital with a 10 percent simple interest rate for 40 days. The effective interest rate would be 10.46 percent annually. Borrowing $100,000 for this period would cost $1,162.22. However, if the firm shortens the cash conversion cycle to 20 days, the interest expense at the effective rate of 10.50 percent would only be $583.33. The CCC may be shortened by reducing the ICP -- processing the raw material and producing the goods as quickly as possible; 1 1 reducing the RCP -- speeding up collections lengthening the payable conversion period -- slowing payments

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These three strategies are best utilized by the small business owner who is familiar with sound inventory, receivables and payables management techniques as well as the sources and costs of short-term financing. Figure 1 presents a few tips for shortening the CCC through faster cash collection and slower cash disbursement. We then examine techniques for managing the various components of current assets such as cash, marketable securities, accounts receivable and credit management, and inventories. Following this we'll examine the use of short-term liabilities as a means of financing operations. Short-term liabilities include: 1 1 1 1 accruals accounts payable short-term bank loans short-term credit secured with accounts receivable and inventories

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11.0 Conclusion Nike, Inc. is a company rooted in competition. From equipping athletes with the finest sports equipment in the world to continuously improving our own financial performance, Nike dominates its competitors. Phil Knight and Bill Bowerman probably could not have imagined in 1962 to what degree their $500 investments would yield in 2000. They did know that product quality and innovation would help athletes to achieve greater goals. Nike still operates on this philosophy today. It is one that has helped athletes and stakeholders alike to realize athletic and financial greatness. Despite a changing marketplace for athletic footwear, we will continue to expand our product lines and marketing reach to become a more powerful global brand. Part of Nike's strategy to revitalize the company was aimed at addressing their revenues which had been fixed for four years and their net income which had fallen to almost $220M. Additionally, Nike had been losing overall market share and the strong dollar had adversely affected revenue. To address those issues, management was planning to raise revenue by developing increased levels of athletic-shoe products in the mid-priced segment. Push its well performing apparel line, and control expenses.

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References Green at Work Magazine. Reuse-A-Shoe Program Going Strong. Nov/Dec 2003, from http://www.greenatworkmag.com/magazine/newslines.html. GreenBiz.com. Environmentally Responsible Business Travel, from http://www.greenbiz.com/toolbox/. GreenBiz.com. Nike Endorses Beyond-Compliance Aims. Nov. 9, 2000, from http://www.greenbiz.com/news/. The Irish Times. The eco industrial revolution. http://www.wbcsd.org/. MBDC.com. Just Doing It: Nikes Track to Ecologically Intelligent Products . Darcy Winslow, Dec. 2001, from http://www.mbdc.com/features/feature_dec2001.htm. NikeBiz.com. http://www.nike.com/nikebiz/. (see this website for CR reports)

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