What do Apple, Starbucks, Disney, and McDonald's all have in common? Besides being massive corporations, they all possess widely recognized consumer brands. This has been a big contributor to their long-term success and relevance.
The world's leading apparel and footwear business, Nike (NKE 0.13%), undoubtedly belongs in that list of the most powerful brands out there. But is the company's brand really its most important competitive advantage, and therefore, the key to all its success? Let's take a closer look.
Sizing up the business and the brand
Warren Buffett, arguably the greatest investor ever, looks for a company he's interested in to have an economic moat, or something that allows it to fundamentally outperform rivals, especially when it comes to revenue and profits. In Nike's case, it's clear that its moat stems from having one critical competitive advantage, its brand.
According to Piper Sandler's fall 2022 Taking Stock With Teens survey, Nike was ranked as the top footwear brand (with a 60% share) and top clothing brand (31% share) among the 14,500 teens surveyed that had an average age of just under 16 years old. What's more, according to Kantar, a consultancy, Nike had the 49th strongest brand in the world in 2022.
The company's apparel and footwear products aren't necessarily of better quality than what rivals offer. In fact, customers have numerous options when deciding what to buy. Adidas, Under Armour, and Lululemon Athletica immediately come to mind. And then there are up-and-coming businesses like Gymshark, Athletic Propulsion Labs, and ASRV. All these companies provide high-quality clothing or shoes.
However, what has helped Nike stand out in a ridiculously crowded industry is the fact that it has developed a remarkable brand presence over decades that resonates with consumers and allows the business to generate wide margins and strong profitability. Over the past decade (between second-quarter 2013 and second-quarter 2023), Nike's annual gross margin and operating margin have averaged 44.7% and 12.8%, respectively. During the same time, revenue is up 122%, with diluted earnings per share up 193%.
NYSE: NKE
Key Data Points
It's strikingly clear that Nike has pricing power, an important indicator of the brand's strength. A quick look on finishline.com shows that 451 of the 992 men's shoes above $100 are Nikes or Jordans. Additionally, some Nike sneakers have become collector's items, going for thousands of dollars in the resale market.
The number of high-profile endorsement deals it engages in boosts Nike's presence with consumers. For example, the company has contracts in place with Cristiano Ronaldo and LeBron James, two of the most popular athletes on the planet. Combined, they have 678 million Instagram followers today. This provides Nike with another channel with which to gain visibility and remain top of mind.
We can't forget about the company's burgeoning digital ecosystem. According to the management team, there are 160 million active members across Nike's suite of digital apps, which include Nike Training Club, Nike Run Club, and the SNKRS app. Continuing to focus on and invest in bolstering the digital presence has some key benefits. It not only allows Nike to meet its most loyal customers where they are in an increasingly online world, it also helps the business develop deep connections with them, while at the same time driving e-commerce revenue.
It's incredibly obvious that Nike's success throughout the decades has come as a direct result of just how strong its brand is. For shareholders and prospective investors, a deep understanding of the business can't be complete without understanding this important fact. Furthermore, there's a high likelihood that Nike will remain the preferred athletic-wear enterprise for a very long time. This durability and staying power are attractive investment characteristics for any long-term shareholder.
