Nike (NKE -0.34%) is a business that needs no introduction. The popular sportswear enterprise generated $50.6 billion in sales and $5.5 billion in net income in the trailing 12-month period, giving it the largest market share globally in the cutthroat industry. The stock has done well, too, outperforming the S&P 500 over the last five and 10 years.
But what makes this business stand out? Shareholders of this top apparel stock are probably familiar with what makes Nike special. It benefits from something called an economic moat, or a competitive advantage that allows it to outperform rivals. For Nike, this is the company's incredibly powerful brand.
Does the secret to Nike's success make the stock a no-brainer buy?
Built over many decades
Let's face it: Clothing and shoes are essentially commodities. Sure, some businesses sell products that are of better quality and might result in better performance, but generally, they all serve the same purpose. But the reason Nike has long been able to generate outsized profits -- such as its gross margin of 43.3% in its fiscal 2023 third quarter, which ended Feb. 28 -- is because of what its famous Swoosh logo represents to customers. People are clearly willing to pay a premium to be able to identify with the Nike brand.
Make no mistake, this took decades to develop. Just think of such luxury European fashion houses as Hermes, Gucci, and Chanel. All were founded more than 100 years ago, and through a constant focus on maintaining their image, they are still relevant today. Founded in 1964, Nike also took a while to get to where it is today when it comes to resonating with consumers. In fact, four decades ago, rivals Adidas and Reebok were on par with Nike.
However, I think there are a few critical factors that we can point to that helped to catapult the brand since then. Nike is well known for its effective marketing campaigns. And these have helped associate the brand with inspiration, a winning attitude, overcoming the odds, and striving to be the best version of one's self.
Then there are the high-profile athlete endorsements. Nike's collaboration with Michael Jordan, which started in 1984, is widely viewed as the single most important strategic move that pushed the company to new heights, as he became one of the greatest basketball players of all time and even developed his own thriving in-house brand. Today, LeBron James and Cristiano Ronaldo are just two of the world-famous athletes that endorse Nike. Entertainers Drake and Kevin Hart also have deals in place with the business.
More recently, Nike has focused on investing in its technological capabilities to improve its product innovation and drive better connections with consumers. Digital sales accounted for 27% of revenue in the latest quarter. And in late 2021, it was estimated that Nike had more than 300 million members across its various apps.
Of course, Nike must also make sneakers and apparel that are highly sought after by customers. This hasn't been much of an issue. Between fiscal 2012 and fiscal 2022, its revenue increased at a compound annual rate of 6.8%. And over the next five fiscal years, Wall Street analysts expect sales to rise by 8.2% per year.
The investor takeaway for Nike stock
Taken together, the initiatives that have bolstered Nike's brand over the years have certainly contributed to the company's success -- providing it with pricing power and keeping Nike relevant. This has given the business tremendous durability, an attribute that shareholders should really appreciate.
While it is true that the company has been dealing with some issues recently, most notably its elevated inventory levels and the delayed economic recovery in China, I think these near-term challenges will prove to be temporary. Nike's brand power will allow it to successfully navigate these headwinds and continue finding ways to grow over the long term. And that might be enough of a reason for investors to want to own the stock.
