Apple, Walt Disney, Starbucks, McDonald's, and Coca-Cola are probably some of the businesses that immediately come to mind when thinking about the world's most recognizable consumer-facing brands. These companies can credit their long histories of success to this key trait.
I don't think anyone would disagree that the global leader in footwear and apparel, Nike (NKE 0.19%), belongs in that category. It has dominated its industry because of how well the brand resonates with consumers, particularly versus competitors.
However, this single attribute could also be a reason for caution. Let's take a closer look at Nike and see why.
Driving lasting success
Over the past decade, Nike has been able to grow revenue and earnings thanks to its elevated standing among consumers. The company commands a huge share of the worldwide market for athletic clothing and shoes. And it has developed top-notch expertise with its marketing initiatives, doing a wonderful job at storytelling and exuding a winning mentality, while paying up for high-profile athlete endorsements.
In Piper Sandler's fall 2023 Taking Stock With Teens survey, Nike was the most popular clothing brand and the most popular footwear brand. This was among survey respondents who were under 16 years old on, average, a valuable demographic that has the potential to produce lifelong customers.
And according to Interbrand, Nike's brand is estimated to be worth $54 billion, making it the ninth most valuable in the world. Without a doubt, Nike's brand presence is the single most influential factor in its success. It's what encourages consumers to pay premium prices for what are largely commoditized products.
The biggest bear case for Nike investors, then, is the possibility that the brand's reputation diminishes for whatever reason. If the leadership team isn't a great steward of the brand, not taking the proper care in managing this intangible asset, sales could fall, and profitability could take a hit. And this would result in Nike's economic moat weakening.
Warren Buffett, who many consider the best investor ever, mentioned many years ago during a shareholder meeting why Berkshire Hathaway never purchased Nike shares. He said that he simply didn't understand the likelihood of the durability of Nike's competitive position "over a 10- or 20-year period."
Present and future
Some troubles are brewing for Nike right now. Revenue in the most recent quarter (the second quarter of fiscal 2024, ended Nov. 30, 2023), was up by just 1% year over year. And executives forecast sales to rise by a similar amount for the entirety of the current fiscal year. This is during a time when budding rival Lululemon Athletica reported 19% revenue growth in its most recent fiscal quarter. Furthermore, major competitors in China recently posted double-digit top-line gains.
To be fair, the pandemic and ensuing supply chain issues made it difficult to properly manage inventory levels. And to make things more challenging, Nike must constantly balance its own selling channels, like company-owned stores and the website, in relation to wholesale accounts, all in the name of protecting the brand's image. This isn't easy. And there could be times of heightened promotional activity and markdowns, which is what has happened recently.
But despite Nike's recent struggles, I think the business deserves the benefit of the doubt. It has been relevant for decades. Not only that, but it has maintained its industry leadership position in a market that must constantly navigate changes in consumer tastes and preferences. This isn't an easy task. This at least gives me confidence in Nike's staying power over the next decade and beyond.
Those investors who believe the company can get past its recent issues and return to strong revenue and earnings growth might want to take a closer look at the stock today.
