Nike: I Like What I’m Seeing

There are some powerful takeaways from Nike’s decision to reduce up to 4% of its workforce – especially for students of Nike history. There are puts and takes, but in the end I like what I see.

1. The timing is rather odd by industry standards. The quarter ends in 3 weeks and there’s no major company event happening imminently. I guess this is what happens when a company is managed proactively instead of waiting until the last minute to react to what the market environment throws its way. But what perplexes me is that the reduction will be done by the end of May. So why announce it now? If there is one thing that drives Nike above all else is the fact that people that work there genuinely love to show up every day. Leaving a dark cloud above the campus in Beaverton for several months can’t help productivity.

2. Speaking of which, Nike has the second-highest employee productivity out of any company in, or near, this industry. It generates $630,000 per employee in revenue, right behind K-Swiss at $633k. With this announced layoff, Nike will need to take its employee productivity just past $700,000 in order to get to a ‘high single digit’ revenue growth goal next year (or up to $656,000 to stand still at current rev run-rate). Productivity is up from about $525k three years ago – so Nike is no stranger to growing in efficiency. But let’s keep this hurdle in mind given the cloud of uncertainty for employees.

3. History plays an important role here as well. Nike almost never cuts jobs. Here’s Nike’s layoff history.

a. 1987: 269 cut

b. 1993: 459 cut

c. 1998: 450 cut. In this cut, there were many rumors that Nike was going to cut roughly 1,500 jobs but within a month of the job cut announcement, Nike only cut 450 (4% of US work force, half of which was in Beaverton, OR).

d. 2000: Warehouse closure that cost 150 jobs and relocated 25.

4. Violating the sanctity of Nike employment is one of the things that led to Bill Perez’ ouster as CEO after just one year at the helm back in 2006. His statements about ‘Nike has too many employees for company that doesn’t even make anything’ did not fly at the company. He wanted to let go of employees and cut costs (among other things) without first really understanding the business.

5. This is a massive move for Mark Parker (CEO). Having spent nearly every moment of his adult working life at Nike – and for so many on Wall Street labeling him as ‘a product design guy’ – for this to come to fruition there could be little doubt as to his allegiance to shareholders. I like that. Make no mistake – Parker is no Perez. Cuts under his regime will actually be carefully planned and will not take away from brand heat. Bill would have hurt the brand.

6. A 4% cut comes out to about $0.21 per share, or 6% EPS accretion – all else equal. Not bad.

7. Does this get me excited about owning NKE?

a. Near-term, no. There has to have been a meaningful slowdown in business that prompted this move. For the first time in my history analyzing Nike, I could not get to the Street’s numbers even before this announcement. Now that’s even more pronounced. Sales slowing, GM getting tougher, with any earnings growth coming from SG&A and better FX hedges. Not pretty.

b. Over a longer duration, however, the answer is yes. Stellar balance sheet, great brand momentum, investing to take share, making the right business decisions, and trading at trough cash flow and earnings multiples. Tough to find something better in this market for a long-term investor.

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