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The case for following in fund manager Terry Smith’s footsteps

Star money manager Terry Smith recently purchased shares in Nike (NKE) for Fundsmith Equity (B41YBW7), the first time his flagship fund had invested in the world’s largest sportswear company.

This is a testament to the high-quality characteristics of the American company famed for its iconic swoosh logo, as the discerning Smith favours cash-generative firms that have historically made very strong returns on the money they invest in their business.

However, the shares have just reached an all-time high (3 June). So is now a good time to follow Smith’s lead and put money to work with the sneakers-to-soccer balls behemoth?

Shares’ research leads us to believe Nike will remain the world’s preferred sportswear brand for years to come given its scale.

Thanks to this scale, strong brand and digital savvy, Nike is well placed to navigate the pandemic’s challenges and even gain market share due to the relative struggles of rivals. This makes it a compelling long-term investment.

As well as its growth credentials, Nike will continue to return significant cash to shareholders too.

Jay Sole, the rather aptly-named UBS analyst, is similarly positive, insisting: ‘Nike is a long-term winner in our view. Nike’s investments in product innovation, supply chain speed and digital are about to unlock a multi-year period of above average growth once Covid-19 ends.’

While the coronavirus outbreak led to physical stores being shuttered around the globe, the crisis may actually provide a long-term tailwind for the sportswear industry as the disease has intensified the public focus on health and wellbeing.

Exercise has been one of the few freedoms many societies have had during lockdown. And the structural increase in people working from home is accelerating trends towards the casualisation of fashion and the growth in athleisure.


Nike, based in Beaverton, Oregon, is among the brands best-placed to profit from the changes Covid-19 is making to the way we live and work. The globe’s largest sportswear company, Nike generates about two thirds of its sales from footwear.

It has been famed for its innovative products ever since it introduced running shoes with pressurized air in their soles in the 1980s and frequently releases new styles of ‘must-have’ running shoes and sneakers.

Nike sells products worldwide and outsources its production to more than 400 factories in more than 40 countries. Products are sold through Nike-owned retail stores and digital platforms, and via major retail chains and independent distributors.

The sportswear designer and marketer is focused on six key categories; Running; Nike Basketball; the Jordan Brand; Football; Training; and Sportswear. Nike’s brands include Nike, Jordan and Converse (casual footwear).


Nike has all the hallmarks of a high-quality business. Revenue has more than doubled over the past 11 years, from $18.6bn in Nike’s 2008 financial year to $39.1bn in fiscal 2019, and has increased in 10 of the past 11 years.

The company has a strong track record of value creation as measured by high returns on capital employed and returns on invested capital, metrics that indicate the presence of a sustainable competitive advantage.

The NIKE brand was ranked the 16th most valuable brand in the world in 2019 by Interbrand, one of only two sportswear brands that made the top 100, and valued roughly three times that of the adidas brand by the way.

Nike generates premium pricing on many products, demonstrating its brand power, with its performance athletic shoes being the most expensive on the market.

In fact, Nike shoes retail for prices associated with luxury footwear brands. Financial data and research provider Morningstar notes that luxury retailer lists some styles of Nike sneakers at prices above $1,000 per pair.

Older and limited-edition Nike shoes regularly sell in resale markets for thousands of dollars per pair, attesting to the enduring power of the brand. Morningstar has a wide moat rating on Nike, based on its intangible brand asset, and believes Nike will ‘maintain premium pricing and generate economic profits for at least 20 years’.

Scale can allow for greater relative reinvestment back into a business in order to maintain a brand’s desirability and relevance, something which Nike is a master at.

It has forged partnerships with an enviable roster of the world’s leading athletes and sports teams and supports its brand through technical innovation which is used to improve the performance of its products.

So whilst the athleisure boom and growth in activewear has attracted new competition for Nike, rivals include Adidas, Puma, Under Armour and Lululemon, not to mention Skechers, VF Corp’s Vans brand and China’s Anta, Morningstar believes Nike has ‘proved over a long period that it can maintain share and pricing’.

And the company remains as relevant as ever. As UBS number cruncher Sole explains: ‘Athleisure is still about comfortable and casual attire, but is moving away from “performance” to more “streetwear” styles. Fortunately for Nike, sneakers are at the centre of streetwear culture and consumers accept it as a streetwear brand.’


Nike also invests to support its brand through its well-developed digital strategy, which includes and its ecosystem of training apps known as NikePlus, which do things such as track runs or provide users with a variety of workouts that can be done at home.

Results for the third quarter ended 29 February (24 March) showed 5% revenue growth to $10.1bn, driven by 13% growth in NIKE Direct with digital growth of 36%. Digital sales in Greater China increased more than 30%, mitigating the impact of temporary Covid-19-related store closures in the Middle Kingdom.

Tellingly, the appointment of former eBay boss John Donahoe, a Nike outsider with a Silicon Valley background, as chief executive at the start of 2020, signalled the importance of technology and e-commerce to Nike’s future.

The shuttering of physical retail stores around the globe presents a challenge, but also a huge opportunity for Nike, which may be able to make up for weakness in some areas of retail through direct-to-consumer sales and sales through succesful retailers, among them JD Sports Fashion (JD.).

In 2017, Nike announced a consumer-focused realignment. It is investing in its direct-to-consumer network while reducing the number of retail partners that carry its product.

Nike is reducing its exposure to undifferentiated retailers, while increasing distribution through a select band including Nordstrom, Dick’s Sporting Goods and Foot Locker, thereby bringing the Nike brand closer to consumers and allowing Nike to control the brand message.

This consumer plan is spearheaded by its ‘Triple Double’ strategy to double innovation, speed, and direct connections to consumers.

Triple Double includes cutting product creation times in half, increasing mobile app memberships and improving the selection of key franchises while reducing its styles by 25%. ‘We think these strategies will allow Nike to hold share and pricing,’ note Morningstar’s analyst team.

It also believes the $161.9bn cap has a great opportunity for growth in emerging markets, notably China, where Nike has experienced double-digit growth in each of the last four financial years.

Investment in sports by the Chinese government should benefit Nike, which offers a compelling portfolio play on the burgeoning ranks of emerging market consumers in China and India and elsewhere that are moving into the middle class and gaining broadband access to boot.

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