Sustainability Financial Analysis: Nike Inc. vs The Jones Group Inc - Research Paper Example

? Sustainability Financial Analysis Project Nike Inc. vs The Jones Group Inc. DOW Jones Sustainability Index The Down Jones Sustainability Index (DJSI) was launched in 1999 as the the first global index evaluating the financial performance of the leading sustainability-driven companies worldwide (DJSI Annual Review, p. 3). The indices are produced as a result of cooperation of S&P Dow Jones and RobecoSAM indices (DJSI, n.p.). In order to be included in the DJSI, the companies must meet economic, social and environmental criteria (DJSI Annual Review, p. 3). The indices apply a broad variety of country, regional and global DJSI benchmarks and thus, serve as an effective tool for investors focused on corporate sustainability oriented businesses (DJSI Annual Review, p. 3). While assessing and selecting companies for inclusion to the DJSI, various corporate economic, environmental and social performance factors are taken into consideration. These factors include, but are not limited to: corporate governance, brand management, risk and crisis management, climate change mitigation, supply chain management, strategy for emerging markets, environmental policy, water related risks, raw material sourcing, human capital development, social reporting (DJSI Annual Review, p. 50). All these and other factors specific to each industry belonging to the three pillars mentioned above are also known as a concept of a triple bottom line. Nike Inc. was chosen for analysis. The company is included in the DOW Jones Sustainability United States Index and belongs to the consumer goods industry (category: Footwear). The non-DJSI company that will be analyzed and compared to Nike Inc is the Jones Group Inc. Industry Analysis In order to analyze the industry of footwear market in the United States there was applied Porter’s Five Forces Analysis, where footwear retailers are viewed as players, individual consumers are viewed as the key buyers and footwear manufacturers as the suppliers (Footwear Industry Profile: United States 12). Buyer power. The buyer power of individual consumers with respect to the footwear market is reduced as a result of high sales volumes. As footwear market is a highly differentiated market due to the fashion factors and various functional footwear categories, consumers have a greater choice and availability of suitable footwear products (Footwear Industry Profile: United States 13). Supplier power. Many western countries domestically manufacturing the footwear can’t effectively compete within the mainstream market and much of the footwear offered within this market is outsourced to low-cost manufacturing regions, particularly South-East Asia (Footwear Industry Profile: United States 14). However, many western suppliers have increased their supplier power through differentiation techniques, such as high-end designer footwear and specialist foortwear for specific needs (Footwear Industry Profile: United States 14). New entrants. The threat of new entrants to the foortwear retail market is considered to be strong, mainly due to relatively low fixed costs for retail operations (Footwear Industry Profile: United States 15). Threat of substitutes. Overall, the threat of substitutes to the market is weak as footwear is a basic necessity (Footwear Industry Profile: United States 16). Degree of rivalry. There is a high degree of rivalry among large retail groups, which dominate the market (Footwear Industry Profile: United States 17). However, there are also many smaller retailers that co-exist within the market. Footwear market is broadly diversified by retailers, varying from large supermarket chains to apparel retailers and dedicated shoe retailers (Footwear Industry Profile: United States 17). Company Business Strategy Analysis As Don Blair, CFO in of NIKE Inc. claimed, “Innovation is at the heart of NIKE, Inc.'s business growth strategy” (NIKE, Inc. CFO, Don Blair, on Sustainability n.p.). At NIKE, Inc., a sustainability strategy is an integral part of its business strategy. Sustainability is perceived as an engine for business growth. NIKE, Inc. has successfully implemented and continues to introduce various sustainability measures. Some of the initiatives focused on sustainability promotion were: jerseys, made from recycled plastic bottles for the 2010 World Cup, employing fundamentally different manufacturing processes that reduce waste, launching the Nike Materials Sustainability Index for designers to ease the process of creating products with lower environmental impacts, opening of the Sustainable Business and Innovation Lab where are explored new manufacturing processes and materials (FY10-11 Corporate Responsibility Report 12). Business strategy of the Jones Group Inc. is built on the following five pillars: revitalizing of the core brands, international expansion, investing in emerging brands, operational excellence and improvements of direct-to-consumer performance (Annual Report 2012, 3). The business strategy is based on offering our products in a variety of brands, price points and channels. As part of this strategy the Jones Group Inc. licenses the names and brands of: Lipsy, Givenchy, Rachel Roy, Rafe Brian Atwood, and Jessica Simpson (Annual Report 2012, 28). Below is presented brief summary of SWOT Analysis of two companies: SWOT: Nike Inc. (Annual Report 2012) The Jones Group (Annual Report 2012) Strengths -globally expanded business with a strong brand; -customers’ loyalty to the brand -strong research and development -no dependency on significant customer -the largest athletic footwear and apparel in the world -technical innovation and high quality products -powerful portfolio of brands; -operates in diversified segments; Weaknesses -price sensitive products -high debt level Opportunities -growing middle classes -global expansion opportunities Threats - intense competition - dependence on seasonality -no long-term arrangements with any of suppliers -changing consumer’s preferences -the loss of or a significant reduction of business with any of the largest customers - increase of competition -reliance on independent manufacturers could cause delay and damage the reputation and customer relationships; -Fluctuations in the price, availability and quality of raw materials -Loss of license agreement Stock price performance On the graph presented below is reflected stock performance of Nike Inc., and Jones Group Inc. compared with the Dow Jones Index and S&P 500. NIKE Inc. was recognized by the DJSI in 2007, and this fact seems to have a very positive impact on Nike’s stock performance which shows steady and continuous growth within the last 5 year-period. Nike was performing very well during this period, outperforming by its results industry level. The Jones Group Inc. shows negative tendency in its stock performance, underperforming the industry level. Both companies have shown significant decline in 2009, which is explained by the global financial crisis. While Nike Inc. has managed to improve and continues to strengthen its position demonstrating steady growth of its share prices, the Jones Group Inc. has failed to recover its position. The most notable peaks of Nike are reflected at the beginning of 2012 and since the beginning of 2013. Peak at the beginning of 2012 could be explained by two key events: Nike completed sale of Umbro to Iconix, and reported its fiscal results (Nike Inc. website). The most notable recovery peak of the Jones Group was during the period 2010-2011, and since that period some decline have taken place, while the whole industry was growing. Significant/Critical Accounting Policies Critical Accounting Policies or Significant Accounting Policies are the disclosures that “provide more information about how the uncertainties inherent in estimates may affect a company’s financial statements” (Holtzman, n.p.). Policy decisions about depreciation, revenue recognition, inventory costing methods, and some other performance topics can have a significant impact on a company’s financial statements and interpretation of a company’s results and financial position by users. For this purpose, the most important Critical Accounting Policies presented in the annual reports of the Jones Group Inc. and Nike Inc. are summarized and compared below. Nike Inc. reported Significant Accounting Policies for (Nike Inc. Annual Report 2012, 47-48): Revenue recognition: description in what order wholesale revenues, retail store revenues are recognized as revenue, and provisions of sales discounts, returns and miscellaneous claims from customers are recorded as reductions to revenue; Inventory Valuation: inventories are stated at lower of cost or market and valued on an average cost basis; Depreciation methods: depreciation and amortization of assets used in product distribution, manufacturing, warehousing are recorded as cost of sales; depreciation of property, plant and equipment is recorded at cost; and amortization and depreciation of other assets is recorded as selling and administrative expenses; Short-term investments: these are explained as highly liquid investments, consisting of U.S. agency, U.S. treasury, commercial paper and corporate debt securities; Some others include: software development cost, demand creation expense, impairment of long-lived asset, intangible assets and goodwill, cash and cash equivalents, operating leases, fair value measurements, accounting for derivative and hedging activities, stock-based compensation, earnings per share. The Jones Group reported Significant Accounting Policies for (Annual Report 2012, 37-39): The collectability of accounts receivable – affects all of the Jones Group Inc. segments; The recovery value of obsolete or overstocked inventory - affects all of the Jones Group Inc. segments; here the company’s accountants estimate the amount of goods that the company will not be able to sell at normal charge and write down its value to the recovery value of realized through off-price channels. Here is a significant risk that results of operations can be materially affected; The fair values of goodwill - affect domestic wholesale sportswear, international retail segments and international wholesale; Intangible assets with indefinite lives – affect company’s domestic foot and accessories, international retail, international wholesale, licensing; The assumptions used in the impairment testing of our goodwill and trademarks While both companies have reported some common critical accounting policies for accounts receivable, inventory, fair values of goodwill, etc., Nike Inc. annual report revealed more important Significant Accounting Policies, such as revenue recognition and amortization and depreciation. In the Jones Group Inc. these Significant Accounting Policies are not discussed in their annual report for 2012 even though these policies could have material impact on its financial statements. Sustainability measures undertaken by Nike Inc. were not covered as a particular subject in the Significant Accounting Policies section. Ratio Analysis In order to have a better understanding of the financial performance and investment attractiveness of each company there were calculated and analyzed some of the key financial ratios. These ratios are summarized in the table below and compared with the industry indicators. For calculating some of the key ratios there was used statistics of the current stock price of both Nike Inc. and the Jones Group Inc. as of 16th of October, 2013 (Finance Yahoo). Profit Margin Nike’s profit margin is very high, relative to the industrial companies in general (Fridson Alvarez, 281) , and much higher compared to its competitor the Jones Group Inc., profit margin of which is negative. Therefore, it is possible to conclude that Nike Inc. is a profitable company within the textile industry, with a net income of $0.9 for each dollar of sales. The Jones Group, on the contrary, has a negative profit margin, which serves as a warning sign to the potential investors. Debt-to-Equity Ratio Debt/Equity ratio measures a company’s financial leverage in order to indicate what proportion of debt and equity the company’s management is using to finance its assets (Investopedia.com). Based on the calculations presented above, Nike Inc. has relative low debt to equity ratio, which is a positive sign indicating that the company is not using a lot of outside financing for its operations. However, the Jones Group Inc. has a very high debt to equity ratio, which is almost twice higher than the industry level. This fact should be a warning sign to the potential investors as the company is using a lot of debt, and the cost of this debt financing may outweigh the return that the company generates on the debt (Investopedia.com). The risk of bankruptcy is relatively high if rely on the Debt-to-Equity ratio. Return on Equity (ROE) Return on Equity ratio allows measuring a firm’s productivity of equity and therefore allows investors to evaluate its ability to raise funds and financial flexibility (Fridson Alvarez, 288). Nike Inc. shows a very high ROE ratio, which is even higher than then industry level, while ROE ratio of the Jones Group shows negative result. Based on these results, it is possible to conclude that the Jones Group Inc. will have much greater difficulty in attracting a form of capital and therefore less flexible financially (Fridson Alvarez, 288). Nike Inc., on the contrary, demonstrates a very positive tendency of high productivity on equity, which is even higher than in the industry. Current Ratio Current ratio allows investors to compare the claims against the company that will become payable (current liabilities) during the current operating cycle with the assets that either will be converted to cash or are already are in the form of cash (current assets) during the current operating cycle (Fridson Alvarez, 268). The current ratio of Nike Inc. is a bit higher than the current ratio of the Jones Group and therefore, it is possible to conclude that Nike Inc. is more capable of paying its obligations. Dividend Yield Dividend Yield as a financial ratio indicates how much a company pays out in dividends annually relative to its price of a share; thus, potential investors can measure how much cash flow they will get for each dollar they invest in an equity position (Investopedia.com). Dividend yield of the Jones Group is almost on the same level as the industry, which is relative positive sign. However, Nike Inc. shows higher dividend yield ratio, enabling its shareholders make more cash out of their shares. Thus, an investor would more likely prefer Nike’s stock over that of the Jones Group Inc. Payout Ratio Payout ratio enables to calculate the amount of earnings paid out in dividends to shareholders and also to determine what companies are doing with their earnings (Investopedia.com). Payout ratio of Nike Inc. and the Jones Group Inc. are almost on the same level, 28% and 29% respectively. Financial ratio analysis of two companies has shown that Nike Inc. is a more profitable company within the textile industry, with relative low debt to equity ratio, comparing to the Jones Group Inc and higher dividend yield. Nike Inc. has a very high ROE ratio, which is even higher than then industry level, while ROE ratio of the Jones Group is negative. Investment Decision Based on the background information and financial statement analysis, I would allocate $100,000 to Nike Inc. stocks and $0, 000 to the Jones Group Inc. This decision has come naturally in result of the analyses I have conducted, mainly: SWOT Analysis, Stock price performance comparative analysis, analysis of significant accounting policies, and financial ratio analysis. SWOT analysis has shown that both companies have certain set of the strengths and weaknesses, however, Nike Inc. is viewed as a more stable business with a strong reputation and brand equity, comparing to the Jones Group Inc. The fact that the Jones Group Inc business is heavily dependent on its largest customers, the loss of those imposes too large risks for a potential investor. While Nike Inc. as a business also has some significant threats, company seems to be a more confident investment due to its business strategy based on continuous innovation. Stock price performance analysis was supported by a chart which enabled visual evaluation of the companies’ performances. Nike’s stock performance has shown steady and continuous growth within the last 5 year-period. Nike was performing very well during this period, outperforming by its results industry level. The Jones Group Inc. has shown negative tendency in its stock performance, underperforming the industry level. In terms of reviewing these two companies as potential investments, my decision would be to buy shares of the Nike Inc. because of its positive historical stock performance and active growth. The fact that Nike Inc. stocks did not fall below the industry line during the global financial crisis minimizes investment risks for the future. Financial ratio analysis also has enabled me as a potential investor to evaluate financial positions of two companies and therefore, has impacted on my investment decision to Nike Inc. The key factors that influenced my decision where the following: Nike Inc. as a profitable company within the textile industry had a net income of $0.9 for each dollar of sales, while The Jones Group, on the contrary, had a negative profit margin; Nike Inc. had relative low debt to equity ratio, while the Jones Group Inc. had a very high debt to equity ratio; Nike Inc. had a very high ROE ratio, which was even higher than then industry level, while ROE ratio of the Jones Group has shown negative result; Nike with a higher current ratio appeared to be more capable of paying its obligations; Nike Inc. has shown higher dividend yield ratio, enabling me as a potential shareholder to make more cash out of my shares. Despite all of the above mentioned arguments explaining my preference to invest the whole sum to Nike Inc., I also was guided by the fact that Nike Inc. was a business, oriented on corporate sustainability. Nike Inc. is socially responsible investing company, which is using environmental, social and corporate governance criteria in order to form positive social impact and generate long-term financial returns (Baker, Kent, & Nofsinger, 17). While sustainability requires significant investment, also known as green investment, there are some obvious benefits that enable the company to increase its value in a medium- or/and long-term perspective. Thus, for example, Nike Inc. is more likely to benefit from high employee morale and productivity without bearing the full direct costs (Baker, Kent, & Nofsinger, 422). Positive impact will also be notable in customers’ relationships, efficient use of resources, and improved relationships with various regulatory bodies. All of the sustainable initiatives reported by Nike Inc. in its Sustainability report demonstrate positive impact on social and environmental spheres. Some of the key initiatives include: delivering carbon reductions across the value chain, transformation of working relationships with contracts factories to empower the employees, minimizing of the impact of product ingredients throughout its lifecycles, slashing water use, waste reduction, providing support to communities (FY10-11 Corporate Responsibility Report 18-19). In addition to these strategic sustainable initiatives that are already partially implemented, Nike Inc. also sets its sustainable goals for the future. These include: development and prototyping of an Index to drive and measure level of sustainability integration into processes and innovation portfolios; designing products that combine excellent performance and lower environmental impact across Nike Inc. business lines, including footwear, apparel, equipment, and others; investment in employee development (FY10-11 Corporate Responsibility Report 19). Taking into consideration these results and stock performance of Nike Inc. during the period of 2007-2013 it is possible to assume that sustainable growth and innovation targeted by Nike Inc. results in positive economic results. Thus, being an investor focused on sustainability, I have decided to limit my investment decision to securities of the company whose activities and products are socially and environmentally acceptable (Bollen 2007 cited by Baker, Kent, & Nofsinger, 17). Works Cited: Baker, H. Kent, and John R. Nofsinger. Socially Responsible Finance and Investing: Financial Institutions, Corporations, Investors, and Activists. Hoboken, NJ: Wiley, 2012:17,422-432. Print. "Debt/Equity Ratio." Investopedia. N.p., n.d. Web. 19 Oct. 2013. Available at: http://www.investopedia.com/terms/d/debtequityratio.asp “DJSI Annual Review”. Annual Review 2013 (2013): 3-50. Available at: http://www.sustainability-indices.com/images/DJSI_Review_Presentation_2013_tcm1071-372104.pdf "Dividend Yield." Investopedia. N.p., n.d. Web. 19 Oct. 2013.Available at: http://www.investopedia.com/terms/d/dividendyield.asp "Dow Jones Sustainability Indices (DJSI)." Sustainability Indexes - Dow Jones Sustainability Indexes. N.p., n.d. Web. 19 Oct. 2013.n.p. Available at: http://www.sustainability-indices.com/about-us/dow-jones-sustainability-indexes.jsp Finance Yahoo, Stock performance comparison. Web. 19 Oct. 2013.n.p. Available at http://finance.yahoo.com/echarts?s=NKE+Interactive#symbol=nke;range=20051205,20130930;compare=jny+^dji+^gspc;indicator=;charttype=area;crosshair=on;ohlcvalues=1;logscale=off;source=undefined; Fridson, Martin S., and Fernando Alvarez. Financial Statement Analysis : A Practitioner's Guide. New York: John Wiley & Sons, 2002. eBook Collection (EBSCOhost). Web. 17 Oct. 2013. "Footwear Industry Profile: United States." Footwear Industry Profile: United States (2013): 1-34. Small Business Reference Center. Web. 12 Oct. 2013. FY10-11 Corporate Responsibility Report. Nike Inc. Available at: http://www.nikeresponsibility.com/report/files/report/NIKE_SUSTAINABLE_BUSINESS_REPORT__FY10-11_FINAL.pdf Holtzman, Mark P. "Reporting Critical Accounting Policies." The CPA Journal (2007): n. pag. Web. 18 Oct. 2013. Avaialble at http://www.nysscpa.org/cpajournal/2007/1207/essentials/p42.htm NIKE, Inc. "Overview." 2.1.1. N.p., n.d. Web. 19 Oct. 2013..Available at: http://www.nikebiz.com/crreport/content/strategy/2-1-1-corporate-responsibility-strategy-overview.php?cat=cr-strategy "Press Release." NIKE, Inc. -. N.p., n.d. Web. 19 Oct. 2013.Available at: http://nikeinc.com/press-release "Payout Ratio." Investopedia. N.p., n.d. Web. 19 Oct. 2013.Available at: http://www.investopedia.com/terms/p/payoutratio.asp "Textile - Apparel Footwear & Accessories Overview: Industry Center - Yahoo Finance." Textile - Apparel Footwear & Accessories Overview: Industry Center - Yahoo Finance. N.p., n.d. Web. 19 Oct. 2013. Available at: http://biz.yahoo.com/ic/321.html Appendix Figure 1. Forces driving competition in the footwear market in the United States, 2012 Summary of Significant Accounting Policies – Nike Inc. (Excerpt from the Annual Report 2012, pp. 47-48 Summary of Critical Accounting Policies – The Jones Group Inc. (Excerpt from the Annual Report 2012, pp. 37-39). Table 1. Financial Statements – the Jones Group Inc. (excerpts from the 2012 Annual Report, 34-35). Table 2. Nike – Financial Data (Excerpts from the Annual Report 2012, 42-43). Ratio’s calculation (Excel Sheet copy) Read More