Stock Deep Dive: Nike (NKE) Analysis - Part 3

Economic Moat

Obviously NKE enjoys the economic moat - their products, although no much difference from its competitors in cost, are pricier, and have less discount, but they sell better.

Three pillars of NIKE's economic moat:

1) Innovation: this looks like the blood of NKE. Not much needs to be explained here, you get the idea by just looking at the awesome product line history, from the Bowerman's waffle sole about 30 years ago, to the famed "Air" cushioning system to the latest Nike+.

2) Fashion: For the past several years, the sportswear design started to display more and more fashion awareness. But you can perceive the clear differences between competing companies in how they adopt this fashion factor. Visit one Adidas store and one Nike store, you may easily come to the conclusion that Adidas is a more 'traditional' company than NKE. This goes beyond the variances in design ideas, more or less, it reflects the differences in the management philosophy. For me, I read it as Nike's superiority. For most people, sports and fashion share one fundamental aspect: to feel good about yourself. So moving around, breaking a sweat, feeling good inside and at the same time, dressing well to feel good outside, this caters to almost everybody's desire. Nike's capability to better blur the border between sportswear and fashion is a clear advantage here.

3) Branding: this is all about Nike's endorsement strategy. Check the line of stars behind it, Jordan, Tiger, Kobe, Mitchell Wie, and in my favorite sport: Federer, Nadal, Sharopova. First, if not the best in their sports, they are the top talented ones, and second, they are attractive, might be because of the look, or personality or temperament, or all above. Combining these two, you get the most influential athletes. There are controversies regarding Nike's endorsement cost, but for me, I like the overall strategy: pick the best few, yes they are very expensive, but every one counts; and second, these guys give Nike products the elite perception, which justifies its hefty price. Further, and more importantly, the relationship between NKE and these guys goes way more than that Nike pays them to wear clothes embroiled with the swoosh logo and show up in their commercials, actually they themselves become the work of Nike. The flying Jordan, the unyielding Tiger, the timeless classic Federer and the fighting Nadal, sure, they are born to have these characteristics, but can you deny the behind-the-scene Nike's marketing power? Their images are so deeply embedded with Nike's image, and from it, NKE obtains the unique power to define/lead the fashion/trend of its industry. This trend/fashion thing, as exposed to the feelings and sentiments of human being, may shift fast in unpredictable directions. Obviously the best players are not those only passively respond to it, but those anticipate it, influence and best, define/lead it. I don't see any other company enjoying such a position as Nike does in its industry.

Finally let's go a little further deeper to get a little abstract, what is the ultimate force that drives NKE to achieve this type of economic moat? My opinion, everything traces back to the company's culture or management philosophy. It's better that I stop here before this becomes an empty talk. So let me point out one last thing, NKE seems to have a superior culture or philosophy comparing to its competitors. What's more, NKE spent 30 years building a kingdom/system/team upon this philosophy, and this is the very thing guaranteeing that Nike's economic moat is almost insurmountable.

To Be Completed:
Financial Health
Evaluation
Risks
Buy or Not to Buy