Investigating the Causes of the Decline in Nike’s Share Price

In this paper we investigate why Nike shares went down over the last quarter. Then we analyze possible causes for the devaluation and finally we look at possible ways to push the value of Nike stocks back up to or past its values at the beginning of the first quarter.

Problem

In the last economic quarter year, Nike shares went down 6% in value. The shares originally valued at $63.80 went down $3.70 to $59.50. This is bad news for the firm because it reduces the firm’s capital, takes resources out of the firm and hence reduces its ability to produce. There are several causes for this drop in stock prices, each working synergistically with the other to create a profound overall effect.

Causes

During the third quarter Nike experienced overall growth in both sales and orders; however, the increments did not reach the predicted level of growth and as a result investors lost faith in the firm. At the end of the second quarter, analysts predicted that during the third quarter Nike sales would increase by 6%, this prediction invoked investors to buy Nike shares because they expected a high rate of return and also assumed that their investments were relatively risk-free. However, it turned out that at the end of the third quarter Nike sales failed to increase by 6%, stopping at 5% growth. This discouraged investors who expected to do much better. The failure of Nike to generate the expected amount of sales also led to investors viewing Nike sticks as a much more risky investment than previously thought. As a result of all this, Nike shareholders began to sell their shares at devalued rates.

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Another reason for Nike’s shortcomings was the number of orders it received from the United States. The United States remains one of the major markets for Nike products. At the end of the second quarter, Nike analysts over-predicted the magnitude of orders it would receive from the US; predicting orders to rise to 45%when it only managed to rise to 44%. Nike specializes in athletic apparel, the last quarter consisted of three wintry months, a time of the year when the demand for athletic wear is exceeded by the demand for warmer clothing. It is possible that Nike analysts failed to properly account for the seasonal changes in consumer tastes and preferences. As a result the firm had produced goods for which there was no demand, and hence it was not able to make as large a profit as it expected. This again is a cause for the recent losses of the company.

Solutions

There are many approaches which the company can employ to recover from the losses of the last quarter. Selling new shares, under-predicting sales for the last quarter, a new line of clothing and a new advertising campaign are all solutions which can be implemented on their own or in conjunction with one another.

Predicting the future

At the end of every quarter of sales, analysts are used to predict how the firm can be expected to behave in the next quarter. Analysts then look at sales and other records from the past to predict how well the firm will perform in the next quarter. This information is then made available to those interested in the firm including future as well as current investors. If predictions are good, meaning the firm is expected to make good sales and receive a lot of orders, then investors are likely to put devote their resources to the firm and vice-versa. Therefore, if Nike directs its analysts to falsely under-predict its expected sales, then it could benefit the company in the long run. With low expected profits, investors will not expect to make a large profit; however, since these are under-prediction, investors will receive more than they bargained for. Therefore, at the end of the fourth quarter, Nike stock holders will be very happy and other investors will notice the profit opportunity and hence this will drive Nike stock prices up again.

“A Nike season” campaign

Nike clothing is in-style, hip and desirable. Starting in spring people become more athletically involved and hence the demand for sporting apparel and accessories can be expected to increase. This is a good time to run a new ad-campaign surrounding new products or new designs. Nike could declare summer as its season and create an advertisement showing off new designs for shorts, t-shirts and swim-wear.

NCAA buyout

The NCAA Finals are to be held in Atlanta on Sunday March 31st, this is a good opportunity for the company to introduce some new products and reach out to its consumers.

During the month of March, the NCAA tournament takes place to determine which team will reign supreme in collegiate basketball. Basketball shoes are well within Nike’s forte; it has sponsored and made shoes for ball players such as Michael Jordan (a very successful line of footwear), Vince Carter along with a host of other players. The Kansas team is a strong candidate for winning the NCAA and they also hold a strong fan base. Since it is probably too expensive to sponsor the team it would be more viable to sponsor one player out of the team. John Gooden, the Kansas forward is a favorite of many and is expected to have a fruitful NBA career. Therefore, Nike should design a new pair of shoes for the player and take him under its wing.

The shoes alone will probably will not do the trick, the company should also introduce a new line of clothing. Casual clothing is popular among Americans, and Nike should design a new line of clothing which blends its athletic touch with some street sense to create a line of clothing which is supposed to be worn in the streets or for play. This new lie should be marketed under the slogan “For the playa’ when he is off the courts”. I support this slogan because it goes along with the whole NCAA hype and because it is catchy and appeals to the young generation. For the ad itself, all attempts should be made to display the new line on NCAA athletes because NBA athletes are all too common. I believe that with a successful ad campaign behind some innovative designs will catch the eye of the public and will also attract investors who will expect a rise in Nike’s sales and popularity.

The major problem with this idea is lack of capital. However, capital can be generated through the sale of more shares and/or through borrowing. This is a good time to borrow from the banks because interest rates are low and favorable to producers. The new line of clothing and the shoes can also turn out to be a complete flop, but business involves risk and thus it is not a major setback. Critics might point out that that the campaign will fail if the Kansas team does not win the NCAA and/or if John Gooden fails to live up to expectations. This is why I suggest the entire campaign be advertised during the NCAA Finals but the line should be scheduled to be in the market at the beginning of the first quarter of the next business year. This will benefit the firm because investors will acknowledge a possible profit opportunity in Nike stocks from the fourth quarter and hence will start investing from the fourth quarter instead of waiting until the next business year. This will not only drive stock prices up but will also give Nike the capital it needs to start work on the shoes and the new line of clothes.