Nike Has A Young People Problem... Seriously?

| About: Nike Inc. (NKE)

Summary

Apparently Nike has a problem with young people, according to a recent article posted on the front of MSN Money.

I disagree.

Ever heard of Lebron James?

Nike's (NYSE:NKE) made big news after announcing that it's exiting the golf equipment business to focus on apparel. A 24/7 Wall St. article entitled Nike has a problem: Young people flashed across the front page of MSN Money today, and the author used the company's golf exit to start off an article detailing Nike's problem with the younger crowd. Not only are young people abandoning Nike's golf equipment, but apparently its two main spokespeople, Tiger Woods and Michael Jordan, are both old; and Nike's growth just ain't what it used to be, according to said article.

Lebron James, Kevin Durant, #1 NBA draft pick Ben Simmons, anyone?

The first thing I thought after reading the article was how can it completely avoid mentioning LeBron James who just won the NBA championship and is slated to star in Space Jam 2? What about OKC Thunder turned Golden State Warriors forward (and Nike sponsored) Kevin Durant? The company not only has younger players, but athletes that dominate their sport. It's a real possibility that KD and LeBron might be going head-to-head in the NBA finals next year, while playing for the same endorsement team.

The article acknowledges the power of the Jordan brand's $2.7 billion in annual sales, but stated that as MJ himself gets older, the brand would start to lose relevance.

I disagree here too. People collect Air Jordan sneakers like kids used to collect trading cards pre-video games. The Jordan name has grown into a brand that can thrive - even if nobody knew who Michael Jordan was anymore in my opinion, kind of like Chuck Taylor.

Speaking of Chuck Taylor...

Nike also owns Converse, which is a very popular brand with Millennials, aka "young people". I'm a so-called Millennial wearing a pair of "Chucks" as I'm typing up this article, and I know that both my younger siblings both own a pair.

I know this is anecdotal evidence at best, but don't take it from me, here's a Business Insider article (ironically posted on MSN Money as well) listing the Top 50 brands for Millennials. Converse came in at number 20. That old-fogey of a brand - Jordan - was number 9 out of 50, and rounding things out at numero uno was? Nike. Under Armour (NYSE:UA) was number 45.

Nike is also the second most engaging brand to Millennials, according to Statista, second only to Apple (NASDAQ:AAPL). I find it hard to buy into the whole Nike has a young person problem.

And then there's the numbers...

Another point brought up in the article was the explosive sales growth shown by Under Armour at 28%, outpacing Nike's relatively slower revenue growth of 9%. I can buy into this argument somewhat, but I wouldn't go so far as to say that Nike isn't a growth company. I'd also like to expand a little more on the subject.

Sure, sales growth is nice - it's the lifeblood of the company. Here's the thing though, Nike's net margins are usually double that of Under Armour's - so the former doesn't really need to grow as fast as the latter to mint money. Nike is drowning in free cash flow, too, while Under Armour was free cash flow negative in fiscal 2015.

Conclusion: What did I just read?

There's no argument - Under Armour is growing like a weed and has plenty of opportunities to steal Nike's thunder, but it will be a very steep uphill climb. In the 24/7 Wall St. article, it was declared that (in reference to Under Armour's sales growth):

It should not be doing well at all in a world in which Nike has dominated for decades, holding off Reebok, Adidas, New Balance and a number of other sports fashion rivals.

That's a little short-sighted, in my opinion. There's more than enough room for both companies, and I don't see how it's really doing that well in comparison to Nike. Wake me up when UA's return on equity can easily exceed the 20% mark for a decade straight like Nike. And as far as this illusory "young people problem" - I don't buy it. The data doesn't seem to back it up, either.

For a more in depth analysis of both companies, please click here.

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Disclosure: I am/we are long NKE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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