NIKE, Inc. (NKE) Sets a Power Brand Free and Reaps Billions

Here’s a classic underground question from the last century, a sort of Rorschach test of popular culture that you can pose to your friends and acquaintances: Just who was Chuck Taylor, of Converse basketball sneaker fame? I personally grew up in the heyday of Larry Bird and Magic Johnson, and erroneously believed when I was younger that Taylor had been a bench-bound teammate of Julius Erving, the legendary “Dr. J.”

In fact, Chuck Taylor was an amateur basketball player from a much-earlier era and, in addition, a coach and shoe salesman. Born in 1901, Taylor joined a traveling basketball team in 1921 for the Converse Rubber Shoe company, which had introduced its first basketball shoe, the Converse All Star, four years earlier. Taylor made numerous suggestions to improve the shoe, and was such a successful promoter of the sneaker that the company eventually added his name to the ankle patch.

Photo: Converse.com

Today, Converse is a billion dollar brand owned by NIKE, Inc. (NYSE:NKE) , which acquired the company in 2003 for $305 million. Nike decided, at the time of acquisition, to allow Converse to operate independently, a wise one considering how Chuck Taylor sneakers, lovingly called “Chuck Taylors” by their fans, and the larger Converse brand, have appealed to both athletically minded and fashion-conscious shoe buyers, as well as many subcultures, over the decades.

Why Converse is important to Nike
Owning Converse benefits NIKE, Inc. (NYSE:NKE) serially. Most strikingly, the $305-million dollar purchase price turned out to be a highly efficient investment for Nike, as today, it reaps revenues over four times that amount each year from Converse. The company’s total revenue, as reported by NIKE, Inc. (NYSE:NKE) for 2012, was $1.32 billion.

NIKE, Inc. (NYSE:NKE) doesn’t often buy other companies to supplement its Swoosh-branded revenue, and it exercises discipline in pruning acquisitions that don’t meet expectations. In the last year, Nike divested itself of its well-known Umbro and Cole Haan brands, in order to focus on just four brands: Nike, Jordan, Converse, and the Hurley surf-wear line. Converse and Hurley, together with NIKE, Inc. (NYSE:NKE) Golf, comprise a segment which Nike labels “Other Businesses.” This segment accounts for for 9.5% of Nike’s revenue, and nearly 14% of NIKE, Inc. (NYSE:NKE)’s Earnings Before Interest and Taxes, or EBIT. Converse’s share of the “Other Businesses” revenue has grown steadily: three years after the acquisition, Converse accounted for 23% of “Other Businesses” revenue. As of year-end 2012, Converse accounted for 43% of the segment’s revenue, and this number is likely to have grown once we see the full results for fiscal 2013 later this summer.

For a company that was founded the year that “Take Me Out To The Ballgame” was registered for copyright, Converse is growing at a much faster rate than its parent company. Between 2008 and 2012, Nike’s compounded annual growth rate, or CAGR, was 5.3%. Converse’s CAGR over the same period was more than twice as fast, at 12.7%. Of course, one can’t expect a company of $24 billion in revenue to grow as fast as a subsidiary which is roughly 18 times smaller. But you can bet that NIKE, Inc. (NYSE:NKE) executives are pleased with the return on the original investment.