Was Nike’s Acquisition Of Converse A Bargain Or A Disaster?

by Trefis Team
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On September 4, 2003, Nike (NYSE: NKE) acquired Converse for $315 million – two years after the latter filed for bankruptcy. Converse had annual sales of just over $200 million at the time of acquisition. Fast forward 16 years to Nike’s fiscal year 2019 – Converse sales have ballooned to nearly $2 billion. The 10x revenue gain over the years is just one of several key metrics Trefis looked at in an interactive dashboard to conclude that Nike’s acquisition of Converse was unquestioningly a bargain for the footwear and athletic apparel behemoth. Converse has been a perfect fit for the Nike – helping the company diversify its portfolio and also adding a new dimension to the company’s footwear division.

Nike paid $315 million for Converse in 2003 while the brand had sales of around $200 million – implying a P/S multiple of 1.6x

In sharp contrast, Nike’s P/S multiple was just 0.15x at the time of purchase – less than one-tenth of the multiple for the Converse deal. Although the purchase seemed expensive at that time, it has turned out to be a bargain because of the following reasons:

#1 Converse Has Achieved Robust Revenue Growth Over The Years

  • Converse’s revenue has increased from around $560 million in 2007 to more than $1.9 billion in 2019 at an average annual rate of 10.7%
  • As a result, Converse’s contribution to total revenue has gone up from 3.5% in 2007 to 5% in 2019.
  • However, the brand’s revenue peaked in 2017 at $2 billion. Since then, Converse’s sales have declined.

(Note: We have highlighted trends since 2007, as Nike began reporting Converse’s performance as a separate segment starting that year)

#2 Revenue Growth for Converse has exceeded that for Adidas but has been less than for Under Armour

Additional details about revenue growth for competitors Adidas and Urban Outfitters since 2007 is available in our interactive dashboard

 

#3 Moreover, Converse Has Been Operating At A Higher Margin Than Nike

  • Converse has been operating at a higher profit margin than Nike. Converse’s EBIT margin in the last five years has averaged around 21% while Nike’s margin averaged 17%.
  • However, in 2018, Converse’s margin sharply declined to 16.4% due to a steep fall in revenue. As of 2019, Converse’s EBIT margin of 16% was slightly below Nike’s 17%.

 

#4 However, the Revenue Per Store figure for Nike has been higher than that for Converse

  • Nike’s revenue per store has consistently been much higher than Converse’s.
  • As of 2019, Nike’s average revenue per store stood at $34 million – almost 3x that of Converse’s.
  • Moreover, since 2012, Converse’s average revenue per store has declined by 50% while over the same time frame this metric for Nike has gone up by 16%.
  • Nike’s strategy of accelerated store openings to achieve growth for Converse doesn’t seem to be bearing fruits.

 

Conclusion: Converse Has Been A Bargain Purchase

  • In 2003, when Nike acquired Converse, it was struggling to compete in the footwear market. Nike revived the brand and also turned it into a multi-billion dollar entity.
  • As of 2019, Converse’s revenue stood at almost $2 billion – nearly 6 times its historical purchase price.
  • While being brought under Nike’s fold played a significant role in Converse’s growth, there is no denying the fact that Nike’s deal to acquire Converse was a bargain.

 

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