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Brand Valuation Methodology

Let’s Value “Nike” … or any other brand

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"If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trade marks, and I would fare better than you.”

- John Stuart, Chairman of Quaker Oats

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Why would you attempt to put a value on a brand?

Brand is an investmentIf the company is put on the market for acquisition, the buyer and seller should be able to assign monetary value to the brand and evaluate the investment/bid. In other words, the brand premium that the investor would pay for is the difference between the branded business that is being sold and the value of a similar business (with similar assets) but without the brand recognition. Although Nike is a leading brand in North America, its presence is still growing in other

global markets. The question arises: “if the company is to be sold today, what value should be used to account for brand premium (awareness and liking of the brand that leads to purchase decision) in developing markets that allows the company to earn its global revenue?”

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Why would you attempt to put a value on a brand?

Brand is an investment into a sustainable advantage over competitionManufacturing, design, performance and management strategies can be duplicated by competition and even improved upon. When competitive advantage from operations disappears, weaker brands become irrelevant. But under similar conditions, timeless brands retain their customers and continue to hold the market share. To enhance the value of the brand (strengthening sustainable advantage), inputs in a form of investments need to be made. In turn, these investments need to be justified to the upper management and evaluated against other projects ROIs. In 2013, Nike’s marketing spend was enormous US$2.7 billion on it in 2013 (equivalent to

11% of total revenues). The company described it as “demand creation, with a significant part of it spent on buying endorsement for the swoosh logo.”

Was it too much or too little?

START: Market Communication

Strategies

Customer’s brand awareness level

Purchase decision

Profits

Market Communica

tion ROI

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Why would you attempt to put a value on a brand?

Brand is an investment into a sustainable advantage that captures and retains the market shareWhen brand is evaluated in detail, questions about the brand arise that will give insight into brands attributes that might not have been apparent. Questions can be about evolving customer taste, market awareness (TOMA or not?), value perception and market position compared to constantly moving forward competition, which all feeds into the band equity analysis. Nike focuses on building its brand via strong relationship with a global consumer, appealing

to different demographics and aspirations. Overall price levels and distribution channels in the sportswear market are established and easy to copy. But starting with 2011, Nike emerged as a market leader by introducing innovation into the product that is now connected to the Nike brand name. The company still holding its position today. What is the value and importance of each brand attributes, i.e. innovations, brand awareness, social customer interactions in pre-purchase phase, that lets Nike sustain leading position?

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Approaches and methodology explained

Impact of the Name on Customer Preferences Approach - looks at pre-purchase communication with the customer and builds on the brand loyalty. This approach can be used to value Nike, as it concentrates on the pre-purchase phase to build its brand recognition, but we would need to do extensive market surveys and product testing to assign $ value to the brand name based on how many people are influenced by a brand name alone.

Price Premium Approach - utilizes price/value perception that usually happens during the purchase decision. Customers observe price levels in the market and decide on what they would pay for various features and characteristics. Replacement Value Of the Brand Approach – a cost of establishing a comparable name and businessStock Price Approach – the stock market adjusts the price of a firm to reflect future prospects of its brandEarning Power Approach – discounted present value of future earnings attributable to brand equity assets

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Value the Nike brand

Approach: Comparing Enterprise Vale / Sales ratio for a premium and non-premium (or lesser premium) brand in the same categoryReason: A premium brand gives a firm the benefits of charging a higher price for the same category of products. This leads to higher margins, profit-sales ratios and enterprise value. Thus the brand name and value is proportional to the price charged by the firm because of it being a premium brand

Value of brand name = {(V/S)b- (V/S)g} * Sales where(V/S)b = Enterprise Value of Firm / Sales Ratio with the benefit of the brand name(V/S)g = Enterprise Value of Firm / Sales Ratio of the firm with a generic product or lesser known brand name.Methodology: We have calculated the (V/S) ratio of three brands (Nike, Adidas and Brown Shoes Co (BWS) which fall in the same industry category on the stock exchange. This helps us give the Nike brand value w.r.t Adidas as well as a very generic unknown product in the same category.

The calculations are shown in the following slide…

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Value the Nike brand. Explain approach and methodology

Data Nike Adidas Brown Shoes Co

Stock Ticker NKE ADDYY BWS

Pre Tax Operating Margin 16.67% 7.04% 3.52%

After Tax Operating Margin 12.55% 4.90% 2.45%

Return on Assets 13.26% 6.09% 5.43%

Retention Ratio 77.77% 84.77% 56.25%Expected Growth 1.63% 1.87% -7.28%

Cost of Equity 9.66% 8.00% 8.15%Value / Sales Ratio 1.665 0.840 0.401

Value of Nike w.r.t. Adidas = (1.665-0.840)*Sales = 0.825*18.96 = $15.63 billion

Value of Nike w.r.t. Brown = (1.665-0.401)*Sales = 1.264*18.96 = $23.97 billion

As Adidas is a close substitute to Nike brand, the best estimation of the brand value for Nike would be $15.63 billion

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Data Nike Adidas Brown Shoe Co(BWS)Sales /Revenue 18.96 14.49 2.6Operating Income 3.16 1.02 0.09156Pre taxOperating Margin 0.166666667 0.070393 0.035215385

Effective Tax Rate 0.247094801 0.304425 0.305634165Pre Tax Income 3.27 1.13 0.07774Income Tax 0.808 0.344 0.02376

After Tax Operating Income 2.379180428 0.709487 0.063576136After Tax Operating Margin 0.1254842 0.048964 0.02445236Return on Assets 0.132618753 0.0609 0.054338578Total Assets 17.94 11.65 1.17

BV of debt (previous year) 6.79 6.36 0.81376BV of equity (previous year) 10.38 5.29 0.41372Cash 3.34 1.59 0.06822ROIC 0.1720304 0.070526 0.054841999Return on Assets 0.1720304 0.070526 0.054841999

Retention Ratio 0.777777778 0.847711 0.5625EPS 2.7 4.15 0.64Dividend per share 0.6 0.632 0.28

Expected Growth 0.016341287 0.018688 -0.07283957Reinvestment 0.226 0.188 -0.08444Capex(-) 0.636 0.434 0.06373Dep 0.452 0.264 0.05478Change in WC(-) 0.042 0.018 -0.09339Reinvestment Rate 0.094990694 0.26498 -1.328171316Invested Capital 13.83 10.06 1.15926Return on Invested Capital 0.1720304 0.070526 0.054841999

Length of High Growth Period 5 5 5

Cost of Equity 0.096552513 0.080046 0.081494593Risk Free Rate 0.0275 0.0275 0.0275Risk Premium 0.05 0.05 0.05Marginal Tax Rate 0.04 0.04 0.04Levered Beta 1.381050256 1.050917 1.079891862Observed Beta 1.31 0.8328 0.76Market Cap 75.115 14.57 1.16Debt/Equity 0.090394728 0.436513 0.701517241

E/(D+E) 0.604542807 0.454077 0.337048261D/(D+E) 0.395457193 0.545923 0.662951739

Cost of Equity 0.096552513 0.080046 0.081494593Bond Rating A1 Baa2 B1Default Spread for Rating 0 0 0Pre-Tax cost of debt 0.0275 0.0275 0.0275After Tax Cost of debt 0.0264 0.0264 0.0264Cost of Capital= 0.090736805 0.063744 0.058779685

Value/Sales PV of FCFF in high growth = 8.753349795 2.294235 0.505767359Terminal Value 35.22014488 13.46076 0.713353849Value of Firm Today 31.56681723 12.17711 1.041905877

Value/Sales 1.664916521 0.84038 0.400733029

Value of Nike wrt Adidas 15.63321386Value of Nike wrt BWS 23.96891899