Letter #32: Nike (1992)

Phil Knight's 1992 Nike Shareholder Letter

*Note: Started a new project where I digitally catalog the bookshelves/book recommendations of some of my favorite thinkers and doers. You can check it out here: Bookshelves.

Hi there! I go by KG, and I love studying the history of business and investing. I’ll be sharing some notes from one Investor/Shareholder letter per weekday (mostly from my compilations) here.

Today’s notes are on Phil Knight’s 1992 Nike Shareholder Letter. This was Nike’s 20th Anniversary, and 12th year as a public company. This year was a true inflection point — the year they “went global” thanks in large part due to the 1992 Barcelona Olympics (first post-Cold War, post-Soviet Union) and the US National Basketball Team led by Michael Jordan.

You can find this essay in my Phil Knight Compilation under Consumer/Retail Operators. This particular letter starts on Page 17.


HAPPY BIRTHDAY. Twenty years ago this summer 45 employees started NIKE around a running track in Eugene, Oregon. We started with not much more than a brand name, a stripe for shoes, and a lot of hope.

  • Everybody start from somewhere — most of the time nowhere

In NIKE’s first year we sold $3.2 million worth of goods. It was a good start.

There were many dark days. We always knew we could fail, we knew we might fail, and sometimes we even thought we should fail, but never did we think we would fail.

  • First year solid numbers — I can’t count how many “pre-revenue” companies I see these days. Is this the different between physical and digital goods?

To summarize the history over the 20 years it went like this: 0-1-1-1-2-1-1. Or a rough translation: From 0 to number 1 in Oregon, to number 1 on the Pacific coast, to number 1 in the US, to number 2 in the US, to number 1 in the US, to number 1 in the world. Or if you’re interested in further arithmetic: from $3.2 million to $3.4 billion.

  • 1000x in 20 years — 1000x over any time period is amazing

  • “Slowly” grew and expanded their sphere of influence

In that process we are most proud of our innovation. In product, we initiated every major advance in athletic shoes in the last 20 years: The first cushioned athletic shoes, the first nylon upper athletic shoes, the Waffle outsole, NIKE-AIR cushioning, the first cross-training shoe, Air-Fit uppers, Dynamic-Fit stretch uppers.

  • Focus on innovation

  • That’s amazing — EVERY SINGLE major advancement in a category for 20 years — can you think of any other company that’s done this?

In the process, we aided athletic performances that are in record books around the world. NIKE was part of Jimmy Connors’ first Wimbledon in 1974 and Andre Agassi’s first in 1992. The stats for the years in between include: 1 (the first ever) Women’s Marathon Olympic Gold Medal for Joan Benoit Samuelson, 7 Nolan Ryan no-hitters, 8 NCAA Men’s Basketball championships, 18 out of 24 football bowl teams in 1992, 27 Sergey Bubka world record vaults, 53% of the members of the 1992 US Olympic Track and Field Team, 1 Borussia Dortmund European Football (Soccer) Championship. And a couple of guys name Michael and Bo, who simply defy statistics.

  • Michael Jordan and Bo Jackson, of course — you know how big these guys are when you don’t have to mention anything but a single name. Everyone else had years, titles, accomplishments, statistics, etc.

AS AN INVESTMENT—1980-1992. If there have been many proud moments for NIKE in products and on the playing field in the first 20 years, well… we haven’t done too badly by our shareholders either.

This last year, the company: Achieved record sales and profits—the fifth year in a row. (And there will be at least six in a row.) Increased profits 15%. Increased sales more than 13%, while decreasing inventory 20% through superior inventory management. Increased gross pofit margins from 38.4% to a record 38.7%. Broke the billion dollar mark in international sales for the first time in a single fiscal year. Dramatically increased sales and market share in women’s fitness footwear and apparel. Defined the newest growth category of Outdoor and posted triple-digit gains in footwear and apparel. Introduced Dynamic-Fit Huarache footwear to an enthusiastic reception from both dealers and customers. Launched Air Raid, the single most successful new shoe in the industry this year. Created new Air Max products for Spring ’93, taking NIKE-AIR cushioning to even higher levels. Announced record futures orders of $1.6 billion for June through November 1992, an increase of 17% over our last record futures period.

  • International sales highly boosted by the 1992 Olympics

    • Dream Team + MJ obviously a big boost

    • First Post-Soviet Union/Cold War Olympic Games

  • Lots of new products and innovation

NIKE went public in December 1980 at $5.50 a share. As we go to press, the stock is selling at $65 per share, a growth in market value of 30% per year, and currently pays cash dividends at the rate of .56 per share. Not too bad. And yet…

  • 12x return over 12 years AND it pays a dividend

For all but a couple of very brief periods, we have always sold at a substantial discount from the Standard & Poor’s 500 Index P/E multiple—like a 20-30% discount.

  • What year did they overtake the SP Ratio?

In the last 20 years, I wrote one annual report where I said we weren’t yet a very good company. Now I’d grade us “very good” but our multiple is lower. Go figure.

  • Reminds me of Steve Schwarzman and Blackstone — companies trading at huge discounts relative to brand and earnings power

Here’s the dilemma: Explaining NIKE today is more difficult than it was 20 years ago, when we were just getting started — or ever 12 years ago, when we first went public.

  • 1) Always, always be able to explain your company in simple terms

  • 2) As companies get larger, their circles of competence and scope of operations get larger — be able to define what your value proposition is

So in the simplest terms we get summed up with the old label — “sneaker company” or lumped into the apparel category."

Conventional wisdom dictates a deeply discounted multiple for those categories.

  • “Conventional wisdom” is shorthand for “herd mentality.” Anytime you hear that phrase, take a moment and really think about it

  • Call it a “shortcut,” “mental model,” whatever you want, but at the end of the days it’s just a shortcut — remember the Charlie saying: “It's Not Supposed To Be Easy. Anyone Who Finds It Easy Is Stupid.”

Oh, yes, that’s the same conventional wisdom that we have met in other parts of our business: No one will ever break Beamon’s long jump record at sea level. Andre Agassi can’t win on grass. Nolan Ryan is too old. Communist athletes won’t understand capitalist financial incentives. A black man can never be a good company spokesman in white America. The rest of the world has caught up with the USA in basketball.

  • These examples are… interesting

  • But also love the sarcasm here — clearly Nike and its representatives have defied conventional wisdom every step of their journey — yet continue to be underestimated

THE FUTURE. What the conventional wisdom misses is the international language of sport. When we take over a foreign distributorship, as we did in Australia on June 1, there is already considerable demand. Our target consumers have been watching John McEnroe and Charles Barkley for years. The emotional ties are in place.

  • So true — Think of Bytedance. Bytedance’s core product is Toutiao, a personalized news recommendation platform. However, when they tried to bring this to the US, it failed miserably. On the other hand, Douyin was successfully brought over in the form of TikTok. Sport and video go hand in hand — everyone understands it. The more universal something is, the bigger market it has.

  • Build up demand and community beforehand — when you finally launch, you will “unleash the dam”

Two months ago a survey in a high school in the People’s Republic of China sought to find the world’s greatest man. The survey showed a tie between Chou En Lai and Michael Jordan.

The confused parents asked, “Who is Michael Jordan?” to which the exasperated children responded, “He is the star basketball player of the Chicago Red Oxen.”

  • For those wondering, Zhou Enlai was the first Premier of the People’s Republic of China, China’s head of government.

How do we expect to conquer foreign lands? The same way we did here. We will simply export sports, the world’s best trading currency.

  • Sports are truly global — let’s think about COVID. The US didn’t take it seriously at all — until the NBA shut down. Within a day of the NBA shutting down, the US Government announced lockdown. Before that, “it doesn’t exist.” “It only targets Asians.” “This is fake news designed to implant chips in our brains.”

It is the International Division which will lead our continued growth over the next four years. It grew at 32% this past year and will be bigger than the US market for us by 1996. Operating internationally creates more variables in any business and makes it more challenging to manage. But it also reduces the overall risk to the company and will fuel our growth to $6 billion by 1996.

  • International -> Increased complexity, lowered risk, and increased growth

Qualified people who look at NIKE’s numbers and NIKE’s positioning conclude: “They really can do it.”

  • Lol — love the play on their slogan here

In the coming months and years, it is our goal to overcome the perception of the past, the conventional wisdom that says a “sneaker/apparel company” has to have a multiple much lower than average.

  • Turn over conventional wisdom — as they’ve done so many times in the past

  • Always look for the those who seek to overcome the conventional — look for the crazy ones who go against the grain — it’s them who make the magic happen

  • Favorite question — “How much of that is priced in?”

    • Well, if it’s going against conventional wisdom, probably not at all

It is a part of our challenge to get the investing public to understand that NIKE has a global brand franchise.

  • Wait, is brand a moat though… LOL

    • For the record, I believe it is… but apparently this is a controversial belief in tech twitter (although I’m more #FinTwit than Tech Twitter)

  • Investor education is important — especially when your company is evolving and growing more and more complex each year

If a Chairman’s letter, or even a once-a-year annual report, is not adequate to cover all the complexities of a company striving to be international and grow at 15% per year—and do a little image surgery with investors—rest assured we have learned lessons from our first 20 years.

  • *Striving* to be international — they’re already a global phenomenon

  • Target 15% growth YoY

We know we have to build a total company, not just pieces like marketing and production and investor relations. I think the 6500 people at NIKE today have the same attitude about the next 20 years that the smaller group had 20 years ago: a little terror at the difficulty of the task, but a strong belief that we can do it.

  • Build a company — not a collection of departments (you can do this by having a clear vision for the company and employees and management that truly buy in.

  • Consistent values

  • Do Hard Things, believe in yourself, and make things happen

These last 20 years have been an exciting and profitable ride, but our greatest opportunities lie ahead of us. The Chairman’s letter in the year 2012 ought to be really something. I hope they let me write it.

  • Spoiler alert: Unfortunately, Knight did not write the 2012 Shareholder letter. He resigned as CEO in 2004, but remained Chairman until 2015.

  • However, Knight was right — the 20 years from 1992-2012 were very, very exciting, much of it driven by a man by the name of Michael Jordan

  • Read the 2012 Letter Here


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