Nike's New TreadsDori Jones Yang
At the end of Nike's annual meeting on Sept. 20, Chief Executive Philip H. Knight called for questions. Phoenix Suns star and Nike endorser Charles Barkley bounded up from the back. "Did I hear that something happened to $1 billion of yours?" he asked, referring to Knight's massive Nike Inc. stock holdings.
Shareholders laughed at the jab, but that doesn't mean they were happy: Nike's stock price has dropped to about $44, from $90 last November. At the meeting, they heard Nike was slipping further. After a disappointing 7% drop in net income, to $114 million, for the quarter ended Aug. 31, Knight says both sales and earnings will fall in the current fiscal year. To cope with the slide, Knight will cut expenses at least $50 million and trim at least 300 jobs.
It's Nike's worst downturn since 1987. In the five years since, it has confounded critics by posting average annual profit growth of 29%. But U.S. athletic shoe sales--which account for 56% of Nike's revenues--now have peaked at about $6.1 billion, as consumers increasingly turn to more moderately priced, comfortable casual shoes, such as Timberlands, Doc Martens, and rugged hiking boots. Rival Reebok International Ltd.'s results also have suffered: Sales this year are expected to drop 3%, to $2.9 billion.
WARM-UP GEAR. Knight calls the downturn "a little bump." And in fact, Nike hasn't bowed to grunge fashion, betting that consumers will keep buying "authentic athletic" shoes and clothing. But the company also has moved to balance the decline in its biggest category, basketball shoes, with new divisions for soccer and golf, markets it had barely penetrated in the past. It has begun marketing uniforms and warm-up gear to college teams. And in January, it bought Sports Specialties, a California cap maker. Nike also plans to hook up with Creative Artists Agency to produce sports events.
Still, none of these offshoots matches the profitability of Nike's core businesses. That's why it must search overseas for growth. Nike says it's gaining market share in Europe, with about 20% now, and it's investing $75 million in a new warehouse in Belgium. For now, that potential seems locked up by recession and limited spending power. But demographics point to tremendous opportunities: In the U.S., there are four people for every pair of Nikes; France has 11, Japan 50, and China 11,821. That's a lot of Air Jordans waiting to be sold.