Commentary: The Real Nike News Is Happening Abroad
Ever since Nike Inc. missed its fourth-quarter earnings target by a penny at the end of June, its stock has languished. Investors are spooked by two things: a 10% decline in advance orders of Nike merchandise in the U.S. and uncertainty about the company's tense relationship with Foot Locker Inc., its biggest customer. "Like it or not, the Street looks to Nike's U.S. business as a benchmark" for the entire company, says Wells Fargo (WFC ) & Co. analyst John J. Shanley.
That's too bad, because Nike is a global concern these days. For the first time, Nike is raking in more revenue overseas than in the U.S. -- $5.1 billion to $4.6 billion for the fiscal year ended June 30. That's thanks to rocketing sales of soccer gear, athletic shoes, and apparel in Europe, Asia, and Latin America. As a result, the Beaverton (Ore.)-based sneaker maker has some breathing room to fix its problems at home. On July 9, Nike took a step in that direction when it announced its intention to buy Converse for $305 million -- an attempt to get traction in the hot U.S. market for retro footwear.
While Nike wants to shore up the home front, it clearly believes much of its growth will come from overseas. Sure, Nike's foreign operations are less profitable than its U.S. business -- 18% pretax profit margins vs. 21%. And favorable currency rates have boosted Nike's gains overseas. But even in constant dollars, sales growth in Europe and Asia last fiscal year reached high single- and double-digit growth, respectively. Says Goldman, Sachs & Co. analyst Margaret Mager: "Growth will come from international markets."
Overseas, Nike has duplicated its U.S. marketing strategy: Sign up big-name athletes to sell shoes and apparel. Kids from Rome to Rio de Janeiro take their cues from the likes of Brazilian soccer star Ronaldo. Nike's partnership with Manchester United, the world's most popular soccer team, also seems to be paying off. Last fiscal year, Nike's global soccer business generated $720 million in sales, up from $500 million in fiscal 2002. And Nike's hot-selling high-tech Cool Motion jerseys and fashionable Sphere line helped lift apparel revenues in Europe by 16%, to $1.1 billion, and 24% in Asia, to $500 million.
Nike is running a different race in the U.S. The company's key basketball franchise is a mature business. It recently spent $165 million to sign up NBA star Kobe Bryant and up-and-comers LeBron James and Carmelo Anthony to flog its products. But it's hard to grow in a market that has been stagnant for a decade. Making matters worse, Kobe was accused in early July of sexual assault. Kobe denies the allegations, but his troubles could become an issue for Nike.
The feud with Foot Locker should be easier to solve. A year ago, Foot Locker asked to sell fewer premium Nike shoes and offer steeper discounts. Nike refused, but says it is talking through the problem with the retailer, even as it starts moving the pricier shoes to others. Nike needs to sort this out soon: Foot Locker ordered $1.1 billion worth of Nike shoes in fiscal 2001; last year, orders totaled $800 million.
Nike also is out of step with America's tastes. Since the late 1990s, consumers have drifted from athletic sneakers toward retro runners, sandals, and other street wear. That's where the Converse acquisition would come in. The 95-year-old company has benefited from renewed interest in its classic Chuck Taylor All Star basketball shoe and Jack Purcell tennis sneaker. "This is a good move for them," says John Horan, publisher of Sporting Goods Intelligence, an industry newsletter. "In the short term, it helps them win back some of the classic shoe market. In the long term, it positions them to grab more share of the U.S. market."
Still, the U.S. footwear business has slowed to a walking pace. Even if Nike makes up with Foot Locker and produces more classic shoes, it will never return to high double-digit growth rates. But it no longer has to -- so long as it keeps on just doing it overseas.
By Stanley Holmes