Nike Gains On Global Reach

With 60% of its sales coming from outside the U.S., the footwear and apparel giant stands to benefit from further weakness in the dollar

With investors getting nervous as the U.S. dollar plumbs new lows against the euro, Nike Inc.'s (NKE) earnings release after the market close on Sept. 20 demonstrated the currency-translation benefits that come from having wide geographic reach.

In fact, it was the fact that international sales now account for 60% of total revenue that enabled the sportswear manufacturer to post a 51% gain in profit for the first fiscal quarter of 2008. Nike reported net income of $1.12 a share, vs. 74 cents a share in the prior-year period on an 11% rise in revenue.

Shares hit a new one-year high of $60.99 before sliding back to end 1.8% lower at $57.26.

With revenue growth of just 2%, the U.S. was the weak link in the equation, against a 16% gain in sales in Europe, including the Middle East and Africa, a 22% jump in Asia and a 15% increase in the Americas region.

The 10% growth in revenue in the United Kingdom was impressive given the disappointing sales that several of the largest athletic chains reported for stores open at least one year during the quarter, Susquehanna Financial Group said in a research note on Sept. 21. Driving the sales growth of about 50% in China is the aggressive opening of one to two new Nike brand stores per day in that market and positive same-store sales results, the note said.

The weakening of the U.S. currency is good for U.S. exports but will deter foreign investors from putting money in U.S. equities. Multinational companies such as Nike that are seeing sales in foreign currencies translate into bigger dollar amounts don't have to worry about that, investment strategists are saying.

Overall, changes in currency exchange rates boosted Nike's sales by 3% in the first quarter, adding 7% to revenue growth in Europe, 4% in the Americas and 2% in the Asia-Pacific region. If the dollar continues to hit new lows, the company should continue to see significant currency benefits in quarters to come, Banc of America Securities said in a research note. (BAS has provided non-investment banking services to Nike within the past 12 months.)

Nike said futures orders for athletic footwear and apparel are nearly 12% higher than they were a year ago. It set a revenue target of $23 billion by 2011.

The company's decision to focus on new sports categories in the U.S. such as running, women's training and fitness, along with its expansion into retail distribution channels that were previously underserved – such as large sporting goods chains – helped drive the 2% sales growth in the U.S., Susquehanna Financial Group said in a Sept. 21 research note.

But ongoing weakness in basketball sales, in which Nike holds a dominant market share of roughly 54%, probably offset sales growth in product categories, particularly given that the average prices of the new products that Nike is focusing on in the U.S. tend to be lower than those for its premium basketball sneakers, Susquehanna said. (Susquehanna, which has a neutral rating on the stock, does and seeks to do investment banking with the companies it covers in its reports.)

Citing how hard it is to time the improvement in basketball products or the mall-based specialty retailers in the U.S., Susquehanna said "we remain concerned as to whether Nike will be able to continue to grow sales organically in the U.S in the near future."

Susquehanna didn't hold out much hope for the company's U.S. business prospects, pointing to difficult retail conditions a Foot Locker (FL) and The Finish Line (FINL), two of Nike's biggest retail partners, as well as strong consumer demand for moderately priced, low-profile footwear styles.

But Claire Gallacher, an equities analyst at Caris and Company in San Francisco, contends that weakness in the U.S. is limited to mall-based retailers such as Foot Locker and The Finish Line, which represent only one U.S. distribution channel for Nike.

Sales remain strong at so-called lifestyle center shops like Dick's Sporting Goods (DKS) and Sports Authority, she said.

The bigger square footage and one-stop shopping capabilities of Dick's and Sports Authority are taking customers away from specialty athletic stores located in malls, she added.

In addition, same-store sales are climbing at Nike's co-owned specialty stores like Nike Town, she said. While consumers are buying some of Nike's lower-priced shoes, sales volumes in non-mall stores are rising, she added.

Diversifying into new product categories such as soccer and running apparel will be a big advantage as Nike continues to expand, UBS Investment Research said in a research note. UBS raised its fiscal 2008 earnings forecast to $3.62 from $3.40 a share based on the latest results and predicted a flat second quarter due to higher investment in global growth and owned retail stores. The results in the second half of fiscal 2008 should be stronger as a result, however, it said. (UBS has provided non-investment banking services for Nike within the past year and makes a market in its securities.)

The company also said it's considering selling its Nike Bauer Hockey business, which, if it occurs, would be completed by the end of the fiscal year next May. Nike said the returns in that business aren't big enough to meet its long-term growth objectives.

"A lot of [the business] is equipment, and equipment is lower-margin with lower returns on invested capital. That may be reason," said Gallacher at Caris, adding that Bauer is a relatively small brand for the Nike with only $160 million in revenue.

That announcement sparked speculation about what other businesses Nike might be thinking of disposing of, as well as potential acquisitions.

With just under $3 billion in cash on its balance sheet, Nike can afford to consider buying small brands along the lines of its recent Converse and Hurley acquisitions, without having to worry about the tightening in the of credit market, since it doesn't have to rely on the banks, Gallacher said.

Unlike some analysts, she said she's not concerned that ramping up advertising in Asia ahead of the 2008 Beijing Olympics will erode Nike's bottom line over the coming year.

For the past two years, the company has been spending around 11.7% of its annual revenue on what it calls demand creation, which is essentially advertising.

"It's just a matter of where they're going to be spending their money," Gallacher said. "Two years ago, they were spending in Europe toward the World Cup. Heading into Beijing '08, they'll be spending around the Olympics."

Any additional advertising it does in Asia will hopefully add to the momentum it already has in that region, she added.

The diversity of the company's product categories, including soccer and running apparel, will be a big advantage as Nike continues to expand, the UBS note said. UBS raised its fiscal 2008 earnings forecast to $3.62 from $3.40 a share based on the latest results and predicted a flat second quarter due to higher investment in global growth and owned retail stores. But UBS said it expects the second half of fiscal 2008 to be stronger as a result of the expansion.

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