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How Nike Got Its Game Back


Nike marketing execs couldn't have written a better script themselves. On June 30, Brazilian superstar Ronaldo, sporting a pair of special lightweight, silver-coated Nike soccer shoes, knocked in two goals in the final game to win the World Cup for his soccer-mad country. The 2-0 victory over Germany was sweet redemption for Ronaldo, who had battled back from career-threatening injuries. And it marked a coup for Nike Inc. (NKE) , which sponsored the Brazilian national team and its star in a bid to crack the $2.5 billion global soccer-gear business dominated by German rival Adidas-Salomon.

That's just the sort of deft footwork that Nike will need if it's going to break free from a moribund U.S. sneaker market. The Beaverton (Ore.) giant still gets more than half of its nearly $10 billion in annual sales from shoes. And much of the news lately has been grim: U.S. shoe sales were flat in the three months ended Aug. 31, and orders for future quarters dropped 3%. Factoring in a $266 million charge to reflect goodwill on past acquisitions, Nike reported a $48.9 million net loss. The biggest shock of all: Nike's top customer, Foot Locker Inc., canceled orders for as much as $250 million worth of business. Now Nike has to scramble to find retailers to take all those $160 Vince Carter Shox and $200 Air Jordans.

But the gloom is deceiving. Behind the scenes, Nike is finally making headway in its years-long quest to get back on the growth track. A few short years after some pronounced the brand finished on the basis of tepid product launches, shifting customer tastes, and its ties to Third World sweatshops, Nike appears to be displaying financial discipline for the first time and proving that it can squeeze growth out of something other than shoes.

Even Nike apparel, a chronic underachiever, finally is making significant contributions. Shirts, shorts, and other clothing generated $2.9 billion in sales for the fiscal year ended May 31, or 30% of Nike's total, and kicked in its first meaningful profit. Global soccer revenues rose 24%, to $450 million, last year, a dramatic jump considering Nike had virtually no soccer credibility--or sales--at the time of the 1994 World Cup. Even in golf, Nike seems to be on the way to becoming a power, on the strength of its sponsorship of Tiger Woods and the refinement of a lineup that includes balls, clubs, and shoes.

The result: Nike returned to double-digit profit growth in fiscal 2002, with net income rising 12%, to $663.3 million. Profits should grow another 13% in the year ending May 31--albeit on only 5% sales growth, according to Wells Fargo Securities. "I think now we're a pretty well-run $10 billion company, and we're ready to grow again," says Nike Chairman and CEO Philip H. Knight.

Even Nike's vaunted image-making machinery--so crucial to the rise of the brand in the 1990s--appears to be back on track. Whimsical television advertisements that show an entire city engaged in a giant game of tag have helped soften a brand that was too often associated with hard work rather than play. For the World Cup, Nike created global buzz with an ad that pitted its stable of soccer stars in street-style matches inside a steel cage aboard a tanker.

Knight, the enigmatic company co-founder, finally acknowledged early last year that he needed to shake things up. After a torrid run in the mid-1990s--capped by a 50% burst in sales during 1997--the company simply outgrew its inventory and other systems. By 1999, sales had dropped, and profits, which peaked at $795 million in '97, fell to $451 million. Having accumulated the titles of chairman, CEO, and president, Knight admits he was part of the problem: "We got to be a $9 billion company with a $5 billion management."

The turnaround began when Knight handed over day-to-day control to a pair of Nike veterans, co-Presidents Mark G. Parker, 47, and Charlie Denson, 46. While yoking two ambitious execs can be a recipe for indecision, or worse, Parker and Denson so far have forged a smooth relationship, insiders say. Parker, originally a shoe designer, brought to market such innovations as Nike's flexible Presto and spring-soled Shox. Now he is leading an assault on sub-$100 footwear. Denson, meanwhile, used his sales background to pare down a near billion-dollar inventory bulge, which threatened to implode the supply chain. Among other things, he installed new computer systems to better track goods.

Although Knight has stuck with insiders for the top posts, he has reached outside for some key hires. They have blended surprisingly well with Nike's notoriously insular, athlete-dominated culture. Chief Financial Officer Donald W. Blair, hired from PepsiCo Inc. in 1999, has fostered fiscal discipline at a company that loves to spend money on product development and marketing. For the first time in a decade, Nike's gross margin last quarter exceeded 40% of revenues. Meanwhile, Mindy Grossman, a fast-talking New Yorker hired two years ago from the Polo Ralph Lauren Corp., is pumping life into Nike apparel. She has slashed lead times to put new outfits on the shelf from 18 months to 11 and is launching a line of active lifestyle fashions. "I think they are bridging lifestyle and sport a lot better and creating more fashionable looks and fabrics," says Shawn Neville, CEO of retailer Footaction.

Nike will need to draw on all of its new discipline and brand strength to stay one step ahead of fierce shoe competitors such as Adidas and New Balance Athletic Shoe Inc., which have been gaining U.S. market share. The tense standoff with Foot Locker, which accounts for 11% of Nike's sales, didn't help. The mess, sparked by slow sales of Nike's premium shoes, will take months to clear up. A bigger challenge, though, is to prove Nike can be a force in lower-priced shoes. Whereas some teens once bought eight pairs of pricey shoes a year, cell phones and other gizmos now compete for their money.

That erosion of Nike's core business is a big reason its shares are down 30% since hitting a two-year high of $63.99 in late March. To respond, Nike is offering a relaunch of the classic Air Jordan 9 at $125. Admitting that the initial design and high price of the Vince Carter Shox doomed sales, it will launch the redesigned second edition at the NBA All-Star Game in February. Says a sobered Eric Sprunk, Nike's footwear vice-president: "We're not going to $200. We probably pushed that too aggressively."

Fortunately, Nike is now much less dependent on the U.S. market. Its overall international revenues have gradually grown to $4.4 billion, now nearly matching U.S. revenues of $4.7 billion. In the most recent quarter, Nike's sales grew 15% in Europe and 24% in Asia. A key driver of overseas growth will be soccer footwear and equipment. Last spring, to coincide with the World Cup, Nike introduced a line of radically designed shoes, jerseys, and equipment, including the Mercurial Vapor, worn by Ronaldo. It spent $155 million on endorsements and $100 million on ads, an interactive Web site, and 13 mini theme parks scattered across the globe.

The payoff? Nike believes global soccer revenues should hit $1 billion within five years. Even more promising, Nike seems to be recapturing excitement among younger consumers. "When you're walking down the street, people notice--ooh, Nikes. They don't remark on Adidas," says Fahri G?rlir, a 14-year-old German soccer fan from Frankfurt. Nike isn't over the hump yet. But far from the basketball court, it seems to be getting its head back into the game. By Stanley Holmes in Beaverton, Ore., with Christine Tierney in Frankfurt


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