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 THE STAT 26Percentage of wireless customers who use their cell phones to take picturesMore Vitals
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APRIL 18, 2003
When to Run with Nike? The athletic apparel giant is back on the fast track. Its pricey stock, however, has investors waiting for a price break to get in
Perhaps no company has cashed in more successfully on America's fascination with sports than Nike (NKE ): In the 40 years since its co-founding by CEO Phil Knight and the late University of Oregon track coach, Bill Bowerman, Nike has grown from a maker of shoes for track-and-field athletes into the world's leading purveyor of sportswear and sneakers -- for everyone from major leaguers to wannabes. Nike's pace slowed in the late 1990s, as the sportswear wave it rode fizzled and its revenues fell and profit growth moderated. But the company, which should deliver record sales of more than $10.5 billion for its fiscal year ending in May, has at last come to grips with challenges such as price resistance to $200 basketball shoes and changing tastes on the part of consumers who once treated sneakers as high fashion. A steady stream of new products plus expansion overseas and better inventory controls have produced a resurgence in growth that, though much more restrained than in the mid-1990s, has fueled a 36% rebound in Nike's stock price since October. That leaves investors pondering the question: When will Nike's shares drop enough to make them a smart buy? "WORTH HOLDING." Certainly, Nike is no longer growing at breakneck speed. Analyst Jeffrey Edelman at UBS Warburg expects its revenues to increase a languid 6.8% in fiscal 2003, while profits increase 9.1%. Its outlook is so modest primarily because Nike's U.S. sales -- which account for about 47% of total revenues -- are about flat year-over-year. Yet Nike is faring better than many sporting-goods manufacturers, says David Campbell, an analyst with investment bank Davenport & Co. in Richmond, Va. Its revenues are at least growing, while the overall sportswear market remains stagnant, he says. In fact, "Nike is a stock worth holding" in hopes that an economic upturn will boost its business, says Yogeesh Wagle, an retailing analyst with Standard & Poor's. Though Wagle thinks the shares are fully valued at the current $52.30, just shy of their 52-week high, analysts say the stock could dip in the next few months if the economic recovery slows or if worries mount over the spread of SARS (severe acute respiratory syndrome), which originated in China. Some analysts think it could disrupt operations there that manufacture one-third of Nike's shoes. The stock could be a buy anywhere below $50, says Wagle. Among the variety of factors that have revived the Beaverton (Ore.) company, perhaps the most crucial is growth overseas, where it gathered 53% of revenues in 2002, a figure that's expected to rise to 55% in its fiscal year just ending. International sales, principally in Japan, Brazil, and Britain are rising by double digits annually, thanks in particular to major gains Nike has made in the soccer market. BEYOND FOOTWEAR. That's partly because the Nike-endorsed Brazilian team won the World Cup in 2002. But it's also because Nike has begun customizing its shoe designs for overseas markets. In Latin America, its customers often play soccer on beaches or rocky roads instead of grass fields as in the U.S. So Nike has made its shoes for that market more durable, says Joe Ungari, director of advanced research and development for footwear products. Nike is also diversifying beyond athletic footwear, where it holds more than 40% of the U.S. market. It's dabbling in golf equipment. And in its third fiscal quarter, apparel sales increased 9% year-over-year, to $692 million, amounting to more than 25% of its quarterly sales. Nike doesn't break out its margins by product line, but apparel delivers higher margins than shoes, at least in the U.S., says Jamelah Leddy, an analyst with brokerage McAdams Wright Ragen in Seattle. And Nike is gaining momentum: Surveys of retailers show that its NBA "Replay" jerseys are among Nike's top sellers, according to analysts at Wells Fargo Securities. In its current quarter, Nike plans to launch more "seamless" clothes, tailored to offer better sweat control.
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