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The Honolulu Advertiser
Posted on: Sunday, December 1, 2002

Nike pushes world markets to rescue falling profits

By Anthony Effinger
Bloomberg News Service

BEAVERTON, Ore. — Walk around Nike Inc. headquarters here and there's a chance you'll see golf great Tiger Woods strolling past a glass-and-steel building named for Mia Hamm, the U.S. soccer star.

You might catch an entire pro basketball team in the employee store. Or you may see chief executive Philip Knight, 64, at his reserved table in Nike's sports bar, looking more like a Hollywood superagent in his trademark black suit and black T-shirt.

Nike is nothing if not image-conscious. Now 30 years old, it became the world's biggest athletic shoe maker by getting cool athletes to wear its cool shoes. Michael Jordan's newest model, the Air Jordan XVII, comes in a metal briefcase and costs $200.

"Nike is still the king of sports marketing," says Steve Rosner, cofounder of 16W Marketing, a firm in East Rutherford, N.J., that advises companies on athletes' endorsements.

Brilliant marketing may not be enough, especially if you're buying the stock and not the shoes. Nike shares have fallen 22 percent this year to $43.75 a week ago. Last year, they rose less than 1 percent.

High hopes

Investors expect more from Nike. They got spoiled in the 1990s, when millions of kids paid $100 and up for a pair of its sneakers. An investor who bought $1,000 of Nike stock on Jan. 2, 1990 — a time of slow economic growth, like today — would have had $10,775 by February 1997, when the shares topped $75.

These days, Nike's results are downright boring. Profit margin, or net income as a percentage of sales, was 6.7 percent in the fiscal year ended May 31, 2002. Shipper United Parcel Service Inc.'s margin was 7.8 percent in 2001.

Nike's sales have climbed an average of 1.6 percent a year in the past five, lagging a 15-percent-a-year gain at grocery store chain Safeway Inc. Cash flow from operations at Nike was $4.04 a basic share in fiscal 2002 compared with $6.37 a basic share for Nucor Corp., a steel company.

What's gone wrong? For one thing, U.S. consumers, the source of half of Nike's $9.89 billion of annual revenue, aren't as flush. Unemployment rose to 5.7 percent in October from 5.6 percent a month earlier, according to the U.S. Department of Labor. Consumer confidence fell to a nine-year low in the same month. Shoes costing more than $100 don't sell as well when people worry about losing their jobs.

"I want to see employment picking up before I own more of the stock," says John Maack, who helps manage about $800 million of assets at Crabbe Huson Group in Portland, Oregon. Crabbe Huson had sold most of its Nike shares by March.

Foot Locker fight

Nike is feuding with its biggest customer, too. Foot Locker Inc., the largest U.S. athletic-shoe retailer, cut holiday orders for some of Nike's high-end shoes, Nike said in an Aug. 14 filing with the U.S. Securities and Exchange Commission.

A month later, Foot Locker said in its own filing that Nike was limiting Foot Locker's purchases of some popular Nike products for 2003. Foot Locker expects its purchases of Nike merchandise to fall by as much as $250 million in 2003, the filing said. The retailer accounted for about 11 percent, or $1.1 billion, of Nike's revenue in fiscal 2002, according to Nike.

Rival Reebok International Ltd. is getting back in the game. The No. 2 U.S. athletic-shoe maker is selling more basketball shoes — the product that Jordan, who's now with the Washington Wizards, first endorsed in 1985, when Nike signed him in his rookie year with the Chicago Bulls. Reebok has a sponsorship deal with Allen Iverson, the 6-foot Philadelphia 76ers guard who's led the National Basketball Association in scoring for the past two seasons.

NBA rivalry

In November, Reebok began selling its first NBA-branded shoes at the NBA Store in New York and on www.NBA.com.

Adidas-Salomon AG is going after Nike in basketball, too. In February, it introduced the $90 T-Mac, the signature shoe of Orlando Magic guard Tracy McGrady. The T-Mac was the top-selling shoe in the week ended Feb. 3, according to SportScanINFO, which tracks industry sales.

Adidas, based in Herzogenaurach, Germany, has sold a total of 500,000 pairs. The company unveiled the T-Mac 2 in November. It expects to sell 700,000 pairs of the new model this season, adding to a 50 percent increase in its basketball shoe sales in the first half of 2002.

Knight, a University of Oregon runner who got his start in 1964 selling shoes from the back of his car at track meets, is trying to shake off the malaise by selling more products abroad. He declined to be interviewed for this article.

Soccer endorsements

Knight is pushing hardest in soccer, the world's most popular sport. He spent $155 million of a $1 billion marketing budget on endorsements by soccer players and teams in the fiscal year ended in May — more than he spent signing up basketball stars.

The 2002 world champion Brazil national team wears Nike shorts and jerseys, thanks to a 10-year, $160 million deal Knight made in 1997. In November 2000, Manchester United, Britain's biggest soccer club, agreed to wear Nike shirts and shorts for 13 years after Knight paid $438 million in his most expensive endorsement deal ever.

Nike is hoping for big business in China. It has an endorsement agreement with Yao Ming, a 7-foot-5 Chinese national who joined the Houston Rockets as the NBA's first-round draft pick this year. Yao's games reach as many as 287 million households in China, according to the NBA.

Knight is also pursuing new sports at home, like golf, for which the company is making everything from shoes and apparel to clubs and balls. He's counting on Woods — the No. 1 player in the world, with victories in eight major tournaments — to stir interest in Nike gear. Last year, Nike agreed to pay the 26-year-old $100 million for a new five-year contract after first signing him in 1996.

Nike doesn't disclose golf sales or profits. Chris Zimmerman, Nike Golf's general manager, says sales rose more than 40 percent in the 2002 fiscal year and that the unit made money.

Knight is selling more women's clothes, including a maternity line he started this year. Before then, Nike employees had to discreetly wear other brands for sports if they were pregnant.

He's also making acquisitions. In February, Nike bought clothing company Hurley International LLC of Costa Mesa, California, for an undisclosed price. Hurley sells $70 million of T-shirts, cargo pants and surf shorts annually, capitalizing on a craze for surf and skateboard gear. Nike runs Hurley as a subsidiary.

"Nike wasn't considered authentic in the skate and surf crowd," says Matt Powell, a consultant to athletic shoe retailers at Princeton Retail Analysis. "I applaud the move."

Analysts question what Nike will be without Knight. Pallid for an avid runner, with a tangle of graying red hair and a beard, Knight has said little about succession. He's run the company for almost four decades, as chairman and CEO of Nike and as head of its predecessor, Blue Ribbon Sports, which changed its name to Nike in 1971.

Knight leaves day-to-day business to Charlie Denson, 46, and Mark Parker, 47. Both are Nike veterans.

Aging board

Knight has an unusually large amount of stock for the chief executive of a public company, says Charles Elson, director of the University of Delaware's Center for Corporate Governance.

His shareholdings give him a substantial say about who goes on the board. Nike has two classes of stock. Class A shareholders elect nine directors, compared with three for holders of class B shares, the ones listed on the New York Stock Exchange. Knight owns 80 percent of the class A shares — or about 32 percent of the company — which means he can pick board members at will.

Elson says many of them should retire. "A lot of folks on the board have been there an awfully long time," Elson says. "The longer you're there, the less effective you become as an independent monitor."

Nike's 12 directors have served an average of 19.3 years compared with 7.5 years for the 10 board members at Reebok. Two are octogenarians: John Jaqua, 81, a lawyer in Eugene, Oregon, and Charles Robinson, 82, a venture capitalist from Santa Fe, New Mexico.

Jaqua has been a director for 34 years, Robinson has served for 24 years and Portland lawyer Douglas Houser, 67, has been on the board for 32 years.

"When you invest money in a public company, you want to make sure there's some accountability to shareholders," says Nell Minow, editor of Corporate Library, a Web site that monitors corporate governance. "A company like this, where the CEO controls the board, is not going to have that."

Spokesman Rick Anguilla says Nike wanted established people for its board in the early days. It was a young company in a young industry, and it needed credibility, he says. In November 2001, Nike added Jeanne Jackson, former CEO of Wal-Mart Stores Inc.'s online unit, to get a fresh perspective. Michael Spence, a venture capitalist and Nobel laureate in economics last year, joined in 1995.

There are signs that Nike's push beyond the United States is working. Sales in Asia and the Pacific jumped 9.2 percent to $1.2 billion in fiscal 2002. Sales in Canada and Latin America rose 5.4 percent. Europe, the Middle East and Africa came in at a gain of 5.7 percent, almost triple the 2 percent gain in America.

Getting more Europeans to buy Nike cleats may be the easy part. Convincing investors that they need to look outside America and beyond shoes when sizing up Nike is more challenging.

"We still think of them as a sneaker company," says Bill DeRosa, director of research at Badgley Phelps & Bell in Seattle, which manages $1.3 billion and owns no Nike shares.