FOOL ON THE HILL
An Investment Opinion
Nike's Got the Eye of the Tiger Yi-Hsin Chang (TMF Puck)
August 16, 1999
Like many Americans -- and many people all around the world, I imagine -- I spent a good part of my weekend watching the 81st PGA Championship on TV. I watched as Tiger Woods built a substantial five-stroke lead on Sunday only to nearly squander it with a bogey on the 12th hole and a double bogey on the 13th. I watched as 19-year-old Sergio Garcia came within one stroke of Tiger with some amazing play, including hitting a ball from the side of a tree right onto the green.
The final round at Medinah Country Club couldn't have been much more dramatic and gripping had it been scripted. Surprisingly, the commercials in between the action were also pretty entertaining, especially the Nike (NYSE: NKE) ads featuring Tiger Woods. My favorite was the one showing Woods juggling a golf ball using the club face of a sand wedge. He effortlessly bounces the ball from one side to the other and even with the club from behind, from between his legs. Then he turns slightly, pops up the ball, and then hits it straight out some 200 yards. Awesome. (You can see clips of the commercial at nike.com.) What's even more amazing was that Tiger pulled it off in just four takes.
The mesmerizing commercial (I commented that I could watch that ad all day long) combined with the fact that Woods was clad in a Nike cap and shirt with the distinctive and trademarked Nike Swoosh -- as was Nick Price, who was hot early on in the round but ended up finishing fifth -- made me reassess my take on Nike.
Longtime Fools may recall my Dueling Fools face-off on Nike with one of my favorite Fools, Dale Wettlaufer (TMF Ralegh), almost a year ago in September 1998. I remember it like it was yesterday... well, at least like it was last week. Taking the bear position, I had quite a good time depicting Dale as Ebenezer Scrooge (and me as his friend Jacob Marley), visited by the Ghosts of Nike Past, Present, and Future. My argument ended with Scrooge crying for mercy:
"Spirit! Hear me! I am not the man I was," Scrooge exclaimed, as down upon the ground he fell before it. "Good Spirit, assure me that I yet may sell my shares in Nike and buy a much worthier stock!"
Last September, I was concerned with Nike Present -- that fiscal 1998 (ended in May) revenues grew a mere 4% compared with 42% growth the year before and 36% in 1996; that U.S. footwear sales dropped 7%; that gross margins fell to 36.5%, the lowest in a decade. I was also worried about Nike Yet to Come -- what with projections of revenue shortfalls, declining orders, and rising costs.
But as Warren Gump (TMF Gump) also pointed out in a column last month, things are looking up for Nike. For fiscal 1999 (ended May 31), earnings per share before charges improved to $1.66 from $1.62 a year earlier, though revenues were down 8%. Future orders for athletic footwear and apparel scheduled for delivery between June and November 1999 totaled $4.2 billion, 4% higher than the same period a year ago. In constant dollars, orders for Europe gained 22%, Asia Pacific was up 11%, and the Americas were down 10%. According to Nike CEO Phil Knight, "We have seen the bottom in our Asia Pacific business."
The company has repositioned itself for its next leg of growth. In fiscal 1999, it worked on eliminating redundancies and inefficiencies in its corporate structure, cutting about 1,600 jobs, or 7% of its global workforce, and downsizing its regional headquarters. In October, Nike launched a new signature Jordan brand, featuring a full line of premium, high-performance basketball footwear and apparel.
Most importantly, Nike has been smart in diversifying its product line, from soccer shoes and apparel to its just-announced line of racing footwear. We're talkin' NASCAR, folks. Come next February, four models of racing-specific footwear will hit the tarmac when the 2000 NASCAR Winston Cup kicks off at the Daytona 500. NASCAR drivers Dale Jarrett, Bobby Labonte, Tony Stewart, Adam Petty, Al Unser Jr. and their crews will all be sporting Nike footwear. As Dale has pointed out many a times among these pages, NASCAR is certainly a growth sport. Now, if only Nike could get involved in wrestling...
Seriously, the best bet that Nike has made in recent years has been on golfing sensation Tiger Woods. I must admit I was one of the many skeptics who questioned Nike and American Express' (NYSE: AXP) decisions to sign the young golfer to multi-million-dollar endorsement contracts. In hindsight, signing the ever-photogenic and ever-marketable Woods was a brilliant move.
Not only is this guy young, good-looking, and universally appealing, he's incredibly talented with what will likely be a long and illustrious career ahead of him. Already, the Tiger Woods brand is incredibly strong. Woods has been credited with attracting many more fans -- particularly young people -- to the sport of golf, and his name is well-recognized even among non-golfers. Even my mom knows who he is! With Michael Jordan now retired, there's really no other athlete with the kind of prominence and popularity enjoyed by Tiger Woods.
Nike seems fully aware that they've got quite a prize with Tiger Woods. Not only is he featured on the main page of Nike's recently redesigned website, he's also the first athlete promoted on the company's pages dedicated to "Our Heroes," and the company has earmarked $2.3 million between 1997 and 2001 to help Woods teach and inspire underserved kids to play golf.
Just a few years ago, Nike didn't make any golf shoes or apparel, much less equipment. Today, you can order golf footwear, apparel, accessories (caps and visors), and equipment (balls, bags, and gloves) right from the Nike website.
The athletic footwear market appears to have bottomed out in Asia and may be bottoming in the U.S. Nike appears well-poised to take advantage of the Tiger Woods-inspired golf boom. For me, the Ghost of Nike Yet to Come is no longer painting a grim outlook for the company. Nike's best days are yet to come.