Fool on Call: Nike Talks Up a Big Game

Nike (NYSE: NKE  ) CEO Mark Parker, in the company's latest quarterly earnings conference call, declared with a star athlete's ego, "We're aligning every competitive advantage we have in our offense to connect with consumers and attack and beat the competition." Ali would be so proud.

But before turning our attention to how Nike plans to thump the competition, you can examine a snapshot view of the company's latest quarterly numbers. And following the release of the company's second-quarter results, my colleague Ryan Fuhrmann took us through a discussion on the company's valuation from a discounted cash flow perspective.

After running the numbers, Ryan concluded that at the current price, Nike has little room for error. From his perspective the sporting-goods manufacturer will have to keep throwing touchdown strikes, or else investors buying at this level might end up playing the part of boo-birds.

To help us determine whether Nike can continue on its hot streak, we turn to its latest quarterly earnings conference call. In this edition of Fool on Call, the following areas of growth will be explored in more detail:

  • China.
  • Retail.

Give me a "C" ... give me an "H" ...
What does China spell? Growth. We saw in the last conference-call analysis that China is critical to Nike's present and future success. I would be remiss if I did not address China and the Asia-Pacific region in the present discussion.

For the quarter, revenues from the Asia-Pacific region increased 15% compared with the same period a year ago. Nike's sales in China grew an astounding 30%. Both marks were considerably better than the 10% top-line growth that the company netted.

Parker pointed to Nike's increasing brand power as one of the primary drivers of growth. In a recent Wall Street Journal study, it was revealed that Nike is "among the 10 most admired companies in Asia." Not bad for a company that can't seem to design an attractive outfit for the founder's alum, the Oregon Ducks.

The Ducks' unis may be ugly, but the same can't be said for its performance in Asia. Nike is looking pretty in this region because it has found a way to identify its products and marketing with the people residing there. It connects with China, for instance, because it invests heavily in what it calls demand creation.

The power of Nike's brand isn't accidental. Rather, it has come about by considerable investment. For the quarter, demand-creation expenditures were up 27%, according to CFO Don Blair during the question-and-answer portion of the call.

Demand creation is being employed on multiple fronts. In the United States, the Air Force One/Air Force 25 campaign is one way that the company plans to connect with consumers during the NBA All-Star game. In China, its Just Do It campaign, particularly as it is tied to the upcoming Olympic Games, is one way that it is creating an identity among consumers there.

And Chinese consumers are buying ... a lot. Don't expect the high-double-digit revenue growth to dissipate in China anytime soon. Its Just Do It campaign will continue to increase in presence as we move closer to the 2008 Olympics, and at that time, we should see Nike in full effect for the world to see as Beijing takes center stage.

Increasing its retail presence?
The opening remarks of this particular call aren't where you'll find the good stuff. During the give-and-take time between Nike's leadership and Wall Street analysts is where the very interesting developments were revealed.

One development worth commenting on briefly is in regard to retail. Nike is primarily known as a wholesaler, providing goods to be sold through a wide range of retailers from Dick's (NYSE: DKS  ) to Foot Locker (NYSE: FL  ) . In addition to wholesale, its main retailing effort has been on the discount side. Outlet stores are useful, since they provide another avenue for Nike to get rid of clearance items. But aside from a few full-price retail stores like the multistory unit located in downtown Chicago, Nike really doesn't have much of a presence in Nike-only, full-priced retail. Expect that to change in the near future.

One analyst noted that Adidas and Puma are finding success with their own retail stores and wondered whether Nike would follow suit. Charlie Denson, president of Nike Brand, commented that outside the United States, it has leaned on using more owned as well as partnered stores that feature Nike only. Doing so enables it to more effectively create an experience for consumers and build brand awareness. The success the company is having with this strategy overseas may lead to similar retailing strategies in the domestic market, as Denson admits the company has an opportunity to do more retail in the U.S. and Western Europe.

This strategy makes a great deal of sense to me, considering that Nike has been struggling of late in Western Europe. Using more Nike-only retail stores might be just what is needed to get Europeans excited again about the Swoosh.

The Swish
Every great player seems to have a descriptor attached to her or his name. Ray Leonard had some "Sugar," Walter Payton came with some "Sweetness," and Nike has the Swoosh. Or perhaps better said, it has "Swish," because it has been nothing but nets for this giant as it continues to launch threes from beyond the arc.

No other brand dominates the world of sports quite the way Nike does, at least on the apparel and footwear side. We would have to look at Disney's (NYSE: DIS  ) ESPN for an equally dominant player on the media side. And perhaps we can include Electronic Arts' (Nasdaq: ERTS  ) EA Sports in the virtual realm. But as far as the athletes actually in the heat of competition, it is Nike, the "Swish," that rules the field of play.

Nike is talking up a big game about how it intends to put the big hurt on the competition. My bet is that Nike is fully capable of backing up the talk. With China ramping up to the 2008 Olympics and with more Nike-only retail stores in the works as well as its enormous e-commerce opportunities, I don't see any reason why Nike can't continue on its path of solid growth and dominance of the sporting world.

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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool has a disclosure policy.


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