FOOL PLATE SPECIAL
Shox Support at Nike

As expected, Nike reported a dip in third-quarter profits on flat revenue growth as divisional gains were dragged down by the company's core market: domestic footwear. While the success of new lines such as Shox and Presto bode well for Nike, the company is still reeling from bumps in software implementation, excess inventory, and a faltering euro.

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By Rick Aristotle Munarriz (TMF Edible)
March 21, 2001

Investors jogging their minds over what to do with their shares of Nike (NYSE: NKE) didn't even break a sweat yesterday. The leading athletic footwear maker reported $0.35 a share in third-quarter profits -- in-line with recently reduced estimates -- and well off the $0.52-a-share showing the year before. Sales were flat, coming in at $2.2 billion, and margins took a hit as everything from a weaker euro to supply-chain disruptions to excess inventory closeouts hurt the company.

Dig a little deeper into the quarter's problems, though, and you'll find a gorilla brand that might not be doing as badly as the numbers suggest.

Nike breaks down its footwear, apparel, and equipment divisions into four geographical areas. In 11 of those 12 segments, revenue showed healthy upticks. The one downer just happened to be the company's largest and most penetrated market: U.S. footwear sales. While stateside sales now make up less than a third of Nike's total business, a 15% decline was enough to flatten the growth spurts everywhere else.

Nike also tries to hedge its currency risk, but it's often feast or famine in the global economy. On a constant-dollar basis, all three international regions (Europe, Asia, and the Americas) had sales gains in the mid- to high-teens. However, a strong U.S. dollar cut into those top-line tallies.

One sluggish segment. One anxious buck. And, well, yes, one painful system upgrade too.

The company is in the middle of a five-year plan to upgrade its supply chain system. By the time everything is in place, Nike will have spent $400 million to improve its efficiency. Nike outsourced the project to three major software players: i2 Technologies (Nasdaq: ITWO) is handling the demand and supply planning, SAP (NYSE: SAP) is tackling the order and delivery management system, and Siebel Systems (Nasdaq: SEBL) got the nod for the sales force automation and customer management update.

Things rarely go as planned, though, and serious problems in i2's implementation forced Nike to put out unordered inventory to the tune of 5 million pairs of sneakers. Most of the excess inventory is already accounted for: Nike's nearly 120 factory outlet stores worldwide were the perfect destinations for some of the surplus. But the problems are also delaying real orders, which will create a bit of spillover through at least the next two quarters. (For more on the consumer brands business, check out our InDepth Page on the subject.)

The economy is also threatening to challenge Nike to some one-on-one action. Dipping consumer confidence isn't the best scenario for a company looking to move the resilient yet perpetually high-priced Air Jordans. If we are entering a global recession, the economy will find Nike easy to post up and slam through the hoop. Like everything else, though, this too shall pass.

In short, while Nike's problems are huge, they are also temporary. If there is one long-term concern, it is that the big markdowns to clear out merchandise may lead consumers to expect steep discounts from now on. The one glimmer there is that Nike's latest innovations -- the high-end Shox and mid-range Presto -- are selling briskly.

You know Shox, right? The sneakers with the "boing" ads? Boing! That's exactly what Nike is hoping to do right now. Its chances of bouncing back are probably better than you think.  

Rick Aristotle Munarriz scored just six points for his junior varsity high school basketball team. He did so wearing Nike shoes. Absent any lucrative endorsement deals, he settled for the trophy wife and a shot at writing for the ultimate community-fueled financial site. He does not own shares in Nike. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.