FOOL'S DEN
Q&A on Nike

With Bob Fredeen (TMF Bobdog)
March 28, 2000

Nike shoes may be on your feet, but do you know where the sneaker maker stands? Foolish Research Analyst Bob Fredeen knows Nike from head to running-shoe-clad toe, and takes some time to answer questions on everything from Nike's ads to its stock price.

Q: Can you talk a little bit about Nike's recent advertising campaigns? It seems like Nike's ads lost a little bit of focus, but the company may be back on track with ads featuring Tour de France winner Lance Armstrong. How do these campaigns compare with previous ads?

A: Nike's recent ads? Nothing nice comes to mind. In fact, I think most people will agree that campaigns like "Whatever" and that tattooed guy in magazines don't seem to really say anything about Nike. Sure, the "Whatever" spots have athletes, but that's about it. The problem with these ads is that Nike is about winning at sports, not sports personalities or self-expression with an ink-laden needle. It's about winning regardless of the effort it takes, about training and competing to be the best.

But now we have Lance. Sure, he's a sports personality, but the ads aren't about that. They are about him overcoming the odds, training, and dedicating himself to first beating cancer, then beating the greatest cyclists in the world. And he doesn't apologize for his success, either. He earned it. I think this campaign is vintage Nike and the company is on the right track with this idea.

Q: Okay, I don't follow Nike or anything, but I know the company has been languishing for the past three years, and I wonder, in a nutshell, what must Nike do to get its business back on track? Does the company most need to improve its brand image, its inventory management, its earnings predictability, or all three?

A: All three are connected. If the brand image improves, then inventory management is easier to correct because products are selling well. And, if products are selling well, then earnings are more predictable. Then again, if inventory gets out of control, this causes more discounting, which hurts earnings, and could hurt the ability of the brand to charge higher prices. Where should Nike start? Probably with inventory management. Inventory levels were a major factor in the recent industry slow-down, and I believe that inventory management will be a critical factor in Nike's future success.

However, having an efficient system for bringing shoes to market isn't all that useful if people aren't buying those shoes. So, Nike also needs to work on its brand. Marketing is improving, and the company is focusing on its core values. These efforts should help the company generate consistent growth. Other factors related to inventory and brand management will also help, including working more closely with retailers and manufacturers and encouraging the use of advance ordering.

Q: How is Nike handling the so-called "brown shoe" fad? Is this continuing to hurt its sales?

A: You know, I don't think brown shoes are a fad. Look around your office. For folks who work for unenlightened companies, wait for Casual Friday. Business casual isn't really jeans, it's more like khakis, twills, and other pants. Do your cross trainers go with those pants? Probably not. When I look around the Fool offices, I see lots of hiking boots, casual shoes, and other outdoor-styled shoes -- all "brown" shoes. Is that going to change? Honestly, I don't think so. Business casual seems to be growing in popularity, as will the shoes of business casual.

Nike has developed some styles such as hiking boots made like athletic shoes, darker colors, and more outdoor-oriented styles in response to the popularity of these types of shoes. But since these styles are not Nike's forte, it tends to be a follower, not a trendsetter. Is this hurting sales? Actually, I think Nike's own marketing has done more damage to its sales than Timberland, Wolverine, and Rockport combined. If basketball shoes are out, why are adidas round ball shoes so popular? How about the strength of the Jordan brand, which is focused entirely on basketball? If athletic shoes are out, why are running shoes doing so well (and not just those "all-terrain" runners, either)? I think the answer is marketing. Sure, brown shoes are popular, but they're only a piece of the puzzle.

Q: If you had to name the one thing that Nike's long-term fate relies upon most, what would that be?

A: Improve inventory management. CEO Philip Knight has mentioned that inventory is "where you really get killed in this industry," and he is correct. Because this industry has a large fashion component, inventory risk is even greater than for other industries. Shoes that are popular in spring may not be in style by the "back to school" season, which means that prices may have to be reduced to encourage people to buy the shoes. Beyond the obvious damage to gross margins and profits, extensive discounting makes it harder for a brand to return to previously high prices. If a lot of Nike shoes are on sale at half price, it will be harder to convince consumers to pay full price for the rest of the shoes. To protect margins and brand value, the company needs to manage its inventory better.

Q: Why might Foolish investors want to consider investing in Nike at recent prices?

A: The first reason a Fool should consider Nike is because it's one of the biggest brands in the world. Second, it dominates its industry. These are the two main reasons to look at Nike. The fact that Nike seems to be priced according to what the market expects to see in the next year makes the company even more attractive to Fools. Why? Because the next year won't be very good for the company. It is just beginning to reap the rewards of its restructuring in terms of higher profit margins; however, sales are still increasing slowly. Neither Nike nor adidas is expecting much over the next 12 months because it will probably take the industry about 12 months to work through its problems.

In the meantime, we have a UEFA Cup in Europe, the Olympics in Sydney, plus U.S. sporting events like the NBA finals, the World Series, and the Super Bowl, as well as a multitude of college events. In Asia, economies are turning around and pro sports are becoming more popular. In 2002, the FIFA World Cup will be held in Asia, which should boost the popularity of soccer in that region like it did the U.S. in 1994.

There should be a lot of excitement in the sports industry worldwide over the next few years. If you think Nike can capture some of the excitement and direct it toward its products, then now might be a Foolish time to invest in Nike.

Q: Do you believe that Nike will be able to leverage this year's Olympics into a new marketing campaign that can create a lasting increase in sales, as it has to some degree in years past?

A: The Olympic games are great for creating athletic heroes, and that's what Nike is all about. But there are a couple of concerns with this year's Olympics. First, they're in Australia. That's not meant to slight the Fools Down Under, but the competitions will be about 14 time zones ahead of the U.S. Sure, there will be taped coverage, but I don't think we'll see too many Americans glued to their seats for the live coverage.

Second, the Olympics are in September this year -- in the footwear industry's down season. Overall, I don't think the Olympics will have a huge impact in the U.S., and if there is an effect, it will most likely show up in spring 2001. However, the Games could help boost sales in Asia, especially if the athletes from the region perform well.

Q: If you were frozen for 10 years, when you woke up in 2010, do you believe that Nike would be a considerably more valuable company given what you know now?

A: It's really hard to answer that right now because Nike is in the midst of a transition. Ask me after next quarter. But since I've got to give an answer now: Yes, I do believe that Nike will be considerably more valuable in 10 years. Once it works out its short-term problems and concentrates more on its core values, it could enjoy another string of very successful years. The company seems to be willing to review its own performance, put itself under a microscope and do whatever it takes to perform well again. That kind of company should be successful in the long term.

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