Nike Dons Its Back-on-Track Shoes

After regrouping, Nike (NKE Quote - Cramer on NKE - Stock Picks) appears to be on the rebound. But swoosh watchers are wondering whether, this time, the comeback is for real.

The stock got a lift Monday, gaining 2 7/16, or 5%, to 47 15/16, after Bloomberg.com posted comments from Nike's Chairman and Chief Executive Philip Knight, who said earnings would improve in the fiscal year ending in May 2000.

But some shareholders complain that they've heard this all before from Nike, which in the past said earnings would improve in spring 1999 but later pushed that back to the fall.

"It's been so hard to figure out because of the problems in the industry," says Doug Plahn, an analyst with Omaha, Neb.-based Bridges Investment Counsel, which owns 100,000 Nike shares. "It all depends on whether or not you believe in the forecast going forward."

The First Call consensus has the company earning $1.54 per share for fiscal 1999, compared with the $1.62 per share Nike earned a year earlier. Analysts expect Nike will earn $1.92 per share in fiscal 2000. With Nike trading at 25 times the 2000 projected earnings, the stock is far from cheap given the lingering concerns.

Yet if Nike can return to its former lean, mean self, the upside could be a slam-dunk given the company's dominant position and uncanny marketing ability. John Shanley, an analyst with Van Kasper, says Nike -- after receiving a wake-up call in 1998 in the form of its first-ever market share loss -- has made some significant changes that could improve its standing. (Shanley rates Nike a buy. His firm hasn't participated in underwriting for Nike.)

Among the initiatives: a push to sell sneakers, apparel and equipment on the Internet; increasing emphasis on fashion and styling; a new program that attempts to segment product among major retailers; and the re-emergence of some former bestselling products.

Nike is expected to offer more details at an analysts' meeting Feb. 9 in New York.

Vada Manager, a Nike spokesman, says the company will unveil its e-commerce effort within the next 10 days, and that it will include footwear, apparel and equipment. The company's high-end Alpha Project line of sneakers will be among the styles sold online.

While most analysts and investors say selling direct to consumers makes sense for Nike, and they likewise expect the stock to react positively on the news, e-commerce efforts at other companies have been lost in the shuffle. For instance, Authentic Fitness' (ASM Quote - Cramer on ASM - Stock Picks) stock did little after it launched an e-commerce business, while much smaller competitor Active Apparel (AAGP Quote - Cramer on AAGP - Stock Picks) watched its stock soar. And even though investors are granting many Internet stocks heady valuations, an e-commerce initiative is by no means a cure-all for troubled companies. Take Venator (Z Quote - Cramer on Z - Stock Picks), whose stock hit a 52-week low last week despite the fact that its Foot Locker chain sells sneakers and apparel online.

Nike's status as a company on the mend goes deeper than the Net. During the past year, the Beaverton, Ore., manufacturer has realigned some business units to make them more product-focused, hired fresh blood and placed more emphasis on fashion and styling. The effort appears to be winning back retailers who complained that some of Nike's recent styles were unfashionable. For instance, a green Air Jordan shoe scheduled to be introduced this month is expected to disappoint, simply because the color is garish and hard to match with clothes.

"Nike assumed that if the product had the swoosh, people would buy it," says Van Kasper's Shanley. "That was a misnomer that caught up with them last year." New styles are expected to minimize the swoosh and be less "athletic" looking so that people will want to wear them from the gym to the mall.

"The general feeling is that Nike's line is strong for back-to-school," says an executive at a major retailing chain, who asked not to be named. "The cosmetics and price points are good."

Nike will test a program that attempts to provide retailers with differentiated merchandise for the first time this fall in an attempt to eliminate the "mirror effect" that plagued retailers, many of whom were forced to mark down merchandise during last year's back-to-school season, Shanley says. Customers walking through a mall saw exactly the same shoes in almost all the athletic retailers. By offering each chain "exclusivity" on certain products, Nike hopes to drive sales.

Nike also is planning to launch a "comeback" line featuring the company's best selling styles of the past five years, such as such as Airmax '95 and Air Jordan 13, Shanley says. "This will go off like a rocket," he predicts. "Believe it or not there are people who collect athletic footwear. This will draw traffic into stores."

Nike has faced a challenging environment for nearly two years as both domestic and foreign markets for athletic apparel and sneakers have become glutted. Shanley estimates that 1998 U.S. athletic shoe sales declined by $500 million to $11.5 billion even as retailers added some 2.3 million square feet of selling space. Sales in foreign markets haven't faired much better given the problems in Asia.

But Nike should see a Far East boost when Sydney, Australia, hosts the summer Olympics in 2000. Shanley says the games could do for Japan what the Atlanta games did for the U.S. And he says two major European athletic retailers he spoke with are increasing the amount of Nike product they will carry this spring.

Nike may also find the going a bit easier in the next six months as its main rival, Adidas, which stole market share last year with its push into running shoes, faces problems. Shanley says retailers are complaining that Adidas' spring shoes look too similar to last year's styles.

If Nike can pull off these initiatives, then perhaps after months of losing its way, the swoosh will finally find its way back on track.