Nike Bear's Den
by Yi-Hsin Chang ([email protected])

Once upon a time -- of all the good days in the year, on his birthday, his 30th birthday -- Dale Wettlaufer, a.k.a. TMF Ralegh, a.k.a. Ebenezer Scrooge, sat busy and alone at Fool HQ, crouched over his desk punching numbers into his calculator and adding countless figures to his endless spreadsheets. Periodically he surfed the Fool message boards, posting a few snippets here and there, checking to see if anyone else had made him a Favorite Fool. As the hours passed, Dale got sleepy and soon dozed off.

Not long thereafter, he was startled by the voice of his fellow hack, Yi-Hsin, a.k.a. TMF Puck, a.k.a. Jacob Marley, speaking in an ominous tone: "Dale. Dale. I am here to warn you that you have yet a chance and hope of escaping the fate of a Nike shareholder. You will be haunted by Three Spirits: the Ghost of Nike Past, the Ghost of Nike Present, and the Ghost of Nike Yet to Come." And with that, she was gone.

"Bah! Humbug!" said old Scrooge, dismissing the advice out of hand. Then suddenly a strange figure appeared. It wore a bright white T-shirt with the words "Just Do It" and a "Swoosh" blazoned in red across the chest. "I am the Ghost of Nike Past," it said. "Take heed! I am here to remind you what Nike once was in its glory days." With that, the spirit popped a video into a nearby VCR and directed Dale's eyes toward the TV screen.

The face of Phil Knight, Nike's co-founder, chairman, and CEO, popped onto the screen. He sat courtside watching the U.S. Dream Team easily trounce its far inferior opponent in basketball. Watching his Dream Team -- eight of the 12 players had Nike contracts and were sporting shoes bearing the Swoosh logo. In the past decade, the company's revenues increased 5 � times to $9.55 billion while net earnings reached as high as $795.8 million in fiscal 1997 (ended May 31). What's more, its market capitalization grew more than ninefold in that same period to $13.2 billion.

"Solid marketing, solid financials, what's not to like?" Dale asked, looking about him for the Ghost of Nike Past and saw it not. In its place was another spirit, wearing a T-shirt decorated with the words "I can" and instead of the Swoosh mark, "nike" was written in all lowercase script. "Nike was a great success story, but that was in the days of Nike Past," the spirit said. "I'm the Ghost of Nike Present."

The ghost then handed Dale a summary outlining why Nike isn't the way it used to be. Under the title "Fiscal 1998," it read:

* Revenues grew a mere 4% compared with 42% growth in 1997 and 36% in 1996.

* U.S. footwear, Nike's largest market segment, saw sales drop 7%, or $255 million.

* Net earnings (including a $129.9 million restructuring charge) were cut in half to $399.6 million. Earnings per share were $1.35, down from $2.68.

* In the U.S., operating income plunged 38%, while in the Asia-Pacific region, the company had an operating loss of $34.6 million compared with income of $175 million in 1997.

* Gross margin fell to 36.5% -- the lowest in a decade -- from 40.1% a year ago.

* Return on equity was a dismal 12.5% compared with 28.5% in 1997 and an average of 27.5% for the preceding 10 years.

* Return on assets was 7.4%, down from 17.1% the year before.

* Selling and administrative expenses increased to 27.5% of revenues compared with 25.1% and 24.6% in the two years past, respectively. Advertising and promotion expenses alone totaled $1.13 billion, a 15.5% rise from $978.3 million -- outspending all fashion and accessories advertisers in the U.S.

* Nike's share price shrank 20% over fiscal 1998, while the S&P 500 rose 28.6% and the S&P Consumer Goods Composite gained 34.6%.

In terms of global brand recognition, Nike certainly ranks up there with Coca-Cola, Disney, and McDonald's, and it remains the world's largest athletic shoe and apparel maker. But with the U.S. market near saturation, Nike's size and ubiquity has actually resulted in a "big-brand backlash." Losing ground to rival adidas, Nike is no longer seen as one of the coolest brands by U.S. teens, who make up the company's biggest market, according to a recent survey. Those fickle teens now sport "brown shoes" such as boots with their baggy or bellbottom pants. Marketers say that teens want shoes and apparel that express their individuality instead of showing they are fans of Michael Jordan or Grant Hill. Far from the rebellious trendsetter that it was in the late '80s and early '90s, Nike now stresses function over fashion, and its new, politically correct slogan "I can" lacks that "in your face" attitude of its phenomenally successful "Just Do It" campaign.

In July, Standard & Poor's placed Nike's corporate credit and senior unsecured debt ratings on CreditWatch with "negative implications" and expectation that operating results will continue to fall short of previous forecasts.

Dale's countenance fell as he asked in a soft, hesitant voice, "Spirit, tell me if Nike will live." The voice that answered was not that of the Ghost of Nike Present, but a deeper, more somber voice much like that of James Earl Jones, "Nike will survive, but don't expect to see a phoenix suddenly rise from the ashes."

"Are you the Ghost of Nike Yet to Come?" old Scrooge inquired.

Without answering the question, the spirit continued: "Take a look at Nike's latest 10-K. There in black and white the company says it expects 1999 revenue growth to lag that of 1998. That means less than 4% growth. The company also anticipates revenue shortfalls in the U.S. for the first half of fiscal 1999 and says that revenues from Asia could be as much as 30% lower than in 1998. Meanwhile, advance orders for Nike shoes and apparel scheduled for delivery between June and November 1998 totaled roughly $4.2 billion -- 13% lower than the same year-earlier period. In addition, the company expects selling and administrative spending to be 27.5% to 28% of revenues, below its target of 25%."

"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!"

Holding up his hands in a last prayer to have his fate reversed, Dale saw the phantom shrink, collapse, and dwindle down into the carpet.

Next: The Bull Responds