Nike Bull's Rebuttal
by Dale Wettlaufer ([email protected])

First, let me compliment Yi-Hsin for a wonderfully imaginative framework for presenting her argument. This stuff doesn't have to be all dullardry! I loved the Dickens device.

Yi-Hsin brings up some cogent points. No doubt, 1999 will not be a great year for Nike and 1998 was not too hot, either. Future orders are down and Asia will decline 30%, huh? Well, that's business. This is a global company that has to deal with these things. Japan is still caught in a grinding and serious recession, and the developing nations of Asia have fallen flat. However, as I pointed out in my argument, these are only two years in a number of years that decide the value of a business.

As for fashion, the company is not a fashion company, but it does have to serve the changing tastes of youth. As a result, the company is changing its tack somewhat and concentrating more on girls and women. Talking with Women's Wear Daily late last year, Phil Knight said, "The women's business is probably more exciting than the men's. That's true. It's grown faster, and it has more percentage growth [potential] in the future than the men's business." In the coming year, women's soccer will see its first World Cup. According to the WWD article, women's apparel will account for 40% of Nike's apparel sales by the year 2002. Compared with last year's total revenues of $9.6 billion, we're talking about $1.7 billion in sales, a compound annual growth rate of 35% since 1996, when women's apparel generated $280 million in revenues.

When you look at Nike, you have to look at the collection of businesses it is building. You can look at the aggregate numbers, or get a sense of what's happening under those numbers. From the company's 10-K: "Despite the economic issues facing the Asian markets, total non-U.S. footwear and apparel revenues increased 12%, 21% on a constant dollar basis, and now represent 41% of total Company revenues." Looking at that a little more closely:

Revenue increases were experienced in every region except the United States. Outside the U.S., Europe increased 15% (24% in constant dollars), with footwear and apparel increasing 6% and 35%, respectively, (14% and 44% in constant dollars, respectively), Asia-Pacific revenues were flat compared with the prior year (11% increase in constant dollars) with footwear down 8% and apparel increasing 34%, respectively, (2% increase and 50% increase, in constant dollars, respectively), and the Americas increased 32% (35% in constant dollars), with footwear and apparel increasing 20% and 78%, respectively, (23% and 83% in constant dollars, respectively).

That is the picture of a healthy company. Looking at the company's cash flow, we also see that net cash flow from operations increased steadily in 1998 as inventory growth slowed dramatically:

 
  
                    1998       1997       1996 
 Cash provided by 
 operations  .....  517.5      323.1      339.7 
 (in millions) 
 

This year the company will probably see inventory reductions generate cash. Furthermore, late last year Nike announced a four-year $1 billion stock repurchase authorization and bought back $202 million in stock in fiscal 1998.

I could roll out a lot of numbers to support my assertion that the company is fairly valued here and that shareholder value can grow from here at a rate greater than the S&P 500 over the next 10 years, but I really would rather rely on the anecdotal evidence and light quantitative stuff that I've brought out. This is a company that promotes sports worldwide and is building affinity for its products and name throughout the world. As for over-Swooshification, the company is breaking out sub-brands and organizing itself along the lines of individual sports, and not just products. ACG (All Conditions Gear) will be its own unit, along with Nike Hockey and the Jordan brand, according to Footwear News. This will allow the company more pricing flexibility and let Nike introduce new brand names. With a recent cutback in employment, the company will have ample headroom in the budget to proceed with new initiatives.

I'll return again to my out-of-pocket test. Would I buy this company at a premium? There are lots of other companies that I feel offer me better value as an investor, but there are a HECK of a lot more companies that offer much worse value. Would I make a market rate of return on this company over 10 years? Yes. So, I can't be bearish on it. And leaving any disclaimer behind, yeah, I'm bullish on Nike.

Next: The Bear Responds