Riding The Roller
Coaster
by Risa Kaplan
(TMF Style)
Shares of NIKE <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NKE)") else Response.Write("(NYSE: NKE)") end if %> have been sitting in the front seat of
the Cyclone for months. This Coney Island amusement park ride has left some
investors holding their stomachs. The stock traded lower toward the end of
1996, possibly because many investors concerned about the valuation began
to sell. Nike had risen from a split-adjusted $32 1/2 in October 1995 to
$62 in only one year and many thought that this was as good as it would get.
Right after Nike split its shares on October 29, 1996, Montgomery Securities
analyst Alice Ruth reduced her earnings estimates for Nike citing higher
than expected marketing expenses. Concern about these higher marketing costs
brought the stock down to the low $50's in only a few months. However, Nike
rebounded from this setback to hit an all-time high of $76 3/8. Then, in
light of a series of bad press-related incidents, the stock started its descent
down, down, down, to fall as low as $52 1/4 in the first week in April.
On April 7, 1997, Smith Barney analyst Faye Landis reported that Nike's sneaker
production might be off as much as 20%, based on a trip she had just taken
to Nike's units in the Far East. On April 16, retailer FOOTSTAR <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTS)") else Response.Write("(NYSE: FTS)") end if %> announced it would have lower-than-expected sales at its athletic shoe
outlets. As the company is one of Nike's biggest customers, this appeared
to confirm the comments Landis had made. As if Nike was not having enough
problems, it was around this time that national press reports began to appear
that characterized Nike as a big bad company engaged in "unfair labor practices"
in Asia.
On May 27, the clouds appeared to part as Nike jumped from $55 1/4 to $60
in one hectic session and no one could pinpoint exactly why. The next day,
rumors emerged that Warren Buffet's BERKSHIRE HATHAWAY <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BRK.A)") else Response.Write("(NYSE: BRK.A)") end if %>
was interested in accumulating more of the Oregon-based sneaker company.
This was not as huge a surprise as it was painted, however, as Berkshire
already owned five million shares of the 287 million outstanding through
its GEICO insurance subsidiary.
Just as things seemed to improve, the other sneaker dropped on May 29. Nike
announced that earnings for the fourth quarter would be between $0.51 and
$0.56 per share, well below the consensus estimate of $0.69 per share. The
company blamed lower-than-expected revenues due to order mix, shipments timing
in Europe, product shortages, and a slight increase in U.S. order cancellations.
The company also reported that earnings would be impacted by a one time pre-tax
charge of $18 million related to the shutdown of a manufacturing facility
at its Bauer Inc. subsidiary as part of its long-term plan to reposition
some manufacturing facilities to more cost-effective overseas operations.
Disappointed shareholders drop-kicked the stock for $8 3/4 to close at $55
3/4. Since that nasty week, shares of Nike have slowly started to climb back
on average volume to close Wednesday at $60 3/8. Even a Goldman Sachs &
Co. downgrade to "market outperformer" from the U.S. "recommended list" on
June 6 hasn't had that much impact.
The reason for the return of the queasy shareholder seems apparent.
Notwithstanding the rise and fall of the Nike Empire, two important things
about this dynasty haven't changed. First, this is a mega-company with trailing
revenues of $8.66 billion. Second, Nike doesn't just do sneakers anymore.
Besides the $40 million deal that Nike made with Tiger Woods that should
come back many times over in sales and goodwill for Nike, there are millions
of Americans who want to be seen in Nike apparel. More than Polo, Tommy Hilfiger,
Reebok, and Converse, this brand name is consistently the most popular sports
apparel for teenagers.
More and more adults are wearing all the casual clothes (forget the sports
stuff) made by Nike: shoes, socks, running shorts, fleeces. It also reaches
a broader consumer base then some of the higher-end casual retailers. My
visit to the local sneaker store reminded me that they can barely keep the
Nikes in stock. My eleven year-old daughter, who is not Miss Athletic, has
to own one pair of Nikes to be cool. Nike also runs sports camps all over
the nation. My son is going to Nike Golf School this summer, which -- along
with soccer and tennis -- is being offered all over the country.
According to the company, fiscal 1997 (with one more quarter to go) will
be a record year with projected revenues and earnings increasing by more
than 40%. In fiscal 1998, revenues are expected to grow in excess of the
company's previously stated long-term annual goal of 15%. With or without
Buffet, with or without cries of "slave wages," and even with lower-than-expected
numbers for the third quarter, Nike will continue to make money in the future.
On to Lesson # 4 -- The Labor
Ethics Debate |