Tuesday, February 07, 2006

Nike Facing A Run By Adidas In U.S.


NEW YORK -- Now that Adidas-Salomon AG has closed its $3.8 billion deal to buy Reebok International Ltd., it appears the German sneaker-maker is poised as never before to challenge Nike Inc. in the United States.

That's significant, because Nike must be able to defend its profitable U.S. turf while it strives to achieve growth overseas, particularly in the European market. Adidas' share of the U.S. athletic-shoe market at the end of 2005 was 11 percent, well off Nike's 44 percent, said John Shanley, a research analyst at Susquehanna Financial Group. Combined with Reebok, though, Adidas has 21.5 percent of the U.S. market, enough to make a stab at its bitter rival.

For Nike investors, Adidas' stepped-up U.S. presence is not particularly good news. The U.S. market has been the engine for Nike's double-digit percentage earnings growth in each of the last 11 quarters. If Nike loses market share in the United States, its stock price would probably drop.

If Nike, based in Beaverton, Ore., is to break out of the mid-$80-a-share range where it has traded since last fall, it needs a catalyst. And because Nike's share of the U.S. athletic-shoe market has probably reached a limit, Shanley said, the stock's near-term driver was supposed to come from increasing sales in Europe and Asia.

"But internationally, Nike has been stumbling," Shanley said. "European retailers are looking for much more modest price points, and that hasn't been Nike's strength."

Western Europe had been a major growth area for Nike until six to eight months ago when rising unemployment in Germany and France cut into Nike's sales, Shanley said.

Nike generally has the highest-priced shoe in any market and sells more than 95 percent of athletic shoes in the U.S. priced over $100, according to the company. No data is available for higher-priced shoe sales overseas.

The company's weaker-than-expected international fortunes were the main reason Joseph Battipaglia, chief investment officer of Ryan Beck & Co. in Florham Park, N.J., sold his entire Nike stake at the beginning of January.

Battipaglia, who manages the company's $27 million Victory portfolio, said he sold his Nike shares because of fears that slow growth in Europe and Asia would retard any positives the stock might receive from new products or big sporting events this year, such as the Winter Olympics and soccer's World Cup. In January, Nike released the Air Max 360 running shoe, with a suggested retail price of $160, and a pair of Jordan Retro sneakers.

Like Battipaglia, many investors sold their Nike shares in late December when now-departed Chief Executive William Perez estimated that global orders would probably rise just 2.5 percent through spring 2006. That forecast came as Nike reported that European and Asian sales for the company's quarter ending Nov. 30 were up a mere 2 percent and 4 percent, respectively, compared with a year earlier.

Not only were both figures below analysts' expectations, Shanley pointed out that when adjusted for currency valuations, Nike's European sales were flat.

So even though strong U.S. sales of high-end shoes drove quarterly profit up 15 percent over a year earlier, Battipaglia said he determined Nike's stock price had reached a top.

"You really need to focus on whether there is growth in unit volume and leave the other stuff like currency exchange out of it," Battipaglia said. "Frankly, Nike had reached our valuation targets, and we didn't see how it would rise much further."

Ryan Beck & Co. bought Nike shares at $81.75 in early September and sold at $85.60 in early January.

Since Nike reported earnings on Dec. 20, its stock is down about 5 percent. As for Perez, recruited just 14 months earlier from the top spot at S.C. Johnson & Son Inc. in Racine, Wis., he was forced out and replaced two weeks ago by longtime Nike executive Mark Parker.

For those investors willing to think long term, Nike consistently generates strong free-cash flow, and its stock trades at a price below its historic price-earnings ratio, Shanley said. Furthermore, Nike produces tantalizing shoes under a brand name as internationally recognizable as Coca-Cola or McDonald's.

To counter an anticipated Adidas attack, Nike has been pushing its moderate- and lower-priced brands into sporting goods stores, family footwear chains and discount retailers such as Wal-Mart and Target. Rather than weaken the Nike name, these shoes sell as Hurley International, Cole Haan, Exeter and Converse.

Based on projected earnings of $5.50 a share for Nike's fiscal 2007, beginning in June, the company's stock trades at a 15 multiple. That's not only below the industry average of 17, he said, but it also is a discount to Nike's roughly 20 P/E multiple average over the last three years.

"With its market dominance it should trade at a premium to the industry," Shanley said. "But right now, investors are thinking about Adidas and are concerned about Nike's international prospects. So a cap has formed on Nike's trading range."

For that reason, Battipaglia is looking elsewhere.

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