Wednesday, January 17, 2007

Changing The Game On Nike

How budget sneakers are tripping up its basketball business

By Stanley Holmes

Like the National Basketball Assn.'s top-tier Dallas Mavericks, Nike Inc. continues to display a potent offense. Its recent second-quarter profit surged 8%, to $326 million, and sales jumped 10%, to $3.8 billion. The stock, up about 15% over the past 12 months, continues to fly high. "The brand is strong," Nike CEO Mark Parker told analysts in December. "The company is growing."

But the sporting goods giant is facing a full-court press at the heart of its U.S. business: basketball footwear. Industrywide unit sales of basketball shoes dropped 16% last year, says market research firm SportScanINFO. And Nike, which counts on basketball gear for an estimated 30% to 40% of its U.S. revenues, acknowledged last month that footwear inventories were 15% higher than a year ago. Running shoes and the apparel business remain strong, but John Shanley, who tracks the industry for Susquehanna Financial Group, says Nike will have to sell a lot of shoes in the coming weeks or suffer a possible hit to earnings. Nike CFO Donald Blair told analysts he believed the inventory overhang would not "have a material negative impact."

Nike has been the king of the basketball sneaker since the 1980s, when Michael Jordan-branded shoes first became a fashion statement on and off the court. But the current Jordan line is losing some cachet among suburban and inner-city kids. While a new release of the Air Jordan Retro did well over Christmas, some of the latter-day Jordan models are being sold at unusually deep discounts.

Nike has been betting on NBA up-and-comer LeBron James to help it make the transition from the Jordan era. In 2003 the company announced it would pay the Cleveland Cavaliers forward $90 million over a decade to promote its shoes. But while the new Zoom LeBron IV shoe has sold well, James is not a Jordan-caliber endorser, in part because the NBA is not the draw it was when Jordan was a star.

It's no secret that for the past few years, kids have been trading in their high-tops for skateboarding shoes made by the likes of Vans, dc, and Skechers. But the big news in the sneaker world is the advent of the cheap basketball shoe. Case in point: the Starbury One, which sells for $14.98. Made and sold by the discount clothing chain Steve & Barry's, the sneaker is endorsed by New York Knicks guard Stephon Marbury, who says 3 million pairs have sold since its August debut.

The Starbury and its ilk have the potential to undermine Nike's basketball sneaker business. According to researcher npd Group Inc., the low-cost shoe market—sneakers under $50—has grown nearly 9% over the past two years and now makes up more than half of the $16.5 billion of branded athletic footwear sold each year in the U.S. Nike sells its own cheap sneakers, but doesn't have much traction against such low-cost entrants as the $35 Amp runner, a creation from Payless ShoeSource. "If I were a branded athletic company right now, I'd be reconsidering my whole approach," says Jeffrey Bliss, president of Javelin Group, a sports marketing firm.

Nike has overcome big challenges before. It continues to dominate the basketball sneaker market and still sells 95% of $100-plus shoes. It has a hit with the Converse Inc. Dwayne Wade, a sneaker endorsed by the Miami Heat guard that retails for $100. Thanks to strong demand for the shoe, Nike says revenue at its Converse unit rose nearly 50% during the most recent quarter. The question for Nike is whether the current hunger for cheap sneakers is building long-term momentum or is little more than a fad.

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