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Spokane, Washington  Est. May 19, 1883

Nike Leads Sneaker Stocks To New Heights

The Washington Post

Nike Inc.’s trademark “swoosh” a jazzy checkmark with a beer belly might also be the sound of its stock soaring higher than even Michael Jordan can reach.

It has been a good decade for the athletic-shoe industry, but a remarkable one for the Beaverton, Ore.-based firm. No sneaker company has ever established such a dominant position - about 45 percent of the U.S. market, compared with about 16 percent for No. 2 Reebok International Inc.

Thomas M. Buynak, a senior investment analyst at Society Asset Management Inc. in Cleveland, confessed that his firm unloaded its Nike stock eight months ago. “We sold too early,” he said. “They have just been on a tear. You almost have to throw out the historical evaluation parameters for the stock.”

Nike stock climbed 72 percent in 1996 and has risen about 13 percent so far this year, and students of the industry are looking for gains by other companies in this sector. Reebok stock is up about 16 percent this year and some analysts say it is still undervalued. They also predict growth for No. 3 Fila USA and the much beleaguered Stride Rite Corp. of Lexington, Mass.

“Nike has become in some respects the leading sports and fitness company in the world,” said independent retail analyst Margaret Gilliam in New York. “It is in a different league.”

Nike has augmented its long success with Jordan as a prime spokesman by signing up golf phenomenon Tiger Woods, nearly always seen with his Nike swoosh cap. Nike’s new Brand Jordan shoes are expected to be a popular, lower-cost alternative to Air Jordans.

Nike sales have shot up all over the world, including a 200 percent increase in Japan and a 93 percent gain in Britain. Its debt is down to below 5 percent of capitalization (compared with about 50 percent for Reebok).

Armi Viti, a vice president at Lynch & Mayer, said as the retail industry consolidates, “there will be less store (square) footage out there. The strong will get stronger, and the weak will get weaker.”

That means, to most analysts, that Nike should rule for a long time and provide the best value to any investor. “I don’t have to worry if the stock goes down,” Viti said, “because with the fundamentals still there, it’s a buying opportunity.”

Yet such market dominance and fat profit margins mean Nike is unlikely to produce many more of the favorable earnings surprises that have kept its stock going up on Wall Street. “I see new, younger, savvier brands coming into the business that I think will have impact,” said Kenneth L. Londoner of J. & W. Seligman & Co. “The leadership of the industry is vulnerable from a stock point of view.”

Reebok, once almost on a par with Nike in U.S. shoe sales, long ago lost that race. Dean Witter Reynolds Inc. analyst Scott Emerman said, “They’ve had poor products and inconsistent advertising.”

Some analysts blamed Reebok’s chairman and CEO, Paul Fireman.

The California Public Employees’ Retirement System (Calpers) has put Reebok on its list of America’s top-10 corporate under-performers. It said a shareholder who invested $100 in Reebok in December 1991 would have only $133 five years later, compared with $232 for someone who invested in the Standard & Poor’s shoe-industry index.

“Despite an upswing in the company’s stock,” the Calpers report said, “management has operated with insufficient accountability and weakened Reebok’s long-term prospects.”

But having lost so much investor confidence, Londoner said, Reebok has nowhere to go but up, as indicated by its recent stock surge. “It is just undermanaged,” he said, “and there is an upside there.”

Fila captured some attention with its promotions tied to young Detroit Pistons star Grant Hill. Despite some slips, it still has potential in Londoner’s view. “They have made impressive gains over the last 24 months on the more urban-oriented segment,” he said.

But Londoner’s highest hopes are attached to headline-grabbing designer Tommy Hilfiger and a line of visually pleasing shoes and clothing he is launching with Stride Rite in department stores. “I have just seen the product, and it is going to be a hit,” Londoner said.

Stride Rite has been placed on Calpers’s underperforming list for the second year in a row. The pension fund said $100 invested in Stride Rite in November 1991 was worth only $45 in November 1996.

Londoner shrugged that off. “We don’t own Stride Rite, but it is a good buy,” he said. His firm does own stock in Tommy Hilfiger Inc. and expects a huge shake-up in the industry that will also bring in several new players, perhaps including Banana Republic and the Gap. “I think the sneaker wars are about to escalate to a level nobody has seen or thought about,” he said.