Nike Falls Victim To Drop In Popularity Of Sneakers Troubles Show That Company Is Subject To Consumer Whims

Nike remains the king of the hill in athletic footwear, but its kingdom is under assault.

The leading maker of sneakers in the world, Nike warned last week that its earnings would be disappointing for the final months of 1997 and said a corporate restructuring was to come. Stock analysts raced to lower their Nike profit forecasts for up to two years. Josie Esquivel, who follows the company for Morgan Stanley Dean Witter and at one time expected annual earnings growth of 30 percent, is now forecasting “zero growth over a three-year period.”

The drastic revision suggests far more than a short-term inventory problem. As Asia’s economies falter, bloated inventories have indeed stunted growth in what Nike has long described as one of its most burgeoning markets. But far worse, retailers there, particularly in Japan, have begun canceling orders, suggesting Nike’s shoes will no longer be needed in such quantity.

The company has similar problems in its core market in the United States. Sneakers, or white shoes, are falling out of fashion in some circles. “Brown shoes,” like Wolverine’s Hush Puppies and Caterpillar brands, are being rediscovered by young adults, Nike’s primary customers. In addition, a number of new stores specializing in athletic footwear have opened in the last year, saturating the market and leading to massive price cuts on some of the company’s most popular styles.

While the facts spell problems for the sneaker industry overall, Nike has suffered the most. It is the industry Goliath, with 47 percent of the U.S. athletic-footwear market. Reebok is a distant second with 15 percent.

The company’s announcement on Tuesday included a reference to an unspecified number of layoffs and an unspecified charge against earnings for restructuring. Details are expected when the company posts earnings at the end of March. Analysts say the company may drastically reduce advertising and endorsement spending, cut 1,200 to 1,500 employees of its 22,000 workers and take a restructuring charge of $300 million to $500 million.

Instead of heading for the exits, investors pushed Nike’s stock higher. They tend to view the company as a global consumer brand, like Coke and Gillette, and to buy shares on the dips. The latest woes, though, reinforce the idea that Nike is in large part a fashion company, subject to consumer whims.

While investors looking for beatendown stocks in this pricy market may be forgiven for latching onto Nike, they had better brace for a turnaround that could take at least a couple of years. And then, Nike must reinvigorate itself with some innovative products.

Nike says it will take longer to clear up the inventory problems in Asia than in the United States. With the restructuring, the company says inventory could be manageable domestically by the end of its fiscal year in May, with Asian relief not coming until early 1999.

Meanwhile, 13 of the 19 analysts whose earnings estimates are collected by First Call, a Boston-based research firm, lowered their 1998 Nike forecasts Wednesday to $1.76 a share from $2.

At its current price, the stock is trading at 26 times the forecast for fiscal 1998 earnings per share, ahead of the broad market average and a lofty level indeed for a company with seriously diminished growth prospects for the near term.

“The announcement was a bit worse than people thought,” said Tim Ghriskey, a senior portfolio manager and head of value investing at Dreyfus Corp., adding that he expected Nike would need longer than May to substantially reduce its U.S. inventory.

Still, the restructuring announcement hinted that big changes may be in store.

“If they can cut costs and get rid of inventory, it’s a very positive thing,” said Ghriskey, adding that Nike is a core holding in the $4 billion investments he oversees. He calls Nike a wonderful brand, with more than $4 billion in sales in fiscal 1997, or nearly half of the $8.8 billion in the U.S. athletic-shoe market.

Nonetheless, Nike will have to do some quick reshuffling.

“Nike’s biggest challenge is itself,” Esquivel said. “They need to come up with another identity that they can still say, ‘this is Nike’ but it’s something beyond the swoosh.”