Troubles add up at Nike

Portland -- After two years of ripping through the ndustry like a tornado in a trailor park, Nike Inc. is suddenly losing momentum. Retailers large and small report consumer demand for Nike products has leveled off and, in some cases, declined.

Retailers say a small but noticeable fraction of customers are avoiding the brand on principle. Alarmed by reports of labor abuses in Third World factories, some shoe consumers say they want nothing to do with the dominant name in the industry.

"We've seen a slight drop-off in Nike sales," said Pat Sweeney, president of the Fleet Feet store in Sacramento, Calif. "I think it's because of the bad publicity the company's been getting on their labor policies."

Deidre Karger of Super Jock and Jill, a popular running store in Seattle, said she hears from one or two customers a week who won't consider buying Nike because "they don't like their politics."

The new consumer sentiment aggravates the two most significant issues facing Nike today. Management must cope with the slowing sales growth as well as placate investors unnerved by the resulting 26.8 percent drop in Nike's stock.

The labor controversy is not the only reason for the downturn, or even the dominant one. The issue is barely a blip on some retailers' radar. But clearly the company has had to devote considerable energy to dealing with charges of worker exploitation in its Asian factories. Those charghes have led to negative press and, now, lost sales.

Nothing gets the attention of retailers, a critical link in the distribution chain that puts Nikes on feet around the world, like a drop in sales.

At Footaction, a 480-store athletic shoe chain based in Dallas, Texas, factory conditions "haven't been an issue," spokesman Chris Anderson said. "As they say here in Texas, we don't have a dog in that fight."

But when sales started to slow down, Footaction noticed. Company Chairman Mickey Robinson dealt Nike stock a blow by telling analysts that athletic sho sales couldn't keep up the brisk pace of recent years.

Sales have faltered for a number of reason, ranging from politics to the pocketbook to the vagaries of the fashion industry. Perhaps more than anything, it shows Nike is not immune from the old adage -- what goes up, must come down.

Nike sales exploded from $4.7 billion in 1995 to more than $9 billion in its current fiscal year (ending May 31), a 90-plus percent gain.

That gives Nike an astounding 45 percent share of the domestic athletic footwear market.

Double-digit percentage gains like that are virtually impossible to sustain.

"How much more can that brand captivate the consumer?" asked Footaction Vice President Keith Daly in trade magazine Sporting Goods Business. "The level of expactation for that to continue is just unrealistic."

Carol Momoda, a buyer for Seattle-based REI Inc., echoed Daly's sentiments. "You can't expect any company to keep that up," she said. "There always are ups and downs. And I wouldn't even call this a 'down.' I'd call it an adjustment."

Other retailers said price has become a factor. They think too many of Nike's shoe models simply cost too much.

Nike officials point out that 80 percent of the company's shoes still sell for less than $100. But a growing number boast price tages of $120, $125, even $140.

"We've seen a huge slowdown on the Air Max, especially on the women's side," said Fleet Feet's Sweeney. "There's only so many peole who are gong to pay $140."

Questions on growth:

Be the reason price or politics or the vagaries of the apparel industry, U.S. consumers appear to have sated their insatiable demand for Nike shoes.

Analysts still expect domestic footwear sales to jump 35 percent in fiscal 1997, which ends May 31, but that growth won't be repeated in 1998.

Nike managers are frustrate by the furor. "They're saying it can't continue to grow at the rate of the last two years," said Rick Anguilla, Nike's investor relations director. "Nobody here is arguing with that."

In fact, Nike has been warning analysts for months that the growth rate for U.S. shoe sales would slow.

But sales growth appears to be slowing more than analysts expected.

Shelly Young of Hambrecht & Quist in San Francisco has reduced her '98 growth projection for domestic sales from 10 percent to 4 percent. Some of the quarter-to-quarter comparisons in 1998 actually could be flat or down, Young added.

Of course, domestic footwear is just part of Nike's business. Its apparel business has grown into a $1.4 billion juggernaut by itself. Expected internatonal growth should also counterbalance slower sales here at home.

Analyst Jennfier Black-Groves of Black & Co. In Portland said "explosive" internatonal growth will allow Nike to sustain 15 percent to 20 percent annual earnings growth during the next five years.

Yet, domestic footwear always has been the staple of Nike's revenue diet. The $2.7 billion of U.S. sneaker sales in Nike's fiscal 1996 represented 42 percent of total sales.

"The company is facing an enormous sea of change," Young siad.

Shareholders jittery:

Besides retailers and customers, the other major constituency Nike must try to keep happy is shareholders.

That was easy in 1996, when Nike's shares doubled in price and the company split the stock for the second time in as many years. But the goodwill of 1996 swiftly gave way to a significant case of the jitters in 1997. Swarms of investors fled the stock after analysts raised questions about sales growth.

Between mid-February and late April, Nike's stock fell by nearly a third, from $76.37 to less than $53. By Friday, Nike's shares had fractionally recovered closing at $55.875. Still the 26.8 percent decline cost shoreholders a paper loss of more than $5 billion.

Bob Falcone, Nike chief financial officer, said at an investors conference April 23 that the drop was a "huge overreaction."

Anguilla said the decline was exacerbated by so-called "momentum" investors, who knew little of the company's fundamentals but were attracted by 1996's heady growth. At the first sign of trouble, the momentum investors turned tail.

One of the biggest drops came after veteran Nike analyst Faye Landes of Smith Barney reported Nike was reducing its Asian factory capacity. She learned of the changes while in Asian touring Nike factories.

Most recently, Hambrecht & Quist's Young reduced her rate. The company remains an excellent long-term bet, she said. "But the stock will trade sideways for a while, probably until first-quarter earnings are released."

Labor issues at work:

Only time will tell if the labor controversy becomes a significant issue for the company on the retail floor.

It already has become a frustration for company executives and employees.

They repeatedly point out that Nike holds its subcontractors to a detaled code of conduct that forbids abuses such as child and forced albor. They point out that Nike was among the companies that signed a groundbreaking anti-sweatshop agreement crafted by a coalition of private industry, labor and human rights groups. They point out they've hired Andrew Young to inspect its overseas factories.

They point out that their competitors make shoes in the same factories run by the same subcontractors.

Yet, it's Nike that is repeatedly held up as the chief villain, not Reebok, not Adidas, not Fila. Increasingly, the trademark Swoosh carries with it the concentric circles of a target.

The critics' charges took on a new urgency in late April when thousands of Vietnamese and Indonesian workers walked out of Nike factories three times in a week to protest low wages.

The ragtag army of labor and human rights activists has made it one of their top issues. In Portland, the Labor Party, supported by other activists, chose as its logical May Day protest site the Nike Town retail store.

The national media still is drawn to the topic.

A prominent alum and business luminary addressed the Stanford University Business School on Wednesday. The San Francisco Chronicle and San Jose Mercury-News stayed away until they leaned the speaker was Nike Chairman Phil Knight and protesters would stage a demonstration outside the hall.

Knight argued at Stanford that Nike is being unfairly singled out. As he did, the sound of chanting protesters wafted through the hall.

"Hey Philip, off the stage. Pay your workers a living wage."

* return to top