Jun 26, 2009
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Retailer time-out adds to woes for Nike

Jun 26, 2009

SAN FRANCISCO (Reuters) - Nike (NKE.N) may be viewed as the best positioned sports shoe maker to weather the global downturn, but for now, the company is sitting on the bench along with the other players.

A disappointing outlook that foresees no uptick in sales until at least early next year came as a shock this week to investors -- who have considered Nike's brand cachet at least a partial buffer to the recession -- and sent shares of Nike and rivals Adidas AG (ADSG.DE) and Puma (PUMG.DE) south.

A triple-whammy of less inventory purchased by retailers, currency fluctuations and spending-averse customers around the world has hit all major sports footwear brands, which are responding by cutting costs across their organizations.

Those belt-tightening efforts were not enough to keep Nike investors from being spooked by data showing that orders scheduled for delivery through November fell 5 percent on a constant currency basis - a metric some consider a proxy for demand -- below the expected 2 percent decline.

"Basically the future orders suggest that the retailers are still scared to death," said John Horan, publisher of trade publication Sporting Goods Intelligence.

Footwear and apparel that arrives in stores from June through August should seasonally be the strongest of the year, corresponding to the U.S. back-to-school selling season. But the weak orders point to no near-term catalyst for Nike sales, nor for those of its rivals, analysts say.

"Everyone's in the same boat," said Susquehanna Financial analyst Christopher Svezia, who said Nike was still healthy. "I don't think Nike is broken. It's difficult comparisons, and currency exchange, and retailers' aversion to holding on to product that's causing this."

But the sales malaise pervading the industry is unlikely to break until 2010, and global manufacturers - and their retail customers - are treading cautiously.

"We remind investors that the strength of the global economy remains at the heart of the Nike story and therefore, we do not anticipate the same double digit momentum that drove results over the last several years to play out again for some time," wrote McAdams Wright Ragen analyst Sara Hasan, following Nike's results.

As the chief financial officer of Foot Locker Inc (FL.N), Nike's No 1 customer, told analysts late last month, predicting a sales increase in the current environment was "a pretty tough assignment."


Retailers selling sports footwear and clothing have finally managed to get their inventory levels in check -- and are anxious to keep them that way.

Despite dismal mall traffic, Foot Locker managed to post a profit in its first quarter and boost its margin on low inventory levels, while rival Finish Line Inc's (FINL.O) inventory was down 10 percent on a square foot basis, considered by analysts the average cut retailers have made in their stock.

"That's why the vendors are having a hard time selling right now," Horan said. "Retailers are going to keep that lid on until they see real solid evidence of a turnaround and they haven't seen it yet."

Last year's Beijing Olympics and the European Soccer Championships sent demand for products by Nike, Adidas and Puma soaring -- and inventory levels climbing that later needed to be purged. But there are no major sports events in the pipeline that could spur reluctant shoppers.

The 2010 World Cup held in South Africa won't likely muster the same sales volume as if it were held in Europe, and the next Olympics, held in London, is not until 2012.

While marquis products, endorsed by sports celebrities, continue to sell well, sales in women's and casual shoes are soft, analysts say, and retailers are shifting inventory to more popular styles, such as basketball shoes.

Since sales are constrained by the economic conditions -- hurt particularly badly in Europe -- sports brands are looking internally, and saving where they can.

Nike is cutting 5 percent of its global staff and reorganizing its geographical structure; Adidas is shutting down offices and shedding workers, while Puma is trimming the variety of offerings it sells as it streamlines operations.

(Reporting by Alexandria Sage; Editing by Tim Dobbyn)

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