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Has Nike Hit Bottom?

By Bob Fredeen (TMF Bobdog)
June 30, 2000

Summary: Nike's fiscal year was unimpressive but better than the last. The company doesn't make it as a Rule Maker because of some weakness in its financial statements. However, U.S. sales may have hit bottom and new styles could help the company drive the lane again.

Nike (NYSE: NKE) announced fiscal 2000 results showing that the company increased revenues to just below $9 billion, a 2% gain for the year. Worldwide futures orders are up 3% from a year ago thanks to stronger international markets. There are a few key points from the earnings announcement and other reports.

First, while Nike isn't doing all that well in its home region, it's doing very well abroad. Second, the financial statements are improving, but not that quickly. Finally, the company may be set for a rebound.

The best news is the strength the company is enjoying in Europe. In constant dollars (pretending that the exchange rate hasn't changed in the last year), Nike enjoyed a 23% increase in revenues. Compare that to a 5% increase in Asia and no growth in the U.S. Improving margins also helped the company. The gross profit margin increased 2.5 percentage points due to lower inventory levels at retailers.

Lower levels of inventory in the sales channel means less pressure to discount shoes and higher prices for everyone. These higher margins found their way through the rest of the income statement, as the operating and net profit margins gained 1.1 and 1.3 percentage points, respectively.

The good news is offset somewhat by a weak balance sheet. Sure, cash and short-term investments increased, but only because of a $580 million increase in total debt. In fact, the company now has about 5.7 times as much debt as cash, compared to 4.1 times a year ago. Not only is that a far cry from the Rule Maker criteria, it's going the wrong way!

The Foolish Flow Ratio improved from 2.99 to 2.87 but was still well above the 1.25 maximum we like to see in our Makers. And while margins also improved, Nike still has a ways to go to meet the 50% gross profits margin and 10% net profit margins criteria.

I've saved the most intriguing point for last. Nike has enjoyed some success with its Tuned Air line. Now it has a new shoe called the Presto. In the future, the company plans to introduce a "breakthrough" shoe that is being compared to the Air Jordan. Finally, the CFO showed some hope that the company had hit the bottom in the U.S. With all this talk of new shoes, there seems to be a lot to be excited about at Nike.

Nike misses our Rule Maker criteria because of some weakness in its financial statements. However, that doesn't rule Nike out as an investment. If the U.S. market is turning around and the new styles can reinvigorate the brand, then Nike could "Just Do It" for you again.

Your Turn:
Can new shoes save Nike? Have you seen the new shoes? Let us know on the Nike discussion board.

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