Nike

Unable to keep outrunning the recession, sportswear behemoth Nike has shown the first impact of the global slowdown in its fourth-quarter sales. These fell by 2.3 per cent. Impairment charges pushed earnings below expectations, and margins slipped slightly from their lofty level. Even so, the numbers still looked surprisingly healthy for a company that sells premium goods to the mass market. Its “futures” growth, however, – the value of pre-sold merchandise – is pointing to a sharper slowdown in coming months, and management has signalled that there will be more margin pressure coming too.

Nike's great strength has come from cultivation of its brands, masterful logistics and smart cash flow management. Return on invested capital was nearly 25 per cent last year – quite an achievement for a company with net cash and heavy working capital requirements. Even as many of its suppliers and retailers suffer, Nike's relative dearth of hard assets and the ability to charge premium prices for its products have kept it insulated. The question is for how much longer?

Nike is cutting centralised costs to respond to the slowdown, but its peculiar cost structure leaves it exposed if it needs to start discounting. The procurement cost of a $160 pair of basketball shoes made in China is already small and cannot be pared by much. If consumers start trading down to lesser brands that are a fraction of the cost, Nike will have to choose between lower market share or competing on price alone. Neither is an attractive option.

Of course, Nike has navigated past slowdowns well, but this one is sharper and, as some analysts suggest, comes at what may be the tail end of a decade-long “sports bubble.” With spending on every other aspect of sports from tickets to star salaries slumping, the prospect of customers paying substantially less for an endorsement by Tiger Woods or LeBron James must be truly worrying for Nike's management.