Saturday, January 14, 2006 -

Nike Investor Day Recap

JUNE 29, 2005 -- Nike Investor Day Recap

JUNE 29, 2005 -- Following a conference call that did not include many of the usual suspects, Nike held an investor day to answer questions and detail plans for the future. The company had some very significant presentations on women's fitness, margin improvement, sourcing, its penetration of the world football market, the US basketball business and more. Here are some highlights:

New CEO William Perez joined the company from SE Johnson & Co., where he managed a portfolio of brands. He noted that Nike is very different from the traditional consumer goods company. It is commonplace for such a brand to concentrate its sales in a very limited number of mega-retailers. In contract, Nike's largest customer represents about 10% of sales, and the next largest customers represent much less. The largest suppliers to Wal-Mart, for example, represent about 1% of sales. Nike represents much, much more to its customers. "There are very few brands with that brand power," he said.

Nike does not sell shoes that retail below $49, but half the market retails for less than $49. By using the Starter and Shaq brands, Nike has the opportunity to expand without diluting the brand. "This multi-branded approach to business excites me," he said.

* Nike brand co-president Mark Parker pointed out that Nike is the top brand in 60% of the top 65 categories in which it competes. It's number one or two in 89%. The company learned the value of an integrated marketing campaign from its Speed campaign last year. Nike will be applying the lessons of Speed to its World Cup 2006 efforts.

There's a strong product pipeline ahead. The Air product is being revitalized via the Air Max 360 which will come out next year. The launch of Free was very successful. It's already one of the top sellers on Nike ID. The concept will be expanded into walking, trail and kids.

* Nike brand co-president Charlie Denson said the company's focus on the young teen male will continue around the world. Products such as the Air Force of sport grows, it is a very large opportunity for Nike's footwear, apparel and equipment.

Denson said a number of unbelievable opportunities were offered Nike for brand extensions, such as soft drinks and health care products. These were rejected as will anything outside the central core of Nike's business, he said. The company does business in some 300 distinct businesses.

Denson noted Nike spends more resources to stay connected with its customers than any other "by a considerable margin. We will not back off of that." Nike will continue to lead in product innovation, Denson said. The company is making progress in supply chain management, but it is scratching the surface on product-cost management.

He concluded his remarks by saying the US footwear market is not mature, as many said two years ago. Today's it's growing at 8%, and new categories are helping that growth, such as skate and sports culture.

* There was a time when the biggest size run for Nike apparel was men's small, because it was used for men and women. That's changed today. Mindy Grossman, VP/global apparel, has made a significant impact on Nike's apparel business, and made it a global force. One way she did it was by addressing the women's fitness market. Women are a force to be reckoned with internationally. In the US alone, they spend $2 trillion annually, making them the third largest economy on earth. They buy 81% of all athletic apparel, including 67% of men's and 91% of children's.

The women's market for footwear and sports apparel is $14.5 billion globally and growing at 5%-8% a year. Women's is about 18% of Nike's total branded business, and women's fitness is definitely the accelerator. Nike changed its strategy and its organization to develop a more intimate relationship with its consumers, Grossman said. "Our products are more relevant," she said. "Our retail presence is more significant. And our marketing is having a greater impact. This is has not been a realignment. It's not been a reinvention. It's truly been a revolution in how Nike is thinking about women and sports." The reason is that women think and feel about themselves differently than ever have. Women are feeling more empowered around the globe, and Nike is assisting this trend in Asia. About 200,000 women's attended Nike dance events in Asia, with 40% coming from China.

Women are looking for more than function in their apparel. What they wear to the gym influences what they wear outside the gym and vice versa. "Women don't do fitness. They do a sport," Grossman insisted. "One solution doesn't fit all any more." Women's fitness must be looked at as distinct sports. The broader market can be broken into four key sports: Running, yoga, fitness/dance and cardio. Nike is creating sport-specific apparel for use 365 days of the year.

Footwear is also adjusting to women. Lasts are designed around women's feet, not small men's. Shox for women were introduced. In the US, Nike experienced a 24% increase in average selling price in the women's fitness category. In the over $100 price point, Nike has a 98% market share.

The website and the women's catalog are helping the company reach women beyond traditional brick and mortar. The average sale per transaction has significantly exceeded forecasts. Some 84,000 women visit the website every week. The company has a database of 95,000 women who have asked to be contacted regularly. The next step is to open women's shops-in-shop in department stores. A workout routine has been developed that is getting considerable exposure. It is finalizing contracts with several clubs to offer the program.

* Nike is making great progress in China, Roland Wolfram, VP/Asia-Pacific Region, explained. Nike is the number one brand and has the number one share. A survey asked Chinese which brands were the coolest. The results came in: Nike 52%; Adidas 38%; Reebok 15%; Li-Ning 13%; and New Balance 10%. There are 2,000 points of sale for Nike in China. In the top three cities, there are 400 doors. Fifty cities have three doors or more.

The company has promoted its relationship with gold medalist Liu Xiang, the first Chinese to win a sprint event in the Olympics. He became a sports icon and was identified with Nike in its advertising.

The US basketball shoe business is said to be dead. It was Gary DeStefano's job to show Nike's part of the business is very much alive. In the NBA, more players wear Nike than Adidas, Reebok and And 1 put together. In the men's NCAA Tournament, 65% of the teams wore Nike. Similar numbers can bee seen in the Women's NCAA Tournament.

In the past year, Nike's market share went up 11 points. Nike and Jordan represent a basketball business three times that of Adidas and Reebok combined. NPD reported that in May, 23 of the top selling 25 basketball SKUs were Nike. It also has 10 of the top 10 basketball styles in the US today. Nike and Jordan are the number one and two brands in very price range. In the $75 and up category, Nike's business is 20 times bigger than Adidas and Reebok combined, he said. Nike ahs a 98% share of basketball shoes selling above $100.

* It's been 11 years since Nike announced its intention to be the number one football brand in the world. Eunan McLaughlin, VP/GM, EMEA, said the company's goal has been to grab the hearts and minds of the Football Crazy Kid. It's doing through imaginative advertising and marketing. It has also been aggressive signing up top clubs and players. The number one and two players in the world are in Nike. These are the players looked up to by the kids. "There is not doubt that in the minds of Football Crazy Kids, we're the brand of choice," declared. The company has passed the $1 billion mark in sales.

For World Cup 2006, it will be more of the same. First of all, it aims to bring the best new product to market and work with the best athletes. The consumer connection campaigns will continue utilizing the Internet and focused PR. Nike will also see that its retail partners also execute.

* Nike realizes that the brand cannot be all things to all people. That's behind the acquisition program that has brought it into other categories and price points. Scott Olivet, VP/subsidiaries and new business development, said Nike is not looking to capitalize on short-term fads; it's looking at long-term brand opportunities. It is also looking for opportunities to apply its strengths to the acquisition's growth.

Hurley opened the door to a $6 billion action sports market, for example. In cooperation with Nike's team, Hurley will be offering the next generation wet suit and board short. Nike's real estate team immediately helped Hurley open two outlet stores.

While there might be some overlap between Nike and Converse, but the latter is an icon in pop culture, even though it has a performance heritage. Converse will be offering apparel again in the US. Due to synergies with Nike, Converse was able to drop $5 million to the bottom line. Nike's people will be working on a developing a new performance product line. Converse just launched a customization site, benefiting from all the experience of the Nike ID team.

The Starter/Shaq product at $20-$35 brings new price points to the company. There's a huge multi-billion-dollar market for opening price product. Nike can assist this effort with its design and sourcing skills. Tests of the footwear at Wal-Mart have succeeded. A new $29 cross-training shoe exceeded expectations. Half the purchasers of the Starter product had never purchased a Starter product before. Starter had primarily been a men's product, but recently the best performance ha been kid's. The Starter jacket will be relaunched in 2006. The Shaq program is at Payless.

* The supply chain and opportunities to maximize margins have not escaped Nike's attention. Eric Sprunk, VP/global footwear, detailed some accomplishments. Between FY01 and FY05, footwear gross margins have improved 720 basis points. Over the past year, the improvement was 200 basis points.

One of the company's objectives is called "innovalue." This concept aims to bring product innovation to all the basis price points. At above $100, Nike offers Shox, Max Air and Zoom. For $70-$95, there is Visible Sir, Impax and Free. For $55-465, there is Dual D, Pyramid Tech and Ramp Air. This strategy is boosting sales and gross margin, he said.

Nike is just beginning to know the value of materials management. As two-thirds of the product cost is materials, Nike is using its leverage to begin negotiating the price of some key raw materials, rather than the individual factories. This resulted in savings of more than 40% in the past two years Nike will begin negotiating for more materials.

Sprunk admitted that Nike learned much from Toyota's lean manufacturing techniques. Nike visited the factories, and hired some Toyota employees and consultants. The process aims to reduced waste and inventory, increase speed of manufacturing and improve quality. It applied these techniques to as new factory in Viet Nam and the results were significant. There's been a 30% reduction in lead times, as well improvements bin productivity and quality.

Nike has made improvements in its supply chain as well. Lead times were reduced from nine months to six. The amount of product it must build before orders are in has been reduced from 30% to under 5%. This reduces the amount of closeouts and improves margins. On-time delivery improved from 85%-88% to 92%-95%. Air freight costs have been reduced from 5% to 3%. Inbound visibility has gone from zero to four weeks. This allows the company to react to cancellations immediately.

- Bob Carr

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