Monday, August 07, 2006

Calls of Note Part 5

- Prudential is negative on Nike (NYSE:NKE) after attending the WSA Shoe Show in Las Vegas, NV on August 1st and 2nd. Firm believes the athletic business is struggling with a drop off in basketball and the entire performance category in favor of fashion athletic.

After speaking with retailers at the show they are hearing that even NKE's Jordan and Air Force 1 brands, which have been two of the strongest selling brands in the athletic category, are seeing a slowdown. As the fashion/non-athletic business has been uptrending the firm is seeing lower price point shoes gain in importance with consumers. While Nike has recently entered the low profile market they remain cautious on the opportunity due to the competition in the market place and Nike's late entrance.

While business in EMEA and Japan has been promotional and difficult for Nike, the U.S. business has been a standout performer. Firm believes a slowdown in the U.S. could hold back Nike's multiple.

Foot Locker (FL), Nike's largest customer, though less than 10% of total sales, reported second quarter sales on August 3rd and noted persistent weakness in Europe and a softening trend in the US. FL also cut Q2 guidance in half and now expects $0.15 - $0.17 versus consensus of $0.29.

Finish Line (FINL) began seeing a softening in its basketball business this year along with difficulty anniversarying the strength in Nike Shox from the prior year. When the retailer announced the first quarter, management noted that inventories were high and the company would be promoting and canceling orders to bring inventory back in line.

In addition, Genesco (GCO) came out with a negative earnings pre-announcement before the shoe show, noting weakness in its urban businesses, which is heavily weighted towards basketball.

Shoe Carnival (SCVL), also a Nike customer, announced Q2 sales on August 3rd and noted athletic was below expectations, with basketball and classics particularly week.

Prudential is lowering their price target on Nike to $85 from $92 using a 14.3x multiple of calendar 2007 EPS. Maintains Neutral Weight.

Notablecalls: This is an actionable call. I think NKE is a disaster waiting to happen and I would not be surprised to see the co warn.

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