Can Running Boost Nike?
Vladimir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Running is becoming increasingly popular all over the world. The equipment is relatively cheap: you put on your shoes, your pants, your shirt, and you are ready to go. You can run almost everywhere, all you need is a road of some kind. Running helps people feel good, lose weight, and build a beautiful body.
No wonder Nike (NYSE: NKE) is serious about running. In the most recent earnings call, the company stated that running revenue grew double digits for the thirteenth quarter in a row. Nike has also stated that it is serious about performance running. But does it have the products that would appeal to amateur athletes?
No more minimalism
Nike is basing its success on Nike Free and Lunar shoes. Nike Free is a minimalist shoe. The minimalism trend in shoes appeared after the release of the book “Born to Run” by Christopher McDougall. The book argued for barefoot running, stating that it is the natural way to run. It has also argued against modern shoes that offer lots of suspension and control.
Running barefoot is too extreme for most people, so companies started to exploit this trend by offering shoes with minimal or no suspension. However, such shoes are not for everyone. They demand a lot from the runner. You must be lightweight and have a good running technique to feel comfortable in such a shoe after a long run. A lot of people are using running as a vehicle to lose weight. In addition to that, they do not have coaches and typically have poor running technique. These factors seriously increase the risk of injury.
According to one of the world’s most respected running magazines, Runner’s World, sales of minimalist shoes declined more than 10% in the first quarter of 2013. At the meantime, sales of motion control shoes increased by more than 25%, while sales of stability shoes increased by more than 10%. Runner’s World separates Nike Free from other minimalist models because a large percentage of Nike Free Sales are to people other than active runners. This is a very important point.
The most recent trend in running are shoes that are light and low to the ground. You can see this trend in Nike Lunar, as well as shoes offered by Under Armour (NYSE: UA) and Skechers (NYSE: SKX). The Runner’s World’s summer running shoe guide features Nike Free and Under Armour's Micro G Toxic Six. Skechers does offer shoes for running, but they tend not to get industry reviews.
The real competition
Skechers does not pose a threat to Nike on the running front. Under Armour has yet to become a big competitor, although its shoes look ambitious. The real competition comes from Japanese firms Asics and Mizuno, as well as New Balance, Adidas, Brooks and Saucony.
If Nike wants to battle on the performance front, it has to put more money into research and development (R&D). The reason why a lot of firms were glad when the minimalism trend appeared was the imbalance between their marketing and R&D efforts. Many fell behind the cushion technologies of Asics and Mizuno, and desperately needed this trend to get back in the game without having to spend a ton on R&D.
While you see a lot of athletes running in Nikes at major events, the picture is different at local runs. Most people do need cushion, motion control and protection if they are training regularly, so they buy Asics, Mizuno, New Balance and Brooks. Saucony’s light-weight models are also popular, in line with Nike’s Lunar series. You do not see the Nike domination that you see on TV when you visit an amateur competition.
The real buyers
Now we get to the most important point. Who are the real buyers of the product? As stated before, shoes like Nike Free are often bought by people who are far away from running. It’s the cool look of the shoes that sells, and this is widely exploited by firms like Skechers and Under Armour. Skechers’ GOrun series is very colorful and appealing to a younger audience. Under Armour shoes even looks provocative. As long as Nike and other companies sign great athletes to promote their brands, their shoes could be bought by people who do not exercise in them.
Running is a trend that is here to stay. But you don’t need to run to buy running shoes. This is the fact that Nike, Under Armour and Skechers are actively exploiting. Truth is, leading running shoes from Asics and Mizuno do not look cool. Their buyers want performance and are less worried about design. On the contrary, Nike buyers want design, and that’s what the company is great at. The stock is up 20% this year and trades at a forward P/E of 20. I think that Nike will continue to deliver on the running front because of its great marketing machine, and I'm bullish on the stock. Under Armour and Skechers, whose stocks trade at forward P/E's of 32 and 15, respectively, could have put more attention into running. It is a market that is growing. The idea or intention of being fit is growing too and is even more important, because companies can sell these products to people who probably will not use them for their designated purpose.
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Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!