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NIKE, Inc. (NKE), V.F. Corporation (VFC): It’s Gotta Be the Shoes

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What if I told you that the footwear industry was approaching $50 billion a year in revenue with over $20 billion coming from the US alone? Is that something you’d be interested in?

NIKE Inc. (NKE)

What if I told you this same industry, which sells products that could just as easily be sold completely online instead, has still managed positive growth in sales at brick-and-mortar locations over the last 15 years, going from less than $20 billion to more than $25 billion a year currently? It was once said by Spike Lee “It’s gotta be the shoes!” In this article I will show you why I agree, and so should you.

NIKE, Inc. (NYSE:NKE)

It’s hard to believe that 30 years ago, NIKE, Inc. (NYSE:NKE) generated revenue of just $867,212 – for the year. The stock has advanced more than 79% in the past 5 years and shows no signs of slowing down.

For the first time in nine quarters, gross margins are expanding and 3Q FY13 earnings released a few weeks ago show several positives for the company’s past, present, and future.

Net income rose 55% to $866 million, or $0.73/share, and net revenue rose 9% to approximately $6.2 billion for the quarter. Orders for Nike shoes rose 6% overall, including an 11% increase in North America.

Much of NIKE, Inc. (NYSE:NKE)’s success, in my opinion, revolves around what it doesn’t do. It doesn’t make big changes in its products and instead keeps delivering the shoe styles and other merchandise that have proven to be solid moneymakers.

Michael Jordan’s 50th anniversary was commemorated in February, so the Jordan brand – both classics and new styles – along with Air Max and other vintage returns help keep the cash flows running positive.

Some critics complain that NIKE, Inc. (NYSE:NKE) hasn’t had any real shoe innovation aside from Zoom Air and Air Max, with the exception of Hyperfuse, in the past several years. But I don’t see why Nike needs to change. It owns more than 90% of the US market, and in my opinion Nike is the original ‘status symbol’ for everyday consumers before Apple Inc. (NASDAQ:AAPL) ever knew what an iPod was.

Nike seems to be holding fast to basketball, and it’s working for the most part. It sold off weak links, such as the Umbro and Cole Haan brands, in favor of growth categories.

Nike, however, still experiences weakness in China and Japan, with sales falling for the third-straight quarter. Dwyane Wade recently left the Jordan brand and is now signed under Li-Ning, which I think can slowly push Nike out of Asia.

The Chinese athletic company seems to come and go with each release in the US, but it definitely has something going on in China. Li-Ning currently makes $1.4 billion worldwide, which actually helps the pro-NIKE, Inc. (NYSE:NKE) argument surrounding domination when it makes $2 billion in China alone, and $24 billion a year.

Li-Ning, however, was apparently able to offer something to Wade that $10 million a year that Nike couldn’t do for the NBA star. Wade now has an equity stake in the Chinese company, and it sounds very similar to the Vitamin Water Deal that rapper 50 Cent was able to receive. In the end, if Nike loses out on the Chinese market I doubt it will slow down its pace globally, as I see the stock going much higher in the future.

Adidas

How much do injuries of top endorsed athletes Derrick Rose, Robert Griffin III, John Wall, and Ricky Rubio affect Adidas (NASDAQOTH:ADDYY)?

Not a whole lot if you look at the stock, which has gone up more than 58% in the past five years. The German-based company has remained strong among athletes and fans despite Nike’s market domination in footwear and the negative attention created by its spokespeople becoming injured wearing the brand.

Recently, Adidas (NASDAQOTH:ADDYY) drew attention with eight NCAA basketball tournament teams wearing its newly designed uniforms. This follows the trends Adidas already has in place for dressing athletes at big events.

For instance, six of the 16 Euro 2012 nations were wearing its jerseys and the company also dressed the 70,000 volunteers and athlete’s in Olympic village for the London 2012 Olympic Games.

2012 earnings showed sales increased 12% to EUR 14.9 billion, or $19.1 billion,  and operating margins improved to 8% with expectations of reaching 9% growth in 2013.

Earnings per share increased 29% to the highest level ever at EUR 3.78, or $4.85. Unlike Nike, Adidas has been successful in Greater China with double-digit revenue gains.

The shoe story, however, remains the Achilles heel for Adidas within the basketball shoe market. With just 5% of the market, Adidas has a lot of room to grow if it could somehow do what Samsung did to Apple Inc. (NASDAQ:AAPL), on NIKE, Inc. (NYSE:NKE).

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