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Nike (NKE, news, msgs) says fiscal-first-quarter profit fell 13%, as stock-options expenses and increased marketing spending around the World Cup soccer tournament and other initiatives outpaced revenue growth.
Shareholders could be excused for wondering whether the shoe-and-apparel giant is getting sufficient bang for its marketing bucks.
Tiger Woods gets more than $20 million to promote Nike's golf division. LeBron James is being paid $13 million for taking the court in Nike basketball shoes. Brazil's national football team gets $12 million for playing its famed "beautiful game" in Nike soccer shoes.
Nike will spend $476 million this fiscal year in exchange for endorsements by celebrity athletes, part of the company's $1.7 billion advertising budget for the year.
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The ratio of marketing spending to total sales hasn't budged in five years. Over that time, analysts and sports executives have debated the wisdom of Nike's endorsement strategy.
Nike shares are up 90% over the past five years. But investors are disappointed with the stock's 10% decline from its all-time high of $91.70 in December 2004.
"Four hundred-plus million dollars is a lot of money for athlete endorsements alone," says Ben Sturner, president of Leverage Sports Agency, a New York-based sports marketing company. "Brands like New Balance, for example, spend zero dollars on athlete endorsements, and New Balance is a top 5 company, in terms of athletic shoes."
Despite the occasional criticism, Nike has done an impressive job in scouting athletic talent. Woods has won five consecutive Professional Golf Association tournaments and 12 majors over the past decade. James is living up to the incredible hype that accompanied his jump from an Akron, Ohio, high school to the No. 1 pick in the 2003 NBA draft. And Maria Sharapova, who is paid $6 million a year by Nike, claimed her first U.S. Open tennis title earlier this month wearing a black Nike tennis dress.
"It's not like back five or 10 years ago, where Nike had a whole lot of athletes under endorsement deals that you'd really question why they were paying those guys," says John Shanley, an analyst at Susquehanna Financial Group.
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Domestic sales of basketball shoes are down 11% this year, compared with a 25% jump in "athletic lifestyle" shoes, including thin-soled sneakers, according to SportsOneSource. Retail sales of Nike's basketball shoes have declined 3%, the firm said.
The market for expensive hoops-star-endorsed shoes is shrinking. Fewer teens in recent years have been buying basketball shoes for everyday wear, and low-cut, European style footwear made by such rivals as Puma and Sketchers is grabbing market share.
And then there's the Starbury collection, launched this summer by New York Knicks point guard Stephon Marbury, who is bucking the prevailing NBA-shoe-endorsement dogma by creating a stylish basketball shoe that sells for just $14.98.
Marbury, who grew up in a tumbledown Brooklyn neighborhood with seven siblings, says his endeavor is motivated in part by his desire to prevent families from having to choose between paying the light bill and a pair of $120 sneakers.
Nike has its own entries in the lower-priced athletic shoe market. But the company has struggled to manage its Converse and The Starter shoe brands.
But Nike built its name in athletic shoes with pricey products that deftly blended style and performance. The company continues to push the high-tech envelope with products like the iPod-compatible running shoes developed with Apple Computer (AAPL, news, msgs) and its own fusion sneakers.
In a conference call with analysts to discuss first-quarter results, Nike cited solid demand for its higher-priced, high-tech shoes in saying it expects earnings per share to increase for the full fiscal year.
There's good reason to think that Nike can keep its edge in the sneaker wars. Nike's best weapon might be its swoosh logo. Young consumers want the next thing, and they want to be first. On that score, Nike delivers.