In a move to focus on its fastest growing brands and enhance shareholders’ return, Nike, Inc. (NKE) intends to divest its two wholly-owned brands, Umbro and Cole Haan. The company revealed that it will start the divestiture process immediately and hopes to complete by the end of May 2013.
Nike is the industry leader by a stretch in the U.S. footwear and athletic apparel industry.Over the years, the company has acquired many well known brands to further strengthen its leadership position. These brands include Converse Inc., which designs, markets and distributes athletic footwear, apparel and accessories; Cole Haan, a leading designer and marketer of luxury shoes, handbags, accessories and coats; Hurley International LLC, which designs, markets and distributes action sports and youth lifestyle footwear, apparel and accessories; and Umbro Ltd. a leading U.K.-based global soccer brand.
We believe the reason behind the divestiture is that Cole Haan and Umbro’s performance does not match with the performance of Nike’s other brands. During the third quarter of 2012, Nike's total revenue grew 15.1% to $5,846 million from $5,079 million in the prior-year quarter, primarily driven by growth in all key categories of NIKE Brand, and in geographic regions excluding Japan. Revenue for the quarter surpassed the Zacks Consensus Estimate of $5,829 million.
Our Recommendation
We believe the company’s decision to divest its two underperforming brands will boost its bottom line. Meanwhile,in an attempt to expand its global reach and market share, Nike is capitalizing on growth opportunities in emerging markets, especially China. The company is focusing on other tools, such as a direct-to-consumer business model, to expand geographically. We believe that Nike’s continued investment in China and focus on the direct-to consumer business will not only help in expanding market share, but will also facilitate in strengthening its competitive position.
However, sluggish discretionary spending and intense competition amid rapidly changing customer preferences keep us on the sidelines.
Nike competes with PVH Corporation (PVH) and Brown Shoe Company Inc. (BWS). Currently, the company maintains a Zacks #2 Rank, which translates into a short-term Buy rating. However, we retain a long-term 'Neutral' recommendation on the stock.
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