Video: Nike profits dip

CNBC
updated 9/22/2006 3:42:45 PM ET 2006-09-22T19:42:45

Nike earnings beating the street, but profits have fallen 13 percent due to stock option expenses and high marketing costs.

The lingering question: Is Nike spending too much on marketing? How much is too much? Nike shareholders could be asking that question.

The company gives more than $20 million to Tiger Woods, $13 million going to Lebron James and $12 million to the Brazilian national soccer team in endorsements alone. To top it, the shoe and apparel giant plans on spending $1.74 billion in advertising, including $476.5 million in athlete endorsements this fiscal year.

Despite the fact that Nike’s marketing spend to gross sales ratio hasn’t changed in five years, analysts and sports executives have long debated the company’s level of spending.

“It’s really within the range of what is considered reasonable, about 10 percent gross revenues from marketing”, said Matt Powell, an analyst at SportsOneSource.

“ I think $400 plus million dollars is a lot of money for athlete endorsements alone. Brands like New Balance for example, spend zero dollars on athlete endorsements, and New Balance is a top five company in terms of athlete shoes”, said Ben Sturner, President of the Leverage Agency.

Despite the occasional criticism, Nike officials are doing an incredible job in talent scouting, with Tiger Woods wining twelve majors in ten years, Lebron James somehow living up to the incredible hype, and Maria Sharapova — at a cost of about $6 million per year to Nike — a beauty who has proven she can also win.

“It’s not like back five or ten years ago where Nike had a whole lot of athletes under endorsement deals that you’d really question why there were paying those guys”, said John Shanley, analyst at Susquehanna Financial Group.

Nike, together with Michael Jordan, virtually inventing modern day sports marketing, and although basketball shoe sales are up 15 percent, it can’t be a great sign that the next Michael Jordan is apparently Jordan himself.

Despite the fact that he last retired three years ago, the top five selling basketball shoes domestically this year are all retro Jordans, according to market retail firm SportsOneSource.

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