Nike Inc. told Reuters Tuesday it will pull its products from Sears department stores in a move that effectively blocks discount retailer Kmart from carrying the famous "swoosh" brand.
Analysts saw Nike's move as an attempt to protect its high-end image as Kmart starts selling well-known Sears brands, although the world's biggest athletic shoe maker did not comment on the Sears-Kmart deal.
Nike's decision comes as it moves to capitalize on growing demand for premium-priced shoes like the Nike Shox, which have fueled recent profits and are typically sold at premium retailers.
Discounter Kmart recently bought Sears in a $12.3 billion deal that created the third-largest U.S. retailer, Sears Holdings Corp..
"As of October 2005, Nike will no longer be selling product to Sears," Nike said in a statement responding to questions from Reuters. "This was a brand decision following a routine account review and the recent expiration of Nike's agreement with Sears."
Sears said it planned to "continue talking to Nike" and noted that it still carries other brand-name athletic shoes including New Balance, Reebok, Adidas and Skechers.
"Sears has a long-standing relationship with Nike," said Sears spokeswoman Lee Antonio. "We were surprised and although we were disappointed, we respect their brand decision."
Nike declined to say whether it would pull its products from other mid-priced chains such as Kohl's Corp., prompting some analysts to question whether the move was purely a strategic change or aimed solely at Sears.
"I'm very surprised by this," said Anthony Chukumba, an analyst with Morningstar who follows Sears. "Sears has always prided itself on having name-brand athletic footwear including Nike, New Balance and Adidas. Clearly this hurts them."
"Maybe this is Nike saying, 'I don't trust (Sears Chairman) Eddie Lampert, and I don't know where the stores are going, so it's not worth taking the risk of damaging the brand image,"' he said.
Image is everything
Sears recently began putting its exclusive Kenmore appliances and Craftsman tools in a handful of Kmart stores. Bringing those brand names to the discount stores was part of the rationale for Kmart's purchase of Sears in March.
But for a company like Nike that is notoriously protective of its brand image, the prospect of its name-brand shoes showing up at Kmart would be unacceptable, analysts said.
"If your image is upscale and you end up in Kmart, then you do look like a loser," said Erik Gordon, a marketing professor at Johns Hopkins University. "It can really destroy your brand."
Other Sears suppliers that do not sell to Kmart include Liz Claiborne Inc., Jones Apparel Group Inc. and Timberland Co.. Timberland and Liz Claiborne declined to comment on whether they would sell to Kmart, while Jones did not immediately return a call.
Nike goes high-end
Nike also declined to say whether it was in talks to bring its lower-priced Starter brand to Sears or Kmart as it promotes those lower-priced shoes in Wal-Mart Stores Inc. outlets.
It also did not quantify how much its Sears sales were worth but said it was confident it would make up lost business elsewhere by capitalizing on its leading position in the marquee footwear category.
Certainly, a recent fashion shift to premium sneakers has turned spending big bucks on athletic footwear more mainstream in a trend that has fueled profits at big shoe companies.
Demand for athletic shoes that cost more than $100 a pair grew 18 percent in the United States last year to almost $600 million, according to data from marketing firm NPD Group.
This is especially good news for Nike whose market share of the lucrative U.S. athletic shoe market is more than twice that of each of its largest rivals, Reebok International Ltd. and Adidas-Salomon .
Nike said higher-priced shoe sales grew 10 percent the past quarter, which the company credited with helping boost quarterly profit to $273.4 million from $200.3 million a year earlier.