The choice between fight and flight is taking on a new meaning in the sporting goods sector. Brands are soaring by exploiting new opportunities in emerging markets, while a subsequent fight for remaining market share is taking shape closer to home, as Joe Ayling reports.

Competition is rife among global sports companies facing the acid test of winning customers at a time when cautious spending habits and tough business conditions plague developed markets.

And while top brands like Nike and Adidas have the assortment and geographical spread to keep their heads above the water, major retailers like JJB Sports and Foot Locker are rolling out store closures amid sloping revenues.

As Susquehanna International Group analyst John Shanley tells just-style: "Business for most athletic brands and retailers is very sluggish - conditions are tough."

Such mixed fortunes are substantiated by ratings agency Moody's, which last month downgraded the ratings of Foot Locker due to "weak profitability levels and weakened credit metrics", but upgraded Nike, saying the company "has strong geographic diversity, with approximately 51% of fiscal 2007 sales generated overseas".

Beaten by the credit crunch
US retailers like Hibbett Sports and Dick's Sporting Goods are expected to post same-store sales decreases in their first quarter statements next week, according to a research note by Susquehanna.

However, the broker also notes that Hibbett's long-term strategy of competing in smaller geographic markets should enable the company to "maintain healthier operating margins than most large format sporting goods retailers".

Retailers in the US were hopeful that the launch of Under Armour's first ever cross-trainer might add some spark to the sector this month.

The heavily promoted launch, which could be followed by a running shoe from the performance brand, turned out to be "a little disappointing" though, according to analysts.

Its 13% sell-through rates were above average but below those resulting from an average Air Jordan launch, Shanley said.

In a research note sent to just-style, financial group JP Morgan says: "The Dick's store we visited was almost completely out of the Under Armour prototype shoes.

"While sell-through was clearly strong, the store did mention excitement was very high at the time of the initial airing of the Super Bowl commercial but died off by the time the shoes were actually released.

"The associate attributed the out of stock position to a narrow depth of sizes, and thought the launch was, in general, below expectations."

Across the pond
It is not just US operators feeling the pinch, with UK retailer JJB closing 72 of its stores and axing 800 jobs after reporting a 71.9% slump in annual pre-tax profit last month.

The retailer, whose full-year profit fell to GBP10.8m, is making a GBP25.0m provision to implement the store closure programme, which is designed to strengthen its remaining portfolio of superstores.

Meanwhile, Foot Locker, which operates footwear stores in the US, Europe, Canada, Australia, and New Zealand, is planning more store closures after reporting a 23% nosedive in profits to $53m during the fourth quarter.

Analysts expect Foot Locker to report further sales declines in its first quarter results due next week, but say that recent strategic initiatives, including store closures, management changes, and tighter inventory management, are all longer-term steps in the right direction.

Having said this, its near-term domestic sales performance will likely remain challenging.

An international playing field
It is worth noting that although most retailers remain firmly grounded amid tough economic conditions, some are instead opting for round-the-world tickets.

UK retailer Sports Direct, for example, is boldly introducing its leisurewear brands into China having inked a GBP20m deal with domestic retailer ITAT Group Limited.

Leading sports brands are tapping into global opportunities too.

Nike is gearing up for this summer's Beijing Olympics with some powerful promotion in the Chinese marketplace and this week launched its China Federation uniforms (pictured above).

Nike is keen to reinforce its number one position in China, with Adidas in close contention, and has a retail presence in more than 300 cities. Today, China represents Nike's largest sourcing country and is its largest business outside of the US.

In their most recent quarterly results, both Nike and Adidas Group posted 32% overall net profit increases.

But both are drawing most revenue growth from Asia Pacific, detracting from softer sales in the US.

Nike's fastest growing market for third quarter sales was Asia Pacific, with revenues up 27% to $748.3m, it announced in March. Adidas, meanwhile, also prospered in Asia, where its first quarter 2008 revenues increased 25%.

Puma, however, was unable to disguise a 14.2% drop in US sales during the first quarter.  Total profits fell 6.7% despite a 13.3% rise in Asia Pacific revenues.

The bubble appears to have burst for upstarts Heelys and Crocs too, as both slid to unprecedented losses.

Recovery time
The outlook for sportswear retailers' recovery could fall slightly behind mainstream fashion, and other more essential consumer goods, according to analysts.

"In the last US economic crisis, athletic products came out of recession later than the rest of the fashion sector recovered," says Shanley. "The problem is that people don't actually need a new item of athletic clothing - these are not things that are essential for work or for school."

However, the caution issued by sportswear retailers means they could be in for a pleasant surprise if US and UK revenues recover before the end of the fiscal year.

The forthcoming Olympics and Euro 2008 spectacles offer an ideal showcase for sporting goods brands.

But while marketing executives are keeping an eye on Beijing, company accountants are more immediately concerned with the economic turmoil unfolding at home.

By Joe Ayling, news editor.