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The world’s largest athletic footwear company, Nike Inc. (NKE - Analyst Report) recently announced that it is selling its Umbro brand to Iconix Brand Group Inc. (ICON - Analyst Report) for a sum of $225 million. The company is expecting to close the deal by the end of 2012.

In an effort to cut costs and sharpen focus on its namesake and other brands, Nike, in May this year, first revealed the intention of offloading its two brands – Cole Haan and Umbro. The company has been facing a number of challenges, such as rising labor and material costs along with uncertainty in European economies and decelerating future orders in China due to the poor performances of these brands. Moreover, according to Nike, performances of these brands’ do not match with that of its other brands.

In a move to improve its soccer-related apparel and equipment business, Nike bought Umbro in 2008 for $578 million. Currently, the brand has more than 30 licenses in over 100 nations. However, Nike now believes that its own brand has become much stronger and has the capability to serve the needs of the footballers.

About Iconix Brand Group

Founded in 1978 and headquartered in New York, Iconix Brand Group is a brand management company engaged in licensing, marketing and supporting a diversified and growing consumer brand portfolio by providing licenses. The company licenses its brands worldwide through its retail and wholesale licenses for use in connection with a broad variety of product categories, including footwear, fashion accessories, sportswear, home products and décor as well as beauty and fragrance, and in the case of Sharper Image brand, consumer electronics and novelty products. Iconix Brand Group will own 29 iconic consumer brands, after the buyout of Umbro brand.

Our Recommendation

We believe Nike’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 also will facilitate strengthening its competitive position.

However, we prefer to be on the sidelines given sluggish discretionary spending, increase in operating costs, and ongoing European crisis.

We retain a long-term 'Neutral' recommendation on Nike. The company, which competes with PVH Corporation (PVH - Analyst Report) and Brown Shoe Company Inc. (BWS - Snapshot Report), currently has a Zacks #2 Rank, which translates into a short-term Buy rating.

Nike is the industry leader 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 UK-based global soccer brand.

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