EXCLUSIVE-Nike cites 'ripple effect' in action sports

* CEO predicts $1.2 bln sales at unit by 2015

* Sees no acquisitions on immediate horizon

* CEO "quite happy" with company's forward-looking orders (Revises first sentence, adds CEO and analyst comments, other details)

By Alexandria Sage

COSTA MESA, Calif. (Reuters) - Nike Inc is looking to double its piece of the action -- the action-sports market, that is.

The company, which helped build running into a mainstream sport, expects sales at its action-sports unit -- specializing in surfing, skateboarding and other "edgy" sports -- to double to $1.2 billion within five years, the chief executive of the shoe and apparel giant said Friday.

"We're quite bullish on that growth prospect," CEO Mark Parker told Reuters, speaking from the offices of Nike's surf brand Hurley. Parker was in Southern California for the U.S. Open of Surfing, sponsored by Nike and held in the nearby beach town of Huntington Beach.

Action sports is the term used to describe surfing, skate and snowboarding, and lesser-known counterculture sports like bicycle motocross, which together make up a $12 billion industry in the United States and about $22 billion globally.

It is a fast-growing category for Nike, which built its company and global image on more mainstream sports like running and basketball which still drive the bulk of Nike's $19 billion in annual sales.

Choppy economic waters in the United States and abroad have hurt not only Nike's mature businesses, but the action sports market as well. Sales in the independent surf and skate channel are down 2.4 percent this year, according to market intelligence group ActionWatch, which tracks such sales.

But in this enclave of Southern California's sun-infused Orange County -- home to a casual vibe but fat wallets -- the world's largest sports shoe and apparel maker is anxious to focus on growth.

In May, the company projected that its non-Nike brands will double in size by 2015, helped by doubled sales from surf brand Hurley and basketball shoe brand Converse, whose Chuck Taylor All-Star shoe carries retro cross-over appeal.

The action sports sales target cited by Parker includes just a small action-sports component of the Converse brand.

Investors, Parker said, need to appreciate the "ripple effect" of action sports within Nike's overall portfolio.

A fabric used in Nike Swim might end up on a board short, or a motocross boot is made lighter through innovative running shoe technology. That shared design and technology innovation drives sales, he said.

"I think they (investors) appreciate the actual growth and what that represents," Parker said. "That shows up on the top and bottom line. That gets people's attention."

Apparel giants such as VF Corp and Quiksilver have already staked a claim in the fast-growing market -- sales of VF's Vans shoes rose 24 percent in the second quarter -- while retailers such as Zumiez, Pacific Sunwear of California and Journeys exclusively target skaters and surfers, or the teens who emulate them.

CLIMB TO TOP

Nike currently is the No. 1 brand in skate footwear, a U.S. market that is just shy of $2 billion, according to footwear analyst Matt Powell of SportsOneSource.

But it was a tough climb, requiring multiple attempts by Nike to prove its legitimacy. Nike built its presence by keeping supply artificially low and initially selling only to small skateboard shops -- what Powell called "a classic Nike play." It also lavished contracts and marketing dollars on pro skaters like Paul Rodriguez and Eric Koston.

"Their plan worked," said Kent Uyehara, owner of FTC Sport in San Francisco, one of Nike's first skate accounts in the country. "They've accomplished what everyone expected -- which was to be the number one brand in skateboarding."

But Nike, in an attempt to pad profit margins by raising prices, which are more expensive than competitors', has put a damper on demand, he said.

"It's backfired and it's reduced the demand overall for the product," Uyehara said. "The problem is these shoes cater to a 16-to-25-year-old. It shook up the consumer demand."

Despite the higher prices, Nike-watchers say the company has excelled with a segmentation strategy that offers different price points at different retail venues, and working with retail partners for exclusive launches that build interest.

Although Nike says its skate sales are up this year, analyst Powell sees sales in the overall skate market down in the high teens, with Nike's down in the mid teens.

Powell argued the industry is ripe for an overhaul, with more innovative product in the pipeline.

"I'm looking to them for fresh things and not the same old same old," he said. "And if they don't, then they fail."

Despite Hurley's success in achieving top tier status in the industry under Nike, the overall surf category has its own pitfalls, and is rife with big names such as Quiksilver, Volcom and Billabong. Manufacturers must focus not solely on boardshorts, the darling product, but "lifestyle" apparel, geared to those who just emulate the surf look.

Sterne Agee analyst Sam Poser cautioned that Nike tends to fare best when it focuses on "performance" shoes and gear, which help the athlete technically: "If they're too lifestyle it hurts them," he said.

Asked about acquisitions in the action sports space or other areas, Parker said he saw none on the immediate horizon.

Nike has about $3 billion in cash.

"I wouldn't predict any acquisition in the near term," Parker said, adding he was "confident we're on a path to deliver" the company's previously announced plan to grow overall sales by 40 percent to $27 billion by 2015.

As for the current quarter, Parker said he was "quite happy" with forward-looking orders placed by retailers for the company's goods. (Reporting by Alexandria Sage; Editing by Bernard Orr and Matthew Lewis)