(FORTUNE Magazine) – In case you hadn't noticed, Nike is back. For the past three quarters, the Beaverton, Ore., behemoth has met or exceeded Wall Street's forecasts. Analysts expect earnings to jump another 13% for the fiscal year ended in May. Though off its highs, the stock currently trades at $50, almost double the low it hit in February of 2000.

How has Nike staged such a comeback? By becoming what longtime CEO Phil Knight once swore it would never be: a fashion company. Mind you, the word "fashion" still makes most Nike execs bristle. And the company hasn't abandoned its traditional focus on high-tech performance gear. But gross margins for Nike's apparel are among the highest at the company; they rose from around 38% to nearly 43% in the 12 months ended February 2002, and analysts expect further increases. Banc of America Securities analyst Susan Silverstein predicts that Nike's apparel business will grow a healthy 5% this fiscal year and 4% the next. "For the first time," concedes Knight, "we're an apparel company as well as a shoe company."

While Nike has long made clothes, its worldwide apparel sales shrank from $2.9 billion in fiscal 1998 to $2.7 billion in 2000 as customers shunned its athletic styles in favor of hipper, street-worthy gear. But Nike kept cranking out ho-hum T-shirts, shorts, and sweats. The business, Knight admits, was "treated as an accessory," even though it accounted for some 30% of total revenues.

In October 2000, Knight recruited Seventh Avenue hotshot Mindy Grossman from Polo Jeans to head up apparel. Since her arrival, Nike has radically changed its approach to designing, manufacturing, and merchandising. Grossman has slashed apparel lead times from 18 months to about 11 while launching a three-tiered labeling system for Nike's clothes: black for hard-core athletic gear, silver for sports-inspired activewear, and white for fashion apparel.

White-label merchandise for fall hits U.S. stores in August and aims to be--dare we say it?--downright trendy. Items from the spring 2003 line include a pair of women's stretch-boucle drawstring pants ($70) and a crocheted pink seamless halter top ($50) that look more appropriate for picking up dates than pickup hoops. Lest critics accuse Nike of pulling a Gap by falling for the latest fad, the white-label line makes up less than 5% of overall apparel volume. On the merchandising front, the company's renewed focus on retailers is "like night and day," says Federated Department Stores President Terry Lundgren, who has set up Nike women's apparel shops at 12 of his stores so far.

Nike still has problems, such as its lingering reputation for using Asian factories that underpay workers. Furthermore, the California Supreme Court recently overturned an appeals court ruling, which had held that Nike's PR and advertising campaign to defend itself against sweatshop allegations fell under free speech protections. The reversal opens the door for false-advertising lawsuits against Nike; it will appeal the ruling to the U.S. Supreme Court.

The company's duds will also compete against activewear from Ralph Lauren and DKNY, as well as niche brands like Juicy Couture. Nike's clothes "are getting a lot better," says Judy Leand, executive editor of Sporting Goods Business, "but so are a lot of other people's." Nike had better hope Grossman's Seventh Avenue smarts are enough to keep the swoosh in style.