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Nike's (NKE) Financials "Just Did It"

By: Market IQ
Posted: 4/4/2013 1:47:00 PM
Referenced Stocks: GS;NKE

By Adil Yousuf

In an environment where investors are expressing caution about consumer spending, Nike (NKE) defied the odds when it reported strong fiscal Q3 earnings. The company reported earnings of 73 cents per share beating consensus estimates of 67 cents per share. However, revenue of $6.19 billion slightly missed expectations of $6.23 billion.

The company reported revenue growth across the U.S and Europe, with the biggest gain coming from the North American markets where sales climbed 18%. Revenue in Central & Eastern European markets increased 16%, and the company experienced 6% growth in emerging markets.

However, economic conditions and concerns over growth in Asia have continued to have a lingering impact on Nike's revenue in the region. Sales in Asia lagged - Chinese and Japanese revenue declined by 9% and 13% respectively.

Although slowing growth in Asia is a concern, Nike has been able to make up for it with a surging North American business and strong growth in other regions. Additionally, future orders, an important growth indicator, rose by 7% which puts Nike in a strong position going forward.

Based on Market IQ's proprietary Fundamental metrics, Nike is fairly priced relative to its peer group. Market IQ characterizes Nike as a high Quality and a low Value stock (see below) resulting in an overall Neutral- rating.

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The company's fundamental stock Quality is better than 64% of its peers mainly due to its profit margin and Return on Equity that compare favourably to the industry average.

However, Valuation metrics suggest that Nike is expensive relative to its peers.

Nike is one of the most recognizable global brands, and the company maintains its "Top-of-mind" status by extensive celebrity endorsements. Consumers' ability to resonate with the "Just Do It" brand has kept Nike profitable even during periods of reduced consumer spending.

The company is also doing a great job at introducing innovative products in the market while reducing its environmental footprint. Recent experimentation has yielded two break-out hits.

  1. Flyknit Racer: Nike has revolutionized running by rethinking shoe construction - Nike Flyknit is an innovation that behaves like a second skin and adapts to the body in motion. Its manufacturing process reduces waste by two-third the weight.
  2. FuelBand: An electronic bracelet that measures physical movements throughout the day. The application helps track physical activity with great ease.

Going forward, Nike has provided bullish insights for fiscal 2014 1 - this is great news for investors. Moreover, recent coverage with buy rating on the company by Goldman Sachs (GS) is a catalyst that could help drive the shares higher 2. However, expected hiccups from China, and current Valuation doesn't justify jumping into the stock at the time. That's not tantamount to saying that the stock can't perform from here, though. Rather, it just means that Nike may not be a strong outperformer relative to its peers.

1 The company expects to report high single-digit, or low double-digit revenue growth accompanied by mid-teens growth rates in 2014.

2 Goldman Sachs resumed coverage on Nike with a bullish rating, as the analysts expect the company to be on the verge of multi-year growth. The analysts rate Nike as "Buy" and see shares reaching $70.


This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.