Nike Inc (NKE, Financial) is the famous global giant engaged in the design, development and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories and services. With its products focused on seven main categories (Running, Basketball, Football (Soccer), Men’s Training, Women’s Training, Nike Sportswear and Action Sports), Nike has been the most valued brands amongst sports businesses, as per Forbes.
On track?
In the second quarter results released by the company on Nov 30th, Nike reported a 45.1% increase in its gross margin. Its topline perched up 17% on currency neutral basis in every product category except golf. Nike’s expenses climbed in the second quarter. To give you further insight, selling and distribution expenses grew 17% because the demand creation expenses inched up by 11%. The bottom line increased 23% to $655 million. Inventories were up 11% to $4.2 billion driven by a 9% increase in Nike’s wholesale inventories.
The diluted earnings per share reflected a boost of an impressive 25%, to $0.74. This was aided by the continued 4 year $8 billion share repurchase program of Nike, wherein the company repurchased 5.1 million shares for approximately $425 million in the second quarter.
Facing Headwinds
In spite of Nike’s overall business chugging along nicely, its stock still floats on a drop. The day after the release of its second quarter results, the stock declined 2% to $94.70 in spite of the good figures. Though the numbers of the past do not hold much relevance in determining the future movement, it is significant to understand the reason that drove this decline. Analysts have pointed out a low single-digit growth of 7 percent in future orders as the culprit. The dismal growth percentage can be largely attributed to the poor condition of international currencies particularly the Euro, Argentine Peso, Ruble and Yen. However, investors should focus on the fact that excluding currency changes, the orders have risen by 11% from the prior year period. The FX decline is putting pressure on the top and bottom lines and the nimble market is not being able to support it.
It is interesting to note that Under Armour Inc (UA), Nike’s primary $14 billion worth domestic competitor has been spared from the FX headwinds. UA recently reported a jump of 30 percent in net revenues and also raised its full year net revenue and income outlook, owing to a better-than expected performance in Q3. So, the reason that UA did not face the FX headwinds as severely as Nike is because of UA’s lower global exposure. As per data, the international business still forms only 10 percent of UA’s overall revenue, whereas Nike has a whopping 40 percent of its revenue from international operations, especially in Europe and China.
A good stock still?
Nike’s Enterprise is valued at $79.65 billion, which is almost 23 times its earnings per share for Fiscal 2016 and well above the market average. Investors should not be worries about a low increase in future orders because foreign exchange challenge is one of the many challenges a multibillion dollar company can face. As on the date of this writing, the share is priced at $96.16, up by 0.32%, and has a 5 year expected PEG ratio of 2.13. Nike possesses a consensus Buy rating from analysts across the globe and an average price target of $98.48. Also, analysts predict that Nike will report an EPS of $0.59 on an average for the current fiscal year. To sum it up, if an investor is willing to invest in Nike, I would suggest he/she should Just Do It.
