Nike: What’s Good, What’s Not? – Seeking Alpha

Thesis

Nike’s (NKE) long-term outlook remains very solid, whilst shares continue to trade at an inexpensive valuation. The company’s fourth quarter results reflect many strengths of Nike’s business model, although comparables were affected by one time items.

Over many years Nike has been a strong performer both regarding the company’s top line as well as its profits:

ChartNKE Revenue (NYSE:TTM) data by YChartsOver the last 10 years revenues doubled, while net income grew by 140% and EPS increased by an even better 190%, for an annual growth rate of 11.2%.

Nike’s top line growth was driven both by domestic growth in the US as well as the global expansion of the company’s presence, mainly in markets with a fast growing middle class population such as China.

This also was visible in the most recent quarter, where Nike’s highest growth rates were recorded in Greater China and the Emerging Markets group of countries (which recorded revenue growth rates of 11% and 21%, respectively). The high growth in these markets was enough to push the company’s total currency adjusted growth rate to seven percent year on year, despite the US market being flat (forex rates had a 200 base points negative impact, thus the GAAP revenue growth rates was lower at just 5%).

Nike also continued to deliver outsized earnings growth (EPS were up 22% yoy), although we have to look at that number more closely. The first factor that plays a role for Nike’s earnings growth (apart from top line growth) is the company’s gross margin, which, unfortunately, continued to decline:

ChartNKE Gross Profit Margin (TTM) data by YChartsNike has a declining gross margin since about one and a half years, and in the most recent quarter the company’s gross margin dropped by another 180 base points – Nike blames forex rates, but higher production costs had a negative impact as well. This is unfortunate, as a growing (or even flat) gross margin would allow for much better earnings growth, due to the impact of positive operating leverage – flat fixed costs would be distributed over an increasing gross profit number, thus lifting the company’s earnings by a wider amount.

Recent Posts

Leave a Comment