For Nike (NYSE:NKE) to perform as it has despite economic challenges in Europe, China, and the U.S. is a pretty strong testament both to the power of the brand, but also the company's commitment to product development. With a strong pipeline, signs of improvement in China, and the potential to recapture some lost gross margin, Nike could retest its 52-week high in the not-so-distant future. Nike isn't a terribly cheap or underrated stock, but strong financial performance could still translate into decent (or better) stock performance.

A Good Fiscal Q3

In an environment where many consumer goods companies are starting to express more caution about the health of the global consumer, Nike keeps on marching along.

Revenue rose 9% this quarter, with footwear sales up about 9% and apparel up more than 7%. North America was not only the largest contributor to sales, but also to growth with more than 18% revenue growth. Western Europe was up a surprisingly strong 8%, while China revenue declined more than 8%.

Nike did relatively well with its margins despite ongoing spending on marketing/promotion and product development. Gross margin improved about 30bp, while its operating income rose more than 12% and fueled a roughly 40bp improvement in operating margin.

Futures Showing Improving Results

Many companies across various sectors have forecast a challenging first half of calendar 2013, with growth improving in the second half of the year. Nike's futures performance would seem to corroborate that.

Overall futures were up 7% in constant currency terms, with volume up about 4%. North American futures were up 11% despite the toughest comp in three years. That strikes me as a pretty remarkable performance, particularly given the growth we've seen from smaller (and theoretically faster-growing) sportswear companies like Under Armour (NYSE:UA) and lululemon (Nasdaq:LULU). It also suggests to me that companies like Adidas (OTCBB:ADDYY.PK) still have their work cut out in terms of gaining share, while Nike's retailing partners like Dick's (NYSE:DKS) and Foot Locker (NYSE:FL) should be doing alright.

Elsewhere, the futures performance in Western Europe was disappointing (down 5%), but the 3% improvement in China suggests that Nike is largely through the worst of the inventory readjustments there. What's more, with China's futures up 3% and Central/Eastern Europe up 11%, it seems like Nike is a net share gainer in key growth markets like China and Russia relative to Adidas and Chinese companies like Li Ning and Anta.

Still Room To Grow

Nike is a large and relatively mature company, but that doesn't mean that the company doesn't still have plenty of tricks up its sleeve. As is often discussed with Nike, there are still millions (hundreds of millions, actually) of people who cannot afford Nike products and improving economic conditions in markets like China, India, and Brazil represent future growth opportunities.

Likewise, the company is still capable of taking advantage of new product introductions and better financial management. Flyknit looks like a major new product introduction for the company, and there's ample room for Nike to do better in sportswear/apparel if/when it becomes more of a priority to management. Last and not least, better inventory management and global sourcing, combined with less labor cost inflation, should be accretive to gross margin in the coming years.

The Bottom Line

As of today, I'm looking for Nike to grow its revenue at a long-term rate of about 6%, with long-term free cash flow growth of nearly 14%. While that looks powerful, keep in mind that fiscal 2012 was a bit of a down year for free cash flow generation, so the “real” long-term growth rate is closer to 10% (which is still quite strong).

Such growth suggests a fair value of about $52.50. That's not tantamount to saying that Nike stock can't perform from here, though. Rather, it just means that there's not much “slack” in the valuation and Nike may not be a strong outperformer relative to the S&P 500. As such, Nike isn't a bad hold here at all, but I'd be careful about chasing the stock if I didn't already own shares.

At the time of writing, Stephen Simpson did not own any shares in any of the companies mentioned.

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