Chasing Nike (NYSE:NKE) in the footwear business has to be a frustrating exercise for the likes of Adidas (Nasdaq:ADDYY), Skechers (NYSE:SKX), and Puma. In good times and bad, Nike's unmatched commitment to marketing and product development translates into strong share, revenue, and profits. Should Nike ever make a similar commitment to leading the apparel market, who knows how much larger the company could get? In any case, Nike doesn't look cheap today, but then it so seldom does.
A Solid End To The Year
Nike brought the fiscal year to a good end with fourth quarter results. Revenue rose more than 7% as reported, or about 9% on a constant currency basis. Growth was led by the tiny equipment business (up over 10%), while footwear sales rose almost 7% and apparel was up 6%. While the North American market has remained a hot one for Nike (up 12%), China has turned positive again.
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Nike being Nike, it's hard to call the margin outperformance this quarter a “surprise”. Gross margin improved more than one point from last year, and while the margin seems to have been boosted by some “one time” shifts in expenses, management guidance suggests this level of gross margin will be maintained and improved over the next year. Operating income jumped almost 19%, with 130bp of operating margin expansion.
The Future(s) Are Still Bright
Nike's futures aren't a perfect representation of what's immediately coming for revenue (last quarter's futures were up 7%), but they still provide a good sense of where the markets are heading. Futures volume improved 5%, and Nike saw 12% growth in futures for North America, Central/Eastern Europe, and Emerging Markets. Japan was up 6%, while Western Europe and China were both flat.
Speaking of China, this quarter's return to growth may not last. Management seemed concerned about the prospects for the next couple of quarters, though they expect performance to improve in the back half of the next fiscal year.
Can Adidas Move The Needle?
Nike has such a strong share of the U.S. (and global) athletic footwear market that it sometimes seems as though competitive threats are relatively trivial. That said, Adidas has been upping its commitment to innovation, with the recent successful introduction of Energy Boost (developed with BASF) a good case in point. While Adidas is probably the best-positioned company to match the Nike model of innovation and brand marketing, I think a stronger Adidas is probable a bigger threat to Puma, Skechers, ASICS, and New Balance
Will Nike Repeat The Model In Apparel
Nike does so many things right, rarely is there much criticism of the company's strategy from the sell-side community. Well, I'm not a sell-sider anymore, but I do think Nike may be missing an opportunity to really flex its muscles in the apparel market.
Nike has almost one-third of the footwear market, but while it's the largest single share-holder in the apparel market, it's share is only about 5% to 8% and rivals like VFC (NYSE:VFC) and Under Armour (NYSE:UA) are a great deal more competitive. With Nike's proven ability to produce meaningful innovation in materials, construction, and design, I see no reason why the basic philosophy that has made Nike a dominant footwear company couldn't be applied to apparel. Under Armour and lululemon (Nasdaq:LULU) have emerged under Nike's watch, and it is my opinion that Nike is letting revenue and profit opportunities slip away by not making a bigger commitment to building the apparel business.
The Bottom Line
Every once in a while Nike shares stumble and investors have a chance to buy the shares of a great company at a decent price. This is not one of those times. With a 42% rise over the past year, Nike shares are back well within the premium valuation range they so often enjoy. While I do believe Nike could continue to grow free cash flow at a long-term rate of about 10%, the shares trade at a slight premium to the implied fair value of $58. I wouldn't chase these shares given how hot consumer stocks have been, but this remains a great company to hold for the long term.