Few companies get as much credit for its brand value as Nike (NYSE:NKE), but brand value alone does not seem to explain why the company continues to do so well in an environment where consumers are looking left and right for bargains. The fact is, while Nike may not offer the cheapest options in its categories, the price gap is not as large as it used to be and the company has done a very good job of delivering value for money. (If you are interested in value investing, read The Value Investor's Handbook.)
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A Good Start to the Fiscal Year
With 18% reported revenue growth and 11% constant currency growth, Nike is starting this fiscal year right. Nike logged 15% growth in North America, while Western Europe was flat on a constant currency basis and China was somewhat sluggish at 9% growth. Emerging markets continue to offer a lot of growth for Nike (up 24%), but are still a fairly small part of the total. On a product line basis, apparel was the laggard with 9% growth (hurt in part by difficult soccer comps), but footwear climbed 13%.
Nike did lose a step on its profitability. Gross margin slid nearly three points on higher input costs and more discounting. While the company recouped some of this with more restrained marketing spending, Nike still lost a little operating margin this quarter and saw operating income growth of 14%. Profitability seemed to be especially disappointing in China and Western Europe, while North America and emerging markets were good sources of operating leverage.
What's the Story in China?
There are going to be ups and downs in any market, but Wall Street has long been obsessed with Nike's China business. Of course China is important (that many consumers cannot be ignored) but so too are countries like India, Brazil, Indonesia, and so on. In any case, the Chinese performance needs to improve. At this point, it looks like a market problem. Li Ning did not report a strong first half, and neither did China Dongxiang, making Belle's outperformance look like the outlier. If it is a "market problem," there is not a lot that China can do beyond sticking to a long-term strategic plan that has worked pretty well thus far. (For more on China, read Top 6 Factors That Drive Investment In China.)
Still a Bright Future
Nike reported that its futures orders were up 16% on a reported basis and 13% in constant currency. Encouragingly, futures growth was quite strong in China (up 22%), emerging markets (up 21%), central/eastern Europe (up 17%) and North America (up 15%), with only Western Europe and Japan standing out as under-performers. Given the state of things in Europe right now, though, it doesn't look as though Nike has to fear share loss to Adidas in what has become a tough market.
Looking at the longer term, Nike seems to be in the driver's seat. Absent the occasional fad (like toning), Nike has almost nothing to fear from the likes of Skechers (NYSE:SKX), K-Swiss (Nasdaq:KSWS), or Brown Shoe (NYSE:BWS). Likewise, Adidas, Hanesbrands' (NYSE:HBI) Champion and Berkshire Hathaway's (NYSE:BRK.A) Russell don't seem to be in a position that Nike would envy.
VF Corp (NYSE:VFC), Under Armour (NYSE:UA) and Lululemon Atheletica (Nasdaq:LULU) may be the exceptions, though. VF Corp is arguably stronger in "lifestyle brands," while UA has a leg up on performance apparel if floor space in stores like Dick's Sporting Goods (NYSE:DKS) is any indication. Likewise, lululemon seems to have a remarkably strong brand and market niche today but the valuation of that company would probably give Wall Street fits if Nike were to buy. Accordingly, Nike has the difficult job of trying to build a worthy rival in a market where cache arguably means more than real performance.
The Bottom Line
Nike is about 10% higher than where it was before its last quarter - a very strong performance in a dismal market. The stock is not all that expensive, but it's in that irritating twilight zone of "not quite a bargain," but not overpriced either - particularly given its quality and stability. Below $80 it's a much more interesting stock, but investors rattled by today's market could be forgiven for deciding that it's better to pay up for a quality name in uncertain times. (For a better understanding of how to choose stocks for your portfolio, check out How To Pick A Stock.)
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