The investment community seems to have locked on to Nike's (NYSE:NKE) "China problem," and this quarter's results aren't going to help. The good news is that investors can still take advantage of this situation to build a position in a stock that very rarely ever gets down to a fair price, let alone cheap. The bad news, however, is that results could slow in the interim and Wall Street is very much a "what have you done for me lately?" sort of business.

Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments.

Fiscal First Quarter Good on Almost All Metrics
It's hard to find much fault with the reported results that Nike delivered for its fiscal first quarter. Revenue rose almost 10% as reported, or about 15% on a constant currency basis. North America led the way with 23% sales growth, while emerging markets grew a little bit above 8% (or roughly 22% in local currency). Revenue in China rose about 8% on strong footwear, but weaker apparel. All in all, the company-wide growth rates for footwear, apparel, and equipment were all broadly similar.

Not only did Nike outperform on the top line, but margins were stronger than analysts expected. Gross margin did deteriorate from last year, by about 80 basis points, but that was better than expected. Likewise, Nike saw adjusted operating income fall about 12%, even though the company spent less on SG&A than analysts anticipated.

The Future Continues to Look Cloudy
Analysts pay a great deal of attention to Nike's futures orders; there has never been perfect correlation between futures trends and eventual reported results, but they are generally directionally similar. To that end, reported futures rose about 8% in constant currency, with 6% volume growth. North American futures continue to grow nicely (up about 13%), but China futures were down 6%.

Looking at the recent results at companies like Adidas (OTC:ADDYY), Li Ning and Anta, it sounds like there is a lot of inventory destocking going on in China, with the domestic rivals (Li Ning, et al) seeing the worst of it. What's more, the bigger companies such as Nike and Adidas are using their superior scale to push hard on discounts to hold (or gain) share. So while this adjustment process is bad for orders and tough on margins, I don't think there's anything fundamentally wrong with Nike's China business - if anything, the company seems to be gaining at the expense of weaker domestic competitors.

SEE: Top 6 Factors That Drive Investment In China

Can Nike Do It All?
There's not much question that Nike rules the roost when it comes to performance footwear; Adidas, Skechers (NYSE:SKX) or Mizuno may get the occasional win, but Nike continues to win the war. I wonder, however, if the company can do the same in apparel - a market that is ultimately much larger than footwear. VF Corp's (NYSE:VFC) North Face, for instance, seems to do more than hold its own with Nike in various outdoor markets. On the indoor side, Nike has yet to really land a telling blow against Under Armour (NYSE:UA) or lululemon Athletica (Nasdaq:LULU). Nike can certainly afford to take the attitude of "if you can't beat them, buy them" to a point, but I do wonder if Nike still needs to make a stronger R&D commitment to its apparel lines.

The Bottom Line
I still think Nike is well-positioned for above-average global growth for many years to come, and I don't think there are serious threats to the company's market position or returns on capital. But that's not to say that the company doesn't have some ebb and flow to its results; with concerns about China weighing on sentiment today, investors may have a relatively rare opportunity to build positions at reasonable prices. I continue to believe that Nike can grow its free cash flow (FCF) at a rate in the high single digits through the next decade. Couple that with a good balance sheet and below-average risk, and this is a solid stock for patient value-oriented investors.

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

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center