Nike (NYSE:NKE) gave investors a rare chance to pick up shares at a more reasonable price twice this year, but it looks like it's back to business as usual for the world's biggest footwear company. Although business in China remains sluggish, Nike's overall growth and margin profile continue to look quite strong.
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A Solid Fiscal Second Quarter
Nike has worried some investors with its flagging performance in China, but the business as a whole continues to perform well.
Revenue rose 7% this quarter (up 10% in constant currency), with footwear and apparel both up about 6% and equipment sales up 24% (though only making up about 5% of total revenue). Sales growth was the strongest in North America (up 17%) on a reported basis, but business was quite good in Japan and Emerging Markets. China was the notable weak spot, with revenue down about 12% in constant currency, and apparel sales down about 16%.
While Nike's margin performance wasn't necessarily great in a vacuum, it was better than sell-side analysts had feared. Gross margin did fall a bit from last year (by about 30 basis points), and operating income growth was just a bit higher than sales growth (allowing for a small improvement in operating margin). Interesting, segment profits grew by 20% or more in all segments except for China (which declined 16%); remember, though, that this does exclude the "corporate expenses" that are still very real in the big picture.
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Future Looks Solid, for the Most Part
Looking at Nike's futures, it doesn't look like any major changes are on the way. Overall futures rose 7% in constant currency, with double-digit growth in North America, Central/Eastern Europe and emerging markets. North America actually continues to lead the way (at 14% growth in futures), which is likely a bit of good news for Finish Line (Nasdaq:FINL) and Foot Locker (NYSE:FL), and Nike's solid apparel sales should be encouraging to the likes of Under Armour (NYSE:UA) as well.
China and Apparel Are Still Long-Term Projects
The declines in Nike's business in China are discouraging, but not altogether surprising. Local Chinese rivals like Li Ning and Anta are having an even worse time of it than Nike, and excess inventory is an industry-wide problem, not a Nike-specific execution error. I still see no reason to believe that this isn't a pullback within a long-term uptrend, though. Nike remains a share leader in China, and if Chinese discretionary spending doesn't continue to increase in the years to come, we'll all have bigger worries than what happens to Nike.
Looking at apparel, though, I'd still like to see Nike get more aggressive. A lot has been made of Nike's technology leadership in footwear, and Nike is happy to talk about how the company has incorporated ideas/technologies like suspension bridges into its shoe design. At the same time, though, companies like VF Corp (NYSE:VFC) (owner of North Face) and lululemon athletica (Nasdaq:LULU) don't seem to be losing any sleep over Nike in their respective apparel/sportswear categories. Though I think Nike could do a lot more in apparel, it doesn't seem like the company is prepared to make a big push just yet.
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The Bottom Line
I continue to believe that Nike is poised to post low-teens free cash flow growth over the next decade; a growth rate that is partly a product of unusually low free cash flow production in recent years. I think a 6% or so revenue growth rate is attainable, particularly if the company ups its game in the apparel industry.
Right now, though, the company sports an EV/EBITDA multiple over 12 and that low-teens free cash flow growth assumption points to a fair value pretty close to today's price. Accordingly, Nike no longer looks like a great bargain today.
At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.