Nike (NYSE:NKE) is often as near as what comes to a bulletproof stock - the company's brand is known all over the world, management runs the company with high efficiency and results are generally reasonably predictable. Occasionally, a little gap in the armor appears and patient investors have an opportunity to buy shares at a reasonable price. Nowadays it looks like Nike's "China problem" may be just such a gap.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.
So-So Results, but Chilled by China
Although the reported numbers were not great, Nike did alright on an adjusted basis. Revenue rose about 12% and did miss estimates, though revenue rose more than 13% in North America and 18% in China. Overall, the miss was less than $100 million relative to average estimates, which is not very large for a company of this size.
Profit performance was disappointing as well. Gross margin fell by 150 basis points, and even if you wish to add back so-called "one time" items like charges related to customs, the company still missed. It was encouraging to see management hold the line on SG&A expenses (even though expectations were for a slight decrease), but operating income was down slightly as the decline in operating margin matched the decline in gross margin.
SEE: Analyzing Operating Margins
The Future Is a Bit More Cloudy
Nike's futures are a closely-watched gauge for the near-term business outlook; while not all of Nike's business is captured through futures, it's directionally valid and important. This is where investors seemed to get very nervous about Nike.
Global futures rose 12% on a constant currency basis, and 7% on a reported basis - missing expectations that ranged in the low teens. Half of that growth was from price increases and even more worryingly, orders in China were up just 2%. Not only is China responsible for about one-fifth of the company's sales, but it is also the most profitable region for the company.
SEE: Futures Fundamentals: Introduction
A China Problem, Or a Nike Problem?
The immediate concern seeing Nike's China futures number is that the Chinese consumer is stretched out and pulling back on spending in the face of a difficult economic environment. By that logic, it should only be a matter of time before companies like Coca-Cola (NYSE:KO), Yum Brands (NYSE:YUM) and even Apple (Nasdaq:AAPL) start seeing their growth in China drying up (as has already happened for industrial companies like Caterpillar (NYSE:CAT)).
That may be too hasty, though. First, Nike's products are not exactly cheap within China and cutting back on tennis shoes is not really the same as cutting back on soda. Second, the competitive dynamics are different. Chinese rivals like Anta, Li Ning and Peak have been having their own challenges as well, as it seems that there's simply too much inventory in the Chinese footwear market at present. So while Nike's news may indeed be bad for Adidas (OTC:ADDYY), ASICS and Under Armour (NYSE:UA), it doesn't necessarily have broad meaning for the consumer goods sector, or at least not yet.
SEE: A Guide To Investing In Consumer Staples
The Bottom Line
No one should rush into Nike stock today with the idea of a quick recovery play. I don't know if the China situation has to get worse before it gets better, but I don't see how it gets dramatically better in just a quarter or two.
Long term, though, I do believe in the Nike story. People like to wear shoes, and while rivals like Li Ning may be closing the gap on Nike, Nike is still one of the best in the business. What's more, Nike is very good at running its business from both a manufacturing and promotional standpoint. With fair value of just over $100, Nike may not be a slam-dunk today, but it's getting pretty interesting for investors who've waited for a chance to get into these shares at a reasonable price.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
Mutual Funds & ETFsLearn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
Investing NewsWill Ferrari's shares move fast off the line only to sputter later?
Stock AnalysisHere are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
InvestingThe further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
InvestingNo companies are completely recession proof, but some industries perform better in a weak economy than others.
Fundamental AnalysisOptions market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
Stock AnalysisCan these two oil stocks buck the trend?
Investing NewsAlcoa plans to split into two companies. Is this a bullish catalyst for investors?
InvestingIn an industry still largely predominated by men, we look at 6 leading female value investors working today.
TermFinancial performance measures a firm’s ability to generate profits through the use of its assets.
A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>
Discounted cash flow (DCF) analysis can be a very helpful tool for analysts and investors in equity valuation. It provides ... Read Full Answer >>
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
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 >>
Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>