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.

Related Articles
  1. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  2. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  5. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  6. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  7. Investing

    Retailers Rebel Against Black Friday: Bad Move?

    The Black Friday creep may have hit a wall as some stores are shutting their doors on Thanksgiving and even Black Friday to give employees the day off.
  8. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  9. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  10. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  1. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  2. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  3. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  4. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  5. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  6. Can working capital be too high?

    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 >>

You May Also Like

Trading Center