Nike Running Away From Everything

By Stephen D. Simpson, CFA | March 26, 2012 AAA

When companies with great brands go on runs, all you can really do is hang on for the ride (if you own shares) or wait in the hopes of a stumble somewhere down the line (if you don't). By no means is Nike (NYSE:NKE) cheap right now, but it's hard to fault a huge global leader that is growing by double-digits and could yet double revenue over the next decade (if not sooner).

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Another Good Quarter ... Mostly
Although it wasn't a flawless fiscal third quarter, on the whole Nike did a very good job and business is strong. Revenue rose 15%, as the company logged double-digit sales in all of its major categories. Sales to North America (the largest region) rose 17%, while sales to China rose over 25%, despite a somewhat sluggish performance in apparel.

Margins were not quite so strong. Gross margin was softer (down 200 basis points), and ongoing wage inflation in emerging markets probably isn't going away anytime soon. Likewise, Nike spends an enormous amount of money on "demand creation" (that's marketing and advertising), and operating income growth clocked in at 10%. For related reading, see What You Should Know About Inflation.

The Strong Getting Stronger
Adding to solid past performance was strong futures orders. Futures rose 15% as reported and 18% in local currency, with volume up about 10%. Order growth was exceptional in both North America (22%) and China (20%), not bad in Europe (10%) but weak in Japan (down 3%).

With North American retail ordering trends so strong, it sounds like there should be decent sales coming down the line for companies like Foot Locker (NYSE:FL) and Finish Line (Nasdaq:FINL). It may also be something of a warning to other shoe companies like K-Swiss (Nasdaq:KSWS) and Skechers (NYSE:SKX) that there simply isn't room for any missteps right now.

Strong Getting Stronger, Part 2
Nike shareholders have to love the fact that Nike reinvests so much of its success back into the business and uses that to further their separation from the competition. Looking at the company's addressed markets, where does Nike not dominate? Lululemon (Nasdaq:LULU) is probably the leader in the yoga segment and VF Corporation's (NYSE:VFC) North Face dominates the hiking and outdoor market, but otherwise it's Nike's world.

What's more, take a look at the marketing spend of the rivals. Nike comes close to spending more than sportswear and athletic apparel makers Adidas, VF Corp, Puma, ASICS and Under Armour (NYSE:UA) ... combined. Not only does Nike wield a big stick in marketing, but the company also continuously drives to innovate and bring new technologies to the market.

The Bottom Line
The market very clearly believes that Nike is going to surpass the current long-range growth expectations out on the Street. With most analysts looking for high single-digit revenue growth out through 2016, the market seems to be pricing in low double-digits growth. Can Nike do that? There's certainly a large enough addressable market out there, particularly if emerging market spending on athletic apparel approaches developed market levels.

Still, investors have to get very aggressive on the revenue growth and cash flow growth numbers to make Nike look cheap today. This isn't altogether surprising; Nike is a proven and reliable company and institutional investors will pay up to own companies less likely to embarrass them. Consequently, investors who don't already hold these shares are probably better off waiting and hoping that there will be a stumble that opens up a more attractive entry point. For related reading, see Top 3 Pitfalls Of Discounted Cash Flow Analysis.

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

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