(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Nike Inc. (NKE) once was suffering from falling U.S. market share, slowing sales, and a perception that its once-hot line of shoe brands had lost their edge. That's changing. By introducing a rash of exciting new products, Nike's sales are now seeing near double-digit growth in North America, where it once struggled. And sales also are surging in China amid a trade war with the U.S. that has hurt other companies.
Nike has executed its rebound through a number of related initiatives, including by: focusing on direct-to-consumer sales; overhauling its online strategy to expand its reach through social media; and revamping Nike consumers' experience on mobile and in the store. The main products driving the rebound have come from the Nike Air product line, which includes the VaporMax and Air Max 270 platforms, two of the world's top-selling athletic footwear models.
Nike's turnaround has been led by CEO Mark Parker, who joined the company in 1979 as a footwear designer and took the helm in 2006. Under Parker, the athletic apparel and sneaker maker has seen its revenue more than double to $38 billion on a trailing twelve-month basis, from just $14.4 billion in November of 2005. The stock has risen more than 8-fold.
Analysts estimate that Nike's revenue will grow nearly 25% through the fiscal year 2021 to $45.4 billion, a compounded annual growth rate of almost 8%, as earnings rise 52%. Analysts now project Nike's earnings will grow at a compounded annual rate of nearly 15% during that period.
China is a key driver of sales and profits. While companies such Apple Inc. (AAPL) have struggled in the world's second-largest economy, Nike has seen its revenue jump 31% to $1.5 billion in its fiscal second quarter ending November. They have risen 26% during the first six months of Nike's 2019 fiscal year. In North America, sales increased 9% in the latest quarter, a dramatic reversal from last year when sales in North America declined by 5%.
Nike also has gotten costs under control. Margins in the second quarter increased 80 basis points to 43.8% and improved by 70 basis points to 44% through the first six months. Last year, margins were contracting.
The future for the stock looks bright based on options trades and technical charts. Currently, options for expiration on January 17, 2020 suggest the stock rises or falls nearly 20% from the $85 strike price by expiration. That places the stock in a trading range of $68.70 to $101.30. However, the betting is very bullish, with the number of calls outweighing the bearish puts by a ratio of nearly 28 to 1, with over 18,000 open call contracts. The dollar amount for the open calls is very high at over $16 million.
The technical chart suggests the stock may be about to break out to a new all-time high. The stock is approaching resistance at $86. If the shares rise above that level, the stock may rally to around $96, an increase of roughly 12% from the current stock price of approximately $85.40 on February 19. Additionally, the relative strength index is pointing to more gains for the stock.
Rivals Close Behind
To be sure, Nike still faces heated competition from stylish athleisure gear makers such as Lululemon Athletica Inc. (LULU) and GAP Inc. (GPS), which owns Athletica. Under Armour Inc. (UAA, UA) is staging a comeback of sorts too, posting strong sales in Asia in its most recent quarter. But right now, Nike is back in the race and firmly in the lead - again.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past 12 months. Past performance is not indicative of future performance.