What makes NIKE, Inc. (NYSE:NKE) really interesting is that it holds a number of NIKE AIR patents that cover specific features in various athletic and leisure shoes that will not expire for several years, giving it a wide moat. The company spends a significant share on its Research and Development, Production and Marketing and Design departments to maintain its competitive edge.
President and CEO Mark Parker said,” At Nike, we run a complete offense and it’s based on a core commitment to innovation. That’s how we stay opportunistic, serve the athlete, reward our shareholders and continue to lead our industry.”
Why Nike is fantastic
Consistency and aggressiveness are the key words for Nike’s earnings and revenue. “Fiscal 2013 was a great year for NIKE, Inc. (NYSE:NKE), driven by our innovative products and the power of our brands,” said Parker. The company’s leadership and innovation are its core strengths and help it perform better. For instance, NIKE, Inc. (NYSE:NKE)’s revenue jumped 8% in FY13 to more than $25 billion, which is remarkable when considering that the company took 18 years to make its first $2 billion but its yearly revenue growth now hits that mark.
Moreover, NIKE, Inc. (NYSE:NKE) has a strong balance sheet and the company can use leverage to drive its promising growth and innovation. Share repurchases of $1.7 billion shows its commitment toward keeping shareholders interested and returning value to them. The company’s financial performance has indeed been strong. NIKE, Inc. (NYSE:NKE)’s earnings for the fiscal year 2013 increased 11% to $2.69 per share from $2.42 per share in the prior-year period.
The company projects revenue growth for fiscal 2014 to be between 7%-9% and earnings per share for the same period will probably grow in the low double digits, while gross margin is expected to expand by 25 basis points on a year-over-year basis. The impressive increase in global orders is one of the reasons why Nike should perform better going forward.
Doing away with underperforming brands is one the best moves the company is making to expand its bottom line and it will also provide a competitive advantage. Recently, Nike completed the sale of its Umbro and Cole Haan brands due to which its cash and short-term investments increased $2.2 billion from last year.
Competition
Nike sells products for such a wide variety of sports, it competes against many niche companies, but also against similar large athletic footwear and apparel manufacturers like adidas AG (ETR:ADS), Brown Shoe, Puma Vct VII PLC (LON:PUMA) and Under Armour Inc (NYSE:UA). Nike is facing tough competition from Under Armour, which is giving it a run for its money in the U.S.
Under Armour Inc (NYSE:UA) has been gradually growing itself into a strong Nike competitor and the company will be providing the kits to the U.S. women’s and men’s gymnastics teams in the next two Summer Olympics. While this might not sound like much and Nike is the giant in the more lucrative soccer market, Under Armour Inc (NYSE:UA) has been slowly expanding its presence and sponsors, such as English club Tottenham Hotspur.
Also, a look at Under Armour Inc (NYSE:UA)’s recent growth tells us that the company is doing well to improve its standing in the market. The company’s revenue grew an impressive 25% in 2012 to $1.83 billion. However, a notable point was that only 6% of it was contributed by markets outside of North America, according to The Wall Street Journal. In comparison, Nike gets almost three-fifth of its revenue from outside the continent, which means that Under Armour Inc (NYSE:UA) has a huge opportunity to grow its business abroad.
But the more dangerous competition comes from adidas AG (ETR:ADS), which is behind Nike, but is looking to make a dent in its market share. adidas AG (ETR:ADS) has been constantly innovating to improve its shoes and it is of the opinion that its latest running shoes should help it chase Nike. The new running shoes from adidas AG (ETR:ADS) provide spring to the runner’s steps with constant energy and bounce and sell for $150. The company believes that this is a fresh innovation in running shoes and Nike should watch out.
Also, adidas AG (ETR:ADS) has a strong presence in international markets from where it derives around 60% of revenue. This is a threat for Nike, since Adidas is a Germany-based company but has spread its wings to markets across the globe, plus it has brand recognition as well. Adidas is looking to open around 100 new stores in 2013 and might open even more if it gets the right locations. Hence, its brand strength and store expansion are reasons why Nike needs to keep a watch on adidas AG (ETR:ADS).
Final words
Nike’s current price to earnings ratio is 23.47 compared with the 20.65 industry average and 16.65 for the S&P 500. At the same time, the P/E’s for competitors like Adidas is 33.06 and Puma Vct VII PLC (LON:PUMA) is 70.54. The stock is trading at a premium to the industry average based on forward earnings estimates for fiscal 2014 and 2015, but this is probably because of Nike’s brand strength and its great record.
With consistent results and a promising future, it seems that the company will increase investors’ confidence and enhance its market share. Continuous growth in its top line and bottom line should drive the stock price as well. Its earnings growth and aggressive expansion plans in emerging markets will definitely fetch good returns for investors over the long haul.
ANUP SINGH has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. ANUP is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article This Stock Should Help Your Portfolio Run originally appeared on Fool.com is written by ANUP SINGH.
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