NIKE, Inc. (NYSE:NKE), creator of the “Just do it” brand, owner of “Swoosh” logo and sponsor of many high profile sportsmen and teams, just checked all the right boxes to be an investment-worthy stock. NIKE, Inc. (NYSE:NKE) shares shot up by 8% as it surpassed Wall Street expectations by posting revenue growth of 9% for the third quarter.
Oregon-based Nike is a Fortune 500 company engaged in design, development, marketing and selling of authentic athletic footwear, apparel, equipment and accessories. It’s the market leader in the Apparel, Footwear and Accessories industry, with other major competitors being Ralph Lauren Corp (NYSE:RL) and Adidas (NASDAQOTH:ADDYY).
The financials
Revenue grew by 9% (10%, on a currency-neutral basis) at $6.2 billion. It was marked by well-balanced growth across all key categories, brands and geographies. With the cost of sales growing at the same scale, the company reported gross profits of $2.7 billion (up 10%).
Total selling and administration expenses grew at 9%, in line with revenue growth. Higher cost DTC business and continued investments towards innovations triggered operating overhead, which grew at 11% for the quarter.
Net income from continuing operations grew at 16% to $662 billion. A lower effective tax rate of 22.8% (last year 27.7%) led net income to outgrow revenue growth by more than 6 percentage points. This decline in tax rate was majorly due to lower effective tax rates on foreign operations and a one-time reinstatement of the R&D tax credit.
Diluted earnings per share increased by 20% to $0.73 due to high net income coupled with the effect of the four-year share repurchase program, approved by the Board in Sep. 2012.
Coming to margins, the gross margin for the quarter expanded by 30 basis points, sparked off by increasing prices and lessening raw material costs, partially offset by labor cost inflation and higher discounts. The current ratio for NIKE, Inc. (NYSE:NKE) stood at 3, much above the industry average.
Beyond numbers
Nike follows a three-pillar growth strategy: innovative products, strong consumer connections and premium distribution, and this strategy has performed again. The Nike growth story is not new on the table, and this quarter has been the 13th with double digit growth in revenue.
Nike saw a growth of 9% in footwear and 8% in apparel. The global futures grew at 7%. This growth was inspired by increasing sports business and innovative technologies offered by Nike, namely NIKE Free, Lunar, Nike Flyknit, Air Max, Dri-FIT, etc.
The vision and plans of NIKE, Inc. (NYSE:NKE) seem to be very clear, as it strives to invest resources in growth businesses only. It divested its Umbro and Cole Haan businesses to keep resources and focus invested only in value drivers like Nike, Jordan and Converse.
Besides innovative products, digital technology, e-commerce and targeting emerging markets, Nike is also eyeing upcoming major sporting events for further growth.
The America and China story
North America, yet again, proves to be the gold mine for Nike as it outperformed expectations by providing revenue growth of 18% (future orders grew by 11%). Despite the American market looking mature, Nike believes that there are growth opportunities in running, basketball and men’s training categories. Increasing relevance in North America and the foreseeable growth opportunities have not turned Nike’s attention from the emerging markets, and that’s been proved by the Chinese turnaround story.
Among the emerging markets, China is precious to NIKE, Inc. (NYSE:NKE) as high price tags and low shipping costs turn it into a high-margin market. However, Nike was suffering in China, as future orders decreased during the first two quarters of the fiscal year. Moreover, Nike had been stuck with excess inventory in China and was finding it difficult to tackle competition by local brands. The company saw a turnaround in this quarter as future orders rose by 4%, one of the reasons being improved merchandising assortments. Nike, however, believes that for long-term progress and growth in China, better strategies are required, namely re-phasing product flow, inventory management, innovation, etc.
Final words
NIKE, Inc. (NYSE:NKE) has shown robust performance over the last few quarters, despite the economic slowdown in the U.S. It showed improvement in gross margins for the first time over the last two years. Additionally, it’s marked by improving EPS, increasing future orders (up 6%), strategic share repurchase programs and focused investments in value drivers. Also, to be noted is the death of a strong competitive brand, Reebok. The Chinese turnaround, and future plans for emerging markets, throws light on a bright future for Nike. It seems Nike is on a dream run, and this quarter has fueled it further. In such scenarios, NIKE, Inc. (NYSE:NKE) would be a value bet, and would be a BUY and HOLD.
The article Nike: Just did it! originally appeared on Fool.com and is written by Adarsh Agarwal.
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