Waiting for NIKE, Inc. (NKE)’s China Growth Story

Industry peer

Nike’s peer Under Armour Inc (NYSE:UA) also operates in China but has a much smaller presence there. However, some analysts (such as Canaccord’s Lyon) have pointed out that during the fall-2012 season, Under Armour proved to be far more efficient than its bigger rivals, such as Nike and Adidas. Moreover, unlike Nike, the company has been selling its shoes and apparel without any discounts thus earning higher margins.

I believe that Under Armour is an attractive long-term growth story in the making with an increasing foothold in the international markets. The company is expecting an significant increase in revenue from $2.2 billion in 2013 to $4 billion in 2016, while the contribution of international sales to the top line will double from 6% to 12% in the corresponding period.

Margin improvement: Big positive?

NIKE, Inc. (NYSE:NKE) has made improvements in its gross margin. The company has been under pressure from rising labor and material costs in China. Nike has responded by increasing costs and improving its supply chain. It also divested its brands Cole Haan and Umbro in 2012, which were dragging its results lower.

In the previous quarter, Nike improved its margins from 42.5% a year ago to 43.9%. This would be Nike’s second consecutive year-over-year improvement after reporting nine straight declines. However, I wouldn’t call it a big positive or a significant improvement since overall, its margins are still in the downward trajectory (shown in the picture below).

Conclusion

Although Nike remains solid on the revenue and earnings front while North America remains its strong point, it continues to face headwinds in China. Its current year-over-year improvement in margin is a step in the right direction but it is also a decline from the previous quarter. As indicated earlier, for Nike, things are slowly moving in the right direction in China but a turnaround is nowhere near, which is evident in the expected decline in Chinese sales.

Several analysts have recently given NIKE, Inc. (NYSE:NKE) a buy rating but I believe that in the current mixed-bag results, a tough business environment with intense competition and an expected slowdown in discretionary spending, it is better to remain neutral on Nike.

The article Waiting for Nike’s China Growth Story originally appeared on Fool.com and is written by Sarfaraz Khan.

Sarfaraz Khan 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. Sarfaraz is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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