Nike Shares Are About to Hit the Ground Running Once Again
Nike, Inc. (NYSE:NKE) is known to almost every country on Earth. It is far and away the most recognizable athletic footwear brand on the globe, especially in the United States. In the spirit of the 2014 FIFA World Cup, I would be remiss to say its number one competitor is Adidas. But here in the U.S., Nike certainly reigns supreme. For those who somehow do not know this company, it is engaged in the design, development, marketing, and sale of athletic footwear, apparel, equipment, and accessories, as well as in the provision of services to men, women, and kids worldwide. The stock has been a huge winner for shareholders. Since the Great Recession the stock is up 211 percent. And guess what? The stock is about to hit the ground running once again.
The company offers products in seven categories, including running, basketball, football, men’s training, women’s training, Nike sportswear, and action sports under the Nike and Jordan brand names. It also markets products designed for kids, as well as for other athletic and recreational uses, such as baseball, cricket, golf, lacrosse, outdoor activities, football, tennis, volleyball, walking, and wrestling. The company offers performance equipment, including bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment, golf clubs, and other equipment under the Nike brand name for sports activities. Finally, it offers athletic and casual footwear, apparel, and accessories under the Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks.
Why do I believe the stock will hit the ground running again? Because Nike is firing on all cylinders. Revenues for Nike’s latest quarter rose 11 percent to $7.4 billion compared to last year’s quarter. Revenues for the Nike Brand were $7.0 billion, or up 13 percent powered by growth in every key category and geography except Japan, where revenues were in line with the fourth quarter last year. Revenues for Converse were $410 million, up 15 percent mainly driven by strong performance in its largest direct distribution markets: the United States, China and the United Kingdom. I was shocked to see gross margin expand once again. That’s right, it expanded again. Gross margin widened 170 basis points to 45.6 percent. The increase was primarily attributable to higher average selling prices and continued growth in the higher margin direct to consumer business. Costs were up though, which means expanding gross margin is even more impressive. Selling and administrative expense increased 21 percent to $2.4 billion.
The company’s so called ‘demand creation’ expense was $876 million, up 36 percent, driven by marketing support for the World Cup and key product initiatives. Nike couldn’t escape a higher tax rate though. The effective tax rate was 23.5 percent, compared to 22.9 percent for the fourth quarter last year. However, the effective tax rate for the prior period was lower due to a reduction in tax reserves related to foreign operations. Finally, at the end of the day, net income increased 1 percent to $698 million while diluted earnings per share increased 3 percent to $0.78. President and CEO Mark Parker stated:
“These results demonstrate the energy and excitement NIKE brings to the market. Our ability to relentlessly innovate for consumers drove our growth in FY14, and will continue to fuel it for years to come. And as we grow, we remain focused on managing all areas of our business to drive sustainable, profitable growth for our shareholders.”
So going forward this stock is hitting the ground running. After some so-so growth, Nike is back. Inventories for Nike were $3.9 billion, up 13 percent from the end of last year’s comparable quarter. Nike Brand wholesale unit inventories increased 12 percent. Wow. Further its cash and short-term investments were $5.1 billion at quarter’s end. True, this is $823 million lower than last year, but it is solely due to the company’s share repurchases and higher dividends, as well as capital investments in the business. During the quarter, Nike, repurchased a total of 12.3 million shares for approximately $912 million. Finally, the company has future orders booked and ready to go. Worldwide futures orders for Nike Brand athletic footwear and apparel scheduled for delivery from June through November 2014 totaled $13.3 billion. This is 11 percent higher than orders reported for the same period last year. In short, you can’t go wrong with Nike shares.
Disclosure: Christopher F. Davis hold no position in Nike, Inc. and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $90 price target.