Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Nike (NKE) rallied up to 5% in after hours trading on Thursday. The seller of athletic footwear and apparel reported a strong set of second quarter results for its fiscal 2013 after the market close.

Second Quarter Results

Nike generated second quarter revenues of $5.96 billion, up 7% on the year before. A strong US dollar had a negative impact on reported revenues. In constant currencies, revenue growth would have come in at 10%. Revenues came in a bit lower than analysts expectations of $6.01 billion.

Gross margins fell 30 basis points to 42.5%. Pricing actions and lower material costs were more than offset by an increase in labor costs and unfavorable exchange rates. Total selling, general & administrative expenses fell 40 basis points to 30.8%.

Operating earnings rose 9% to $521 million as operating margin expansion was partially offset by an increase in income taxes. Net earnings fell 18% to $384 million as the company took a $137 million charge related to discontinued operations. During the quarter, Nike divested its non-core brands Cole Haan and Umbro.

Diluted earnings per share from continuing operations rose 11% to $1.14 per share, as a result of the continued share repurchases. Earnings comfortably beat consensus estimates of $1.00 per share.

During the second quarter, Nike repurchased roughly 4.0 million shares for a total consideration of $384 million. In September of the year, the company announced a new $8.0 billion repurchase program, under which $7.7 billion is still available.

CEO Mark Parker commented on the results, "Our strong second quarter results show that our growth strategies are working, even under challenging macroeconomic conditions. We have a focused and flexible portfolio that allows us to target the biggest growth opportunities at all levels - brand, category and product. We stay connected with our consumers and that enables us to deliver innovations that excite the marketplace, grow the business and deliver more value to shareholders."

Valuation

Nike ended its second quarter with $3.5 billion in cash, equivalents and short term investments. The company operates with a very modest net debt position of little over $300 million. Consequently, Nike operates with a net cash position of roughly $3.2 billion.

For the first six months of its fiscal 2013, Nike generated revenues of $12.4 billion. The company net earned $951 million, or $2.41 per diluted share for the period. The company is on track to generate annual revenues around $26 billion for the year, on which it could earn around $2 billion, or roughly $5 per diluted share.

Factoring in a 5% jump in after hours trading, the market values Nike at roughly $47 billion. This values the operating assets of the firm at some $44 billion. The current share price values Nike at roughly 1.7 times annual revenues and roughly 20-21 times annual earnings.

Nike pays a quarterly dividend of $0.42 per share, for an annual dividend yield of 1.7%

Some Historical Perspective

Year to date, shares of Nike have risen some 8%. Shares started the year around $95 in January and steadily rose to highs of $115 in May. A poor guidance for the full year send shares back to levels of $85 in July. The general market recovery and strong second quarter results send shares to $104 at the moment.

Shares of Nike rose from lows of $40 in 2009 to highs of $115 earlier in 2012. Between 2009 and its fiscal 2013, Nike increased annual revenues by some 35% from $19.2 billion in 2009 to an estimated $26 billion this year. Net income rose from $1.5 billion to an estimated $2.0 billion over the same time period.

Investment Thesis

Nike has made a lot of progress to drive shareholder value this year. The company recently announced the divestitures of non-core brands including Cole Haan and Umbro. Nike will receive roughly $800 million for the sale of the businesses to Apax Partners and Iconix Brand Group (ICON), respectively. Combined, the divestiture of the non-core assets will reduce annual revenues by merely 3%.

In September, the company announced a new $8 billion share repurchase program, under which some $7.7 billion is still available at the moment. The company could retire some 17% of its shares outstanding at current prices.

If Nike would execute the plan in the coming two years, the company could buy some 150,000 shares per working day in the period. The buyback size is significant given the fact that some 2.2 million shares trade hands on average over the past month. Nike's repurchase activity could make up 7% of average traded daily volume.

The valuation of Nike has inched up a bit after shares recovered from their lows in the summer. Shares trade at 1.7 times annual revenues and 20 times earnings, which is not that appealing. The firm operates with a strong balance sheet and has room to boost its dividend, up from its current yield of 1.7%.

Despite the fairly high valuation shares are not an obvious sale. The significant buyback program will provide strong support in the coming years as the company grows into its current valuation.

I remain on the sidelines.

Source: Nike - Shareholder Friendly Financial Strategy Provides Strong Support