Since the declaration of 2Q13 results, Nike's (NKE) stock seems to be on a growth ride with an upside of ~10%. After the share split off and the increase of 17% in the quarterly dividend in November 2012, the company maintained a split-adjusted EPS of $0.57 which was well above the general consensus estimate of $0.50.
Key Positives of quarterly results were:
1. It achieved total revenue of ~$5.96 billion in the quarter which was up ~7% on (y/y) basis.
2. Its apparels segment displayed a growth of ~19% whereas footwear had a ~13% growth in the North American market.
Strong Futures Orders: Another aspect of the quarterly result, which I feel will benefit the company in the coming year, is the Futures Orders which totaled ~$9.3 billion for the period between December, 2012 to April, 2013. These orders were ~6% higher from last year's orders of the same period. This increment was because of the strong North American and European market's futures orders, which were up by ~14% and ~11% y/y respectively. With inventory levels increasing by ~9% by the end of 2Q13, I don't think the company should have any issues in meeting these orders. These orders provide clarity regarding the liquidity and profitability of Nike's business in the upcoming quarters. The only pain-point in the quarterly report was the Chinese market which saw a decrease of ~7% y/y in future orders. However I don't think this decrease should affect the overall growth of the company.
Competition: Domestically, Nike is placed in an over-saturated geography with rivalry from Adidas, Columbia and Under Armor. With the lifestyle segment getting intense and continued consolidation by retailers, investors could anticipate a tough road ahead for Nike. Although Nike is gigantic in terms of its financial statements, distribution channel and its size, as compared to the smaller rivals but its sales and market share could be impacted if the new brands continue to surface. I am discussing two of such rivals below:
1. Under Armor Incorporated (UA): Although Under Armor is very small in comparison to Nike it still has potential to give Nike a tough competition. The reason I feel this is the fact that it is one of the fastest growing companies in the sports apparel market with an annual growth of ~30%. Along with that its 3Q12's profit was more than three times its 2007's sale. Currently the company generates ~95% of its revenue from the U.S. but it is going to enter the European economy soon enough. It has already started some promotional campaigns in the region as well. Apart from that, earlier this year its introduction of running shoes, the UA Spine, was a big hit and was the main reason for the ~21% increase in its footwear sale in 3Q12. I remain positive about the sale of these shoes in the coming quarters as well.
2. Columbia Sportswear Company (COLM): Coming over to Nike's other competitor the Columbia Sportswear, the company is performing really well and is planning for a global expansion. It has entered into a Joint venture which will commence in January, 2014 with Swire Resources Ltd, its exclusive distributor in China. Currently Swire operates through ~530 Columbia Sportswear and ~45 Mountain Hardwear retail locations as well as ~70 directly operated Columbia branded retail locations in China. I estimate that it will make ~$90 million profit from the joint-venture in 2014. Along with that to reduce its dependency on only the winter products, it is expected that the company will launch several new products such as Omni-Freeze Zero, Cool Q ZERO for the spring season in 2013.
Coming back to Nike, innovations and enhancements are the key factors which drive the stocks of footwear and apparel companies. Nike also has invested heavily in such innovations.
Investment in Innovation: Nike is investing dominantly in innovation to fuel its product pipeline which helps in bringing exciting new products to the market. Marquee, FuelBand, NFL Jersey, Luner, Free and the latest Flyknit are a few examples. I view the Flyknit product line as a ~$1 billion opportunity in the next four years, following the footsteps of the Free and Luner product lines. Along with this, I think Nike's ability to capture share in the developed regions and its continued focus on the emerging economies will continue to drive its top line growth in 2013. Talking about mature markets, continuous innovation will help Nike to enhance its apparel category as well as its ability to refill the product pipeline which will be important for a sustainable growth.
Nike has a strong balance sheet with ~$3.3 billion in the form of cash and short term investments. Additionally, Nike also recently sold its Umbro and Cole Haan brands for ~$225 million and ~$570 million respectively. The company will utilize this money in repaying the shareholders in the form of share buyback. In 2Q13 the company repurchased ~4 million stocks and has announced a new ~$8 billion buyback program. I expect these buybacks to continue in the coming quarters. Looking at all these factors I feel that Nike provides a good investment opportunity at this time although due consideration should be given to currency fluctuations as 60% of Nike's sales are Non-US.