Nike (NKE) knocked the top off the ball in its fiscal first quarter ended August 31. Just reported Thursday evening, Nike posted EPS growth of 37%, or $0.86 a share, far better than the analysts' consensus forecast for $0.78. As a result, NKE shares were up more than 6% after hours. But where will they go from here? I'll try to answer that for you and give you a game plan moving forward.
First let's look at the earnings report
Nike grew revenues by 8% in the fiscal first quarter, which is quite impressive considering the maturity of this company and its brands. Nike's growth certainly benefited from the absence of sold off slower growth businesses in Umbro and Cole Haan, and the namesake business line also got a lift from the inclusion of Nike Golf and Hurley, which were previously listed as "other businesses". The company also indicated that innovation played a big role in keeping its offerings fresh this quarter, supporting demand for its goods. Furthermore, it benefited from better sales in North America and Europe, with both economies improving now. However, China and Asia generally did not contribute to growth this quarter, which while worrisome in one respect, makes the company's gains all the more impressive. Obviously, if Nike can get China growing again, it'll find even more lift. The company's Converse segment, now broken out as a separate segment, grew revenues impressively by 16% excluding currency impact.
Applauding Nike's Keeping it Fresh
As a business consultant, I've noted Nike's successful effort to stay relevant across generations. One of the critical ways it does so is by linking its brand with the new champions in sports who overtake and replace the legends of the past. Popular athletes carry significant weight with the young and the general population, so that when Nike links with them, it links with winning and the image of winners. That's something people want, and allows the brand to be ageless. While Nike has faced somewhat successful challenges from the likes of Under Armour (UA) and Lululemon Athletica (LULU) most recently, it has also held its ground and adapted. Meanwhile, history shows us the company's ability to bury rivals over the long run. It's yet another reason to favor the stock.
Income Statement Line Item
As you can see in the table above, Nike grew earnings before interest and taxes at a faster pace than revenues. The company benefited on the gross margin line from a better mix of sales of higher value added goods and also due to lower materials costs. The company also benefited from lower discounting of goods. However, what Nike listed as the final reason for its margin gains, I found most interesting and perhaps behind its sales growth across product lines and its margin expansion as well. Nike's Direct-to-Consumer business sales definitely enhanced the company's Q1 results and add value to its shares today. I expect the distribution channel will increasingly do so and significantly enhance shareholder return long-term.
Kudos to Nike's Direct-to-Consumer Strategy
As a business consultant, I immediately noted Nike's latest value-added strategy and its significance across industry. Direct-to-Consumer has my favor in Nike's case, but it's not for everyone. Nike is one of a handful of brands that have enough strength to bypass retailers and go directly to consumers. Apple (AAPL) is another example of a company in such a position. In most cases though, if a company attempts this it risks being ostracized by retailers across the board; obviously, a brand selling in Wal-Mart (WMT) but not otherwise well-known would not want to risk losing the important retailer. Nike is not going to lose any retailer by selling to consumers on its own though, and it will benefit from consumers seeking its brand directly over the internet, which in this company's case is important. This strategy is certainly a value-add for Nike shareholders, and makes the shares all the more appealing.
The earnings per share line accelerated ahead of revenues and EBIT, thanks to the company's financial strength. Its repurchases of shares, and its ability to borrow capital to do so, helped it to add value for shareholders in the quarter. Nike's cash position was also enhanced by the sale of businesses. It was able to reduce diluted shares outstanding by 1% against the prior year period as a result, and that makes a difference for shareholders. The company also benefited from a lower tax rate, due to its international business and management of overseas sales. This is a topic that recently came under scrutiny in Washington D.C., with Google (GOOG) and Microsoft (MSFT) catching the fire and ire of some congressmen. I wrote an interesting blog post about the subject that I think readers will find valuable entitled Is Apple Un-American?
The Future Looks Bright
Worldwide futures orders of Nike goods for the period from September through January were 10% higher than the prior year period, excluding currency changes. That's really good news and an indication that this quarter's growth will continue through the important holiday shopping period. I expect you can count on further margin expansion and value creation toward the bottom line as well. For these reasons, NKE shares are drawing the interest of investors again Friday. NKE was up 5.4% in early trading.
The company's decimation of analysts' earnings estimates requires investors to reassess full year figures. Whereas old estimates might have made the shares to appear adequately valued, revised figures will offer a different story. Compounding the favor for NKE, we must incorporate its value-adding strategies that are expanding returns for investors. Nike has beaten estimates by $0.06 on average per quarter for the last four quarters, so it might be wise to add $0.24 to each of the next two years' estimates, because that is likely what the stock will eventually reflect over the coming two years. We can get ahead of the game by doing so now, and participate and enjoy in days like these, when the market catches up.
EPS FY 14 (MAY)
EPS FY 15
P/E FY 14
PEG FY 14
For the adjusted estimates above, I have added $0.24 to each year's consensus figures. We are using the most recent stock price of $74 and analysts' consensus 5-year growth forecast of 11.3%, adjusted higher to 15% to improve upon analysts' short-counting. The analysts' figures line offers data calculated before our adjustments. Certainly, when accounting for this company's nascent value addition and what's become a condition of significantly beating analysts' estimates, the stock does not appear too expensive. Investors will certainly pay a premium for a company with improving financial trends, and that is what Nike offers today. The stock's dividend yield of 1.1% pads the investment and perhaps offers a margin of safety.
While I would buy Nike shares over the short-term, I would probably hold off today, and let the October issues of Washington D.C. (shutdown & potential technical default on debt) weigh the shares down along with stocks more broadly near-term. NKE is already a bit off its after-hour gains. So while I would buy NKE, I would suggest waiting over the near-term for the stock to settle to a better price point.