Nike - Fresh All-Time Highs? Nike Just Did It

| About: Nike Inc. (NKE)

Nike (NYSE:NKE) continues to report impressive earnings results, driven by the rapid pace of technological innovation, new sports gear and great customer engagement.

While the brand, its products, and management are great, the valuation has become a bit too rich to my taste as shares have risen already some 50% this year.

I remain on the sidelines on valuation concerns.

First-Quarter Results

Nike generated first-quarter revenues for its fiscal year of 2014 of $6.97 billion, up 8% on the year before. Revenues were roughly in line with consensus estimates at $6.96 billion.

Net income rose by 38% to $780 million, as diluted earnings per share rose by a similar percentage to $0.86 per diluted share. Consensus estimates for first-quarter earnings stood at $0.78 per share. CEO Mark Parker commented on the first quarter developments:

We had a great first quarter driven by our unrelenting commitment to delivering innovative products and services to athletes around the world.

Looking Into The Results..

Total revenues grew by 8% to $6.97 billion, led by the flagship Nike brand, which generated $6.48 billion in total revenues. Converse reported a 16% growth in revenues on a constant currency basis, coming in at $494 million.

Gross margins rose by 120 basis points to 44.9% of total revenues, thanks to easing raw material costs and a favorable product mix, as well as increased lucrative direct to consumer sales.

Selling, general and administrative expenses fell by 230 basis points to 29.5% of total revenues. This was driven by a 16% decline in absolute "demand creation" expenses. Nike incurred higher costs last year related to initiatives for the Olympics and European Football Champions.

The combination of solid revenue growth, gross margin expansion and lower selling, general and administrative expenses resulted in miracles to earnings.


Unlike many other companies, Nike does not give guidance for the quarter and year ahead.

Instead it gives guidance for future orders for its worldwide operations. Orders which are scheduled to be delivered between September and January are seen up 8% compared to last year.

In constant currencies, the reported order rate would have come in at around 10%. Analysts were looking for order growth rates of 7.7% on average.


Nike ended its first quarter with $5.6 billion in cash, equivalents and short-term investments. Total debt stood at $1.4 billion, resulting in a solid net cash position of $4.2 billion.

For 2013, Nike generated annual revenues of $25.3 billion, up by 8.6% on the year before. Net income for the year rose by 11.8% to almost $2.5 billion.

Factoring in gains of 6% following the release of the results, with shares exchanging hands at $75 per share, the market values Nike at $67 billion, or its operating assets around $63 billion.

This values Nike's operating assets at 2.6 times annual revenues and 27 times last year's annual earnings.

Nike pays a quarterly dividend of $0.21 per share, for an annual dividend yield of 1.1%.

Some Historical Perspective

Over the past decade, Nike has been a true power house expanding rapidly in key global sports, supported by marketing efforts of global sports stars. More recently the advancement of the brand has been pushed by technological gadgets.

Between 2003 and 2013, shares have risen from merely $10 per share to all-time highs of $75 at the moment.

Between fiscal 2010 and 2013, Nike increased its annual revenues by a cumulative 33% to $25.3 billion. Earnings rose by a cumulative 30% to $2.5 billion. As the company retired some 8% of its shares outstanding over the time period, earnings per share growth was even more spectacular.

Investment Thesis

Interestingly enough, Nike is performing the strongest in the most mature markets. The company reported revenue growth between 8 and 10% in North America, Western Europe and Central and Eastern Europe. Emerging markets reported growth of just 5%, Japan was up by 1%, and China reported a 3% decline in revenues. On the bright side, orders for China rose by 2% promising a modest recovery in the coming months.

Nike states that consumers are more respondent to the company's offerings, which are superior at the moment, and not so much by the macro-economic circumstances, although Southern Europe remains weak.

Basketball and Running continues to growth at double-digit rates, being the main categories in terms of sales, and being superior in terms of profitability. Some 12% of sales were made online, being extremely helpful to gross margins, since the direct-to-consumer business has superior margins.

Besides product innovation, with the Flyknit lines featuring a pair of shoes for $150, Nike is also focusing on increasing engagement with its customers. The NIKE +Training Club app is often downloaded, as many runners can participate in facilitated running trips in major cities, through its Running Clubs events.

Nike repurchased some 8.4 milling shares during the quarter, for a total consideration of around $526 million. The repurchases are part of Nike's massive $8 billion share repurchase program. At the end of the quarter there is still about $6.7 billion outstanding under this authorization. At the current pace of repurchases, Nike is retiring some 3% of its shares outstanding per annum.

Back in March of this year, I last took a look at Nike's prospects. In the meantime, shares have risen another 25%. I concluded at the time that the strong growth momentum, innovations and strong market positions would structurally boost margins, and thereby earnings growth for the foreseeable future. Yet I had not envisioned such strong returns in the meantime.

The strong customer engagement, innovation in sports equipment and technological apps and devices to keep track of the performance, are all boosting customer satisfaction and Nike's bottom line. Management sees the business stronger than ever before.

Shares have already risen some 50% year to date, boosting the valuation to 26 times last year's earnings, which is a bit rich even for this superior global brand.

I remain on the sidelines. I am a great fan of the company, its products, but not of the current share price, or better said its valuation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.