The shareholders of Nike Inc (NYSE:NKE) would be jumping with joy and hopefully with their Nike shoes on as the company's management team announced a 14% hike in quarterly dividend for class A and B shares. While the double-digit increase in dividend is a source of joy, the company's share has also performed extraordinarily well on the bourse, gaining approximately 52% in the year. This shows that this sports retail giant is churning out reasonable value for its investors. Let's analyze if the company can sustain this momentum and keep on generating consistent gains.
Nike generated a growth of 8% in revenues from continuing operations as was reported in its fiscal 2014 first quarter results. There is no doubt about the fact that the retail sector across the globe is facing major macroeconomic headwinds because of high unemployment rates and growing inflation. Thus, a top-line growth of 8% is a commendable achievement in keeping with the current strained scenario. The company has prudently focused on fundamentals like sustainable innovation and robust brand building exercises.
Nike has invested appropriate efforts in working on and launching new products in the first half of year 2013. The new products like Nike free Flyknit have received good reception from athletes whereas the Tech pack is fast becoming a go-to product for consumers. Thus, the company has aptly come out with novel offerings for different groups of consumers who build up its portfolio. If it can sustain its innovation policy and create an environment for enabling quick and cost-effective innovation methods then it can create reasonable competitive advantage over its peers.
Apart from innovation, another factor that has propelled Nike's growth despite the tough economic situation is its ability to execute efficient brand building strategies. This huge company enjoys the leverage of a large portfolio of products because of which it is able to compensate for risks and losses in a few categories and achieve a balanced overall result. For instance, one of Nike's biggest brands Converse generated a top-line growth of 18% and 36% increase in EBIT in the first quarter.
In addition to the competitive length and breadth of the product portfolio, Nike has also been quite successful in striking a chord with its customers. The management pointed out in the earnings call that their efforts in maintaining a healthy connection with consumers is one of the major reasons behind sustained performance. Thus, it is clearly visible that Nike is moving ahead with suitable strategies with respect to its fundamentals. Also, Nike's incomparable ability to market its ideas and products will help it leverage its fundamental strength.
The basket of advantages
Besides the above-mentioned strength areas, the company has achieved robust financial numbers. It delivered a growth of 65% in total returns over the last year, which is almost twice the growth achieved by S&P 500. Also, Nike delivered a healthy GP margin in the first quarter because of lower raw material costs and an increase in production and sale of high margin products.
Basketball and Running were the top performing segments for the company in the first quarter achieving double-digit growth. This helped the company to compensate for the losses incurred in its Golf segment as a result of operational issues at the supply chain level.
I would like to reiterate that the objective with which I began this article was to understand if the growth momentum of Nike is sustainable. The fundamental and technical aspects of Nike portray quite a sturdy picture of its continuing operations and hence, makes it a viable option for investment.
One of the things that can be a course of skepticism is the large amounts of debt that Nike is loading onto its Balance Sheet. However, it is understandable that the company has opted for debt route to fund its capital requirements so as to gain leverage. Additionally, the company has raised the debt at attractive interest rates, which further lowers the skepticism surrounding its capital structure.
Nike recently announced a target revenue of $36 billion to be achieved by fiscal 2017, which is a growth of around 42% over four years from the fiscal 2013 revenue number. This strongly suggests the fact that management is optimistic about the future opportunities and Nike's ability to capitalize on them.
Nike has maintained a strong dividend history with the aid of a series of dividend increases, which makes it an active income-generating investment bet. The dividend increases are well-backed by an increase in the magnitude of continuing operations thereby making it a consistent performer on the index as well. Though the stock has rallied around 52% in the year, it is poised to gain further because of its adept strategies and cost-effective execution.
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.