Shares of Nike (NKE) continue to ride this year's momentum following the second-quarter earnings release. The strong margin expansion driven by Nike's focus on innovation, accompanied with long-term steep revenue growth projections have pushed up shares to new highs this year.
That being said, second quarter earnings growth is trailing revenue growth as Nike is preparing for the Olympics in Russia as well as the world championship of Football next summer.
On the back of the strong momentum and increased valuation multiples I remain cautious despite the continued growth prospects.
Second Quarter Results
Last week, Nike reported its second quarter results, which showed that the company sold $6.43 billion worth of goods, up 8.0% on the year before. Revenues were more or less in line with consensus estimates at $6.44 billion.
Net earnings rose by 39.8% to $537 million. Note that last year's earnings included a loss of $137 million related to discontinued operations. On a diluted basis, earnings per share came in at $0.59 per share which is up by two cents compared to last year and beat consensus estimates by a penny.
Looking Into The Results...
Reported revenue growth was solid, and was accompanied by strong operating sales leverage. Gross margins rose by 140 basis points to 43.9% of total sales. A shift towards higher margin businesses, easing input costs and strong direct-to-consumer sales resulted in margin expansion.
These gross margins gains were largely undone by higher demand created expenses as well as selling, general and administrative expenses which rose by 170 basis points to 32.5% of total sales.
These higher costs are associated with marketing support for product launches and upcoming sport events including the World Cup and the Winter Olympics.
... And Ahead
For the period ranging from December of 2013 through April 2014, Nike sees footwear and apparel sales of $10.4 billion, which is 12% higher compared to last year. In constant currencies, future orders would have even been up by 13%.
Nike ended the quarter with $5.19 billion in cash, equivalents and short-term investments. Total debt stands at $1.39 billion, resulting in a net cash position of $3.80 billion.
Revenues for the first six months of the year came in at $13.40 billion, up 7.8% on the year before. Earnings rose by 38.5% to $1.32 billion at the same time.
At this pace, annual revenues are seen around $27.5 billion for the fiscal year of 2014. Depending on the outcome of the sport events later this year, earnings could come in anywhere between $2.7 and $3 billion.
Trading around $77 per share, the market values Nike at $69 billion, valuing operating assets just north of $65 billion. This values operating assets of the firm at 2.4 times annual revenues and 22-23 times annual earnings.
Nike recently hiked its quarterly dividend to $0.24 per share, for an annual dividend yield of 1.2%.
Some Historical Perspective
Long-term investors in Nike have seen excellent returns driven by strong returns in the past few years. Adjusted for the recent two-for-one stock split, shares traded in their high teens by 2004 to increase to highs of $35 in 2008. Shares did see a sell-off to their low twenties during the crisis to see a massive bull run to recent highs around $80 per share.
Between the fiscal year of 2010 and 2013, Nike has increased its annual revenues by a cumulative 33% to $25.3 billion. Earnings growth almost kept pace, with earnings approaching $2.5 billion over the past year. At the same time, Nike repurchased roughly 8% of its shares outstanding.
Nike continues to show impressive results as strong branding, marketing, but most importantly innovation to boost its competitive position.
Growth was reported in all major categories including running and basketball as the company is gaining market share from main rival Adidas in key markets. The still very solid and even increasing momentum is still being displayed in Nike's latest results. Future order growth is still growing much more rapid than current revenue growth, boding well for the future.
Notably in Europe, orders were up by 26% which has been very strong while Chinese sales were up by 5% as well, after the company faced troubles regarding too much inventory earlier this year. Shareholders are benefiting from these favorable trends as well as Nike boosted its quarterly dividend by three cents to $0.24 per share recently. Still, the 1.2% dividend yield is not too impressive.
Yet Nike's investors continue to be very happy with its long-term growth trajectory. In October of this year, Nike outlined a long-term growth outlook. For fiscal year 2015 it sees revenues of $30 billion, expected to increase towards $36 billion by the fiscal 2017. This growth should be accompanied by earnings per share growth in the mid-teens.
On top of the growth prospects, amidst modest dividends, shareholders are also pleased with very high repurchase rates of Nike's own shares. During the second quarter, Nike repurchased roughly $400 million worth of shares, at a rate of 2.3% per annum, resulting in a combined dividend and repurchase yield of 3.5%. The company still has an $8 billion repurchase program being approved, which should be financed through operating cash flows and the very strong balance sheet at the moment.
Back in September, I last took a look at Nike's prospects following the first quarter earnings release. I concluded that I am a great fan of the company and its products. It is just that year to date returns of 50% made shares a bit too expensive. While the growth trajectory for 2017 looks very promising, even a cumulative earnings growth of let's say 50% would not be sufficient for me to pick up some shares at current levels.
Macro-economic uncertainty could easily challenge this long-term outlook and result in valuation multiples compression. For these reasons I will take it easy and stay on the sidelines.