Nike Inc. (NYSE:NKE), one of the well-known sports brands in the world, has recently announced its quarterly earnings. The company slightly missed analysts' consensus estimates of revenues, however, the company managed to beat the analyst consensus for the bottom line. The company's last four-quarter results show that the company is consistently beating analysts' estimates of earnings per share. Although the company beat the analysts' estimates, I do not believe the company will be able to beat them again in the future. That is why I have analyzed the company's recent performance as well as future prospects in order to figure out the investment opportunity.
The Future Seems Safe
The region with the highest percentage of future orders is Western Europe; future orders increased to 26 percent. Future orders in Central and Eastern Europe increased to 13 percent. Moreover, future orders also rose in North America and China to 11 percent and 4 percent respectively. Nike's sales weakened in China in the past; however, recent improvement shows healthy signs for the company to achieve high growth in the future. Overall global future orders rose by 12 percent in the second quarter of fiscal year 2014. Worldwide future orders from December 2013 to April 2014 were $10.4 billion.
The gross margin of the company was 43.9 percent. Gross margin increased by 140 basis points compared to the previous year. This is because the company's revenue grew by about 8 percent while the cost of goods sold increased by only 5 percent, and that caused such a huge increase in the gross profit. A couple of reasons that helped Nike post such high gross margins were the higher average pricing and easing raw material input cost. The increasing raw material cost and increased discounts to clear out the inventory might create some hurdles to posting such a high gross margin in the future.
In my opinion, despite the expected increase in costs, Nike's future is safe. Investors should not be worried about its future prospects. Although the cost of raw materials and some other factors will put downward pressure on the margin, the company is in a position that it can raise the average price for its products. Despite the increase in average price, the company's revenues will not suffer as Nike has a well-established brand name among the masses.
Moreover, the key thing that will help the company to post decent earnings in the future is its innovative products. In North America, Nike's share rose by 240 basis points during the last thirteen weeks owing to its innovative and differentiated products. Rising income level will also help the company to bolster its revenues in the future.
Industry Forecasts & Competitive Advantage
The industry will witness a strong growth over the next few years. According to Forbes' estimates, the global sports apparel market will grow with a CAGR of 4 percent from 2012-2019. Presently, the global sports apparel market has a worth of $135 billion in 2012 that will increase to $178 billion in fiscal year 2019. Nike's market share globally increased from 3.9 percent in 2007 to 4.9 percent in 2012. Good news for Nike's investors is that Nike's share will grow further from 4.9 percent to 6.5 percent by 2019 according to estimates. Looking at the performance of the key players in the industry in the past, Nike's sales grew at a CAGR of 12.3 percent during fiscal years 2010-2012 and that was higher than any other key player in the industry.
Moreover, Nike has snatched market share from Adidas AG (OTC: OTCQX:ADDYY) in the European market that is home turf for Adidas. According to a report, Nike experienced an 8 percent rise in sales in the Western market during the first quarter of fiscal year that ended 31 August 2013, while Adidas recorded a 6 percent fall in sales during the third quarter of the fiscal year that ended 30 September 2013. I believe Nike's innovative and differentiated products helped the company to grab the market share from one of its biggest competitors in the industry.
Moreover, Nike is also more popular among fans around the globe on social media. Nike has approximately 2.5 million followers on Twitter while Adidas has only 570,000 followers. Moreover, the company has a higher engagement rate on Facebook compared to its closest rival Adidas on Facebook.
Additionally, Nike is one of the few brands in the industry that has pricing power. In an environment where competitors are striving to capture market share by lowering the prices of their products Nike has the ability to raise them owing to its visually appealing merchandise in stores. Moreover, consumers are not coerced into paying premium prices for Nike's products because Nike offers differentiated and innovative products to its customers. Therefore, I do not think that Nike's earnings will suffer owing to increases in the cost of products sold.
Nike beat the analyst consensus by a large amount in the past few quarters, while in the second quarter, when people were expecting again a large positive surprise in the earnings per share, Nike managed to beat the analyst consensus by only a cent. Therefore, stock price significantly declined after the announcement of results. The following table shows the data of actual and analyst consensus of earnings per share and the surprise in the EPS during the last four quarters.
Looking at history, the company's earnings per share increased at a CAGR of 8 percent over the last five years from $1.79 in fiscal year 2009 to $2.69 in fiscal year 2013 while revenues increased by a CAGR of 7 percent during the same period from $18,528 to $25,313. The bottom line grew at a faster pace than the growth in the top line. Over the last six years, when the company's global market share rose to 4.9 percent from 3.9 percent, the company's earnings per share grew at a CAGR of 8 percent. Therefore, I believe that over the next six years, when the company's global market share is expected to rise to 6.5 percent, the company's bottom line should increase by more than 8 percent during the same time span.
SOURCE: Company's Financials
Although the company missed analysts' consensus estimates concerning the revenues by about 10 million, Nike beat the Wall Street consensus concerning its earnings per share by $0.01. The company has consistently beat market estimates of its earnings per share over the last four quarters. Moreover, the stock has quite a decent outlook. The company's market share is expected to rise to 6.5 percent by 2019 from 4.9 percent in 2012. Since the company has quite a decent outlook, I would recommend buying the stock.