It's Not The Right Time To Bail On Nike

| About: Nike Inc. (NKE)

Summary

Presently, the company is revamping its strategy in China and re-positioning its products in the region to meet the requirements of the Chinese consumer base.

The company maintains a strong foothold in the footwear segment while its apparel segment is growing at a higher pace than the global apparel market’s growth.

Since the USD is getting stronger than most currencies the company’s bottom line is expected to suffer in most geographical locations.

Nike Inc. (NYSE:NKE) recently reported its third quarter earnings for FY2014 indicating a better performance than analyst expectations. The following article discusses Nike's recent performance compared to analyst estimates, the performance of the company in various geographical regions and functional segment performance. Let us see where the stock is headed.

Recent Performance Vs. Analyst Estimates

Nike reported spectacular performance as indicated by its recent quarter earnings release. The top line of the company grew by 13% YoY to $6.97 billion, exceeding analysts' estimates by $0.16 billion. Analysts were expecting sales of $6.81 billion. The company reported profits of $685 million for the quarter, falling short by 21% compared to the earnings reported in the same quarter last year. Note that the previous year's earnings figure included the sale of its Cole Haan and Umbro brands that contributed $204 million to the final reported profit figure. In terms of per share earnings, EPS showed an increase of 4% YoY. For the recently ended quarter, the company posted an EPS of $0.76 compared to $0.73 in the same quarter last year while analysts had their estimates set at $0.72 per share.

In addition to the strong current performance future orders of the company rose by 14% excluding any impact from currency translations. Analysts had predicted a rise of 12.7%. This rise in future orders figure is indicative of higher future sales. Hence, the top line of the company is expected to grow.

Sales in Western Europe, the second largest revenue-generating region of the company, grew by 22% while Central and Eastern Europe sales grew by approximately 18%. However, Japan and China showed a much weaker performance with future orders in China and Japan decreasing by 3% and 1%, respectively.

Geographic Segment Performance

Based on revenue, North America is the biggest contributor to the company's top line with about 44% of revenues attributable to this region alone. Revenues from the North America region grew by 12% YoY approximately this quarter while North America future orders showed an increase of 9%. Although these figures seem promising there is a reason for concern. This is the first time since 2010 that the region showed a high single digit increase in lieu of double digit growth in future orders. Analyst estimates for North America future orders stood at 11.2%.

In China, future orders declined by 3% compared to analysts' estimates of a 2.7% increase. Nike's previous branding strategy failed to resonate with Chinese customers and led to heavy discounted offers to clear up the inventory backlog. This also led to a negative performance in the region in addition to weak demand for the company's products. Presently, the company is revamping its strategy in China and repositioning its products in the region to meet the requirements of the Chinese consumer base. However, it may take a year or two before positive returns start showing.

Functional Segment Performance

As I have discussed in one of my previous articles, Nike captures 47.1% of the global apparel market. Within the US, 42% of customers prefer Nike over any other brand. In North America, Nike is a leader in the footwear segment securing a roughly 60% share of the market. The company spends heavily to market its products having iconic figures such as Michael Jordan, Kobe Bryant, Kevin Durant and Lebron James endorsing its products.

Nike's apparel sales grew at a rate of approximately 10% YoY. According to one estimate, the global apparel market is expected to grow at a CAGR of 4% through 2019 and reach a total value of $135 billion. Nike's apparel segment has grown at a much a higher rate than the industry throughout recent history. This trend is expected to continue for some time into the future considering the fact that the company is in the process of establishing, expanding and revamping its operations in high growth markets such as China.

Shareholder Profits

Nike distributes its cash among shareholders through dividends and share repurchases. Throughout the recently ended quarter the company bought back and retired a total of 10.4 million shares for $788 million. This repurchasing was done as part of the $8 billion share repurchase program instigated by the company in September 2012. Up until now a total of 39.6 million shares have been retired as a function of the program that is expected to continue for the next couple of years, improving the ownership percentage of the remaining shareholders and enhancing the value of remaining outstanding shares.

The company's dividends appear soft as of now but there is potential for them to grow in the foreseeable future. Presently, the dividend yield of the company stands at 1.20% which is much lower than the industry average of 2.60%. The dividend yield remained low even though dividends paid by the company have grown by more than 50% over the past five years. Evidently, the number of shares outstanding rose at a faster pace compared to the growth in dividends. Considering the fact that the company is now on course to reduce its total number of outstanding shares the dividend yield is expected to increase.

Appreciation of Dollar Will Affect Margins

Since the USD is becoming stronger than most currencies the company's bottom line is expected to suffer in most geographical locations. Given that the company's international sales contribute as much as 45% of the total sales generated the potential currency headwind poses a significant potential blow to the top and bottom line of the company. According to Bloomberg, the USD has risen by 0.8% in the past six months among the 10 developed nations' currencies and this trend is expected to continue for some time into the future.

Conclusion

Despite the strong performance shown in the recently ended quarter the stock price of the company dropped owing to a weaker future outlook announced by the company. However, investors should consider this drop in the price as a long-term investment opportunity. Nike's sales are expected to rise in China, its apparel and footwear segments are gaining strength, its share repurchase program is enhancing per share value, its dividend yield is expected to rise and the deal with Manchester United is almost done.

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.