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Summary

  • NKE reported 4Q14 that beat on both top and bottom line.
  • Pricing power continues to be intact with digitization well underway.
  • Maintain overweight on the name due to brand, distribution and innovation.

Nike (NYSE:NKE) reported a solid set of Q4 results. Revenue of $7.4b (+11% y/y) beat the $7.3b consensus estimate while EPS of $0.78 (+3% y/y) beat consensus of $0.75 on lower share count. Double-digit revenue growth and margin expansion (+170bps over the quarter) offset the higher opex associated with World Cup. North America and Europe continue to drive growth, while Asia is showing signs of rebound. I maintain my bullish view of the stock. (See my thesis: North American Sportswear: Time To Get Fit)

Consistent batting average. Revenue for NKE brand was up 13% on a constant currency basis to $7.0b, driven by all geographical regions with the exception of Japan. North America led the growth, up 10% y/y to $3.3b, driven by a 12% increase in footwear followed by 9% increase in apparel. Europe once again showed signs of momentum with both footwear and apparel sale up 26% y/y, fueling the region to a 25% growth rate. Emerging market, excluding China, showed a 9% increase in consolidated revenue as poor equipment sale (-8% y/y) offset the strength in apparel and footwear (+4% and +26%, respectively). Strong top line growth indicates solid execution by the management on areas such as R&D (which reinforces my thesis on NKE's innovative culture) and marketing, which allows NKE to maintain a consistent batting average when it comes to revenue growth and makes it a must-own stock for any long-term investment portfolio.

Cost cutting delivery surprises. Gross margin expanded 170bps q/q on the back of higher selling price and gradual shift to online, which indicates that NKE's pricing power remains intact and that its strategy of leveraging online channels to battle slow retail traffic and online market places seems to be working. I note that during the year, Direct To Consumer business accounted for 20% of total NKE brand revenue compared with 18% a year ago. I expect margin improvement to continue as NKE strengthens its brand and pricing power via product digitalization (think wearable sports T-shirt) and continuing expansion into online channels.

Product digitalization on track. NKE's CEO Mark Parker strongly emphasized the idea of "digital ecosystem" and this seems to suggest that NKE is making the transition from making highly commoditized products (i.e. Apparel and shoes) to something more sophisticated (ie. Wearable tech). The reality is that users, in particular athletes, are demanding real-time and customized performance updates that are easily comprehensible so they can improve their health and performance. In addition, social networking is a big part of the athletic community, as we can see from MapMyFitness's >20m user base, so people can engage one another to share ideas and motivate. Nike+ platform has built the foundation for NKE in the area of wearable tech and digital apparels. I expect NKE to refine its smart shoe product lines to better integrate with Nike+ and eventually roll out smart T-shirt that can accurately measure a user's fitness progress in real-time.

Conclusion: At 23x this year's P/E with a PEG ratio of 1.7x, NKE still has the best-in-class growth profile and best positioned for the proliferation of wearable tech by leveraging the triple threat of brand, distribution and innovation. Maintain overweight on the name.

Source: Nike Q4 2014 Review: Delivering Against The Doubts