- Nike reports very strong fourth-quarter results, beating consensus estimates again.
- The company expects the World Cup to drive momentum into the start of 2015.
- Long-term growth targets and outlook support the price, yet appeal is limited at this premium valuation.
Nike (NYSE:NKE) continues to be on fire, reporting continued double-digit revenue growth, as the momentum surrounding the World Cup is boosting the company's enthusiasm into fiscal year 2015.
Despite the excellent growth, market share gains, strong balance sheet and strong earnings outlook, much of the good news has already been priced in. While the solid long-term outlook limits risk in my eyes, it has pushed up the valuation, which has limited appeal at the same time.
Fourth Quarter Headlines
Nike reported fourth-quarter revenues of $7.42 billion, up 11% compared to the year before. Revenues came in comfortably ahead of consensus estimates at $7.34 billion.
The company posted net earnings of $698 million, which is a 5% increase compared to last year. Thanks to modest share repurchases, earnings per share were up by five cents to $0.78 per share.
Earnings came in three cents higher than consensus estimates.
Looking Into The Results
While reported revenue growth of 11% looks impressive, note that these results were achieved despite a 2% negative impact from adverse currency movements.
Growth was driven by Western Europe, the region in which revenues rose by 25% to $1.31 billion. The company experienced currency tailwinds in these markets, with revenues being up 18% in constant currency rates.
Sales in North America were up by 10% to $3.29 billion, while emerging markets posted a 9% jump in revenues to $1.08 billion. Even Chinese sales recovered and were up by 4% to $702 million. This comes after the company has been struggling in the country for quite some time.
Following the divestiture of some non-core brands, Nike is more focused than ever on its core brand, with revenues of Nike increasing by 13% in constant currencies to $7.0 billion. Revenues from Converse were up by 15% to $410 million in constant currencies, driven by momentum in the US, the UK and China.
Nike saw a further boost in gross margins, improving by 170 basis points to 45.6% of sales on the back of higher selling prices and greater direct-to-consumer sales. The company did see some pressure from higher input costs.
Selling, general & administrative costs rose sharply by 270 basis points to 33.0% of sales. Overhead and operating expenses were up by 13%, yet the real increase in costs was, of course, related to the World Cup. "Demand creation expenses," or a fancier word for increased advertising and marketing spending related to the World Cup, were up by 36% to $876 million. Of course, this put large but temporary pressure on operating earnings. These costs are anticipated to fall after the World Cup ends, and are aimed at guaranteeing Nike's long-term brand appeal.
Of interest in today's tax environment: Nike posted a 23.5% effective tax rate for the quarter, which was up 60 basis points compared to last year, but remains far below statutory tax rates.
As such, net earnings from continuing operations rose by just 1% to $698 million, although reported earnings rose by 5% due to a $28 million loss from discontinued operations as reported last year.
The company ended the year with roughly $5.1 billion in cash, equivalents and short-term investments. Total debt of $1.4 billion is relatively limited, resulting in a steep net cash position of about $3.7 billion.
For the fiscal year of 2014, Nike posted total revenues of $27.8 billion, which was up an impressive 10% compared to the previous year. Reported earnings rose by 9% to levels just shy of $2.7 billion.
Trading around $78 per share, Nike's equity is valued at $69 billion. Excluding net cash holdings, operating assets are valued at roughly $65 billion. This values the company's equity at 2.3 times annual sales and roughly 24 times annual earnings.
Nike's quarterly dividend of $0.24 per share provides investors with a 1.2% dividend yield.
Nike has delivered great long-term value for investors over the past decade. Shares have quadrupled after commencing a steady upward trend in 2009. Shares have steadily moved upwards from their mid-$20s in 2009 to highs of $80 last year and earlier this year. After a modest correction, shares have been approaching these levels again.
Underlying this momentum has been real operational growth, with Nike more than doubling its revenues over this time period. Over the past few years, Nike has made great progress in working with new innovative and high-performance materials while integrating technology in its offerings as well.
Examples of these trends are knitwear shoes, as well as its technology applications, social presence and running events being organized in major world cities. All of these trends have resulted in a re-acceleration of growth in recent years.
Earnings have grown even quicker, as net after tax margins have expanded towards 10%. Note that Nike has repurchased about 15% of its share base over the past decade, adding to earnings per share growth.
The stellar performance looks very good compared to its major German rival Adidas (OTCQX:ADDYY), which has been lagging in recent years and over the past year in particular. While Nike's shares are roughly flat so far this year, shares of its counterpart have fallen by nearly a quarter so far in 2014.
While Nike is not an official partner to the world cup, its German counterpart is willing to spend big bucks to be associated with the event. Yet this might be a very expensive investment for Adidas, as most fans probably won't even know this fact.
In an investor meeting last year, Nike issued some ambitious long-term targets that have been supportive to the company's share price ever since.
At the time, Nike targeted sales of roughly $30 billion for the upcoming 2015 fiscal year. For 2017, Nike targets $36 billion in annual sales supported by high single-digit growth in revenues and earnings growth per share in the mid-teens.
In terms of sports, the focus on soccer is paying off as well, especially as the US team survived the group round of the championship. North American sales were strong, as soccer's popularity seems to be on the rise.
Nike is thriving on the momentum related to the World Cup, despite not being an official sponsor and having seen a few of its stars leave the fields already. The company does sponsor many national teams, outfitting them with sports clothing, including shoes. As a matter of fact, Nike sees "tremendous energy" around the World Cup, which will provide a big boost to first-quarter revenues.
It anticipates first-quarter sales to improve by low double digit percentages in constant currencies. This comes after future orders for the period June to November increased by 12%.
Investors are pleased with the increased popularity of football in the US and the apparent big market share gains in Western Europe, where Nike is gaining share versus Adidas.
As such, all momentum continues to be driven by double-digit topline revenue growth, the World Cup, continued innovation and technology investments. At the moment, shares are a bit pricey, but the valuation is most likely supported by the company's long-term guidance, which calls for continued growth.
I won't say that shares are priced for perfection. In fact, they don't offer great appeal anymore in my eyes at current levels. I remain on the sidelines. At a potential correction to the $65-$70 area, shares might offer appeal in the medium term on the back of the long-term guidance.
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