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Summary

  • Nike reported better-than-expected earnings last week.
  • Soccer related revenue was up 21% compared to last year.
  • Nike closed several long-term sponsorship deals.
  • Soccer-related revenue will support Nike's growth in the future.

Last week, Nike (NKE), the world's largest athletic and sportswear company measured by market capitalization, reported better-than-expected results for its final quarter of fiscal year 2014. Nike reported $7.4 billion in revenue, up 11% compared to last year's fourth quarter. Bottom line, Nike earned $698 million or $0.78 per diluted share. For the twelve months ended May 31, 2014, Nike reported $27.8 billion in revenue, up 10% compared to fiscal year 2013 and diluted earnings per share of $2.97. Overall, investors were very happy with Nike's results. For example, SA contributor Jeffrey Himelson published this article regarding Nike's fourth-quarter earnings report. He concludes: "Tremendous Revenue Growth And Margin Expansion Is Creating Shareholder Value." Nike's shares are up 1.5% since the company reported its fourth-quarter earnings as well.

Soccer market potential

The market for soccer apparel is traditionally dominated by Nike's most important competitor Adidas (ADDYY). However, the soccer market becomes more and more important for Nike as well. I would not be surprised if Nike will be able to challenge Adidas' dominant position in the soccer market. For example, Nike managed to earn $2.3 billion in soccer related revenue during fiscal year 2014, up 21% compared to 2013 (excluding currency changes). According to Nike's press release, the increase of its soccer revenue represents the strongest annual increase of any of Nike's product categories. This confirms the importance of soccer related revenue for Nike.

Further, this year's World Cup in Brazil will support another strong increase in soccer revenue for Nike. First of all, Nike sponsors the host nation Brazil, a very soccer-minded nation, along with other traditional soccer nations like France, the Netherlands and England. Nike represents three out of the eight teams in the quarter finals of the World Cup, where Adidas sponsors three teams as well. Nike executes a long-term strategy, by closing long-term sponsorship deals. For example, the company extended their sponsorship with the Dutch national team until 2026.

In soccer, a team's sponsor acquires the exclusive right to sell jerseys of that team. Therefore, Nike has acquired the exclusive right to sell jerseys of Brazil, France, the Netherlands, England and the United States for a long-term period. As a result, Nike's long-term strategy will support jersey sales in the upcoming years.

Although team USA exited the World Cup in the 1/8 finals, I believe Nike has a lot of growth potential in the United States. Soccer was not a very popular sport in the United States, but this year's World Cup might be a game changer. According to the Wall Street Journal, the audience for World Cup matches was very strong over the past few weeks. For example, 15.9 million people watched team USA's group stage match against Ghana, almost as much as the 17.9 million people who watched the NBA finals between the San Antonio Spurs and the Miami Heat. Since Nike sponsors team USA, the increased interest in soccer should support Nike's jersey sales in the United States.

Conclusion

Overall, I believe that Nike will continue to grow revenue and earnings with double digit numbers. Soccer revenue should be a big contribution to Nike's revenue growth, because soccer is becoming more popular in the United States and Nike sponsors several big soccer nations in the world. Therefore, Nike's jersey- and soccer booth sales will be a big growth market in the upcoming years. As a result, I am confident that Nike will be able to report strong earnings for the first quarter of fiscal year 2015 and beyond. Adidas will most likely be hit by Nike's increased competition, since the company dominated the soccer market for several decades. Therefore, I prefer Nike over Adidas in my diversified portfolio.

Editor's Note: This article discusses one or more securities that do not trade on a major exchange. Please be aware of the risks associated with these stocks.

Source: Nike: Soccer Will Be The Company's Next Big Growth Market