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Summary

  • Nike continues to beat analysts' estimates of both revenue and earnings per share.
  • Nike's women's apparel market and online channel is continuously improving.
  • The Chinese athletic apparel market is expected to reach $32 billion by 2017.

Nike Inc. (NYSE:NKE) is the world's leading designer, marketer, and distributor of athletic footwear, apparel, equipment, and accessories for a wide variety of sports and fitness activities. Nike reported its fourth-quarter earnings on June 26th, 2014, and beat analysts' estimates of both revenue and earnings per share. Despite the increase in marketing costs and administrative expenses due to the 2014 World Cup, the company has managed its earnings growth.

Recent-Quarter Performance

Nike reported its fourth-quarter revenue of $7.4 billion, reflecting an increase of 11% from the fourth quarter of last year, and beating analysts' estimates of $7.3 billion. Fourth-quarter earnings per share were $0.78, also beating analysts' estimates of $0.75 per share. Gross margins improved 170 basis points to 45.6%, and future orders increased 11% on a currency-neutral basis to $13.3 billion. The rise in orders was driven by Western Europe, where future orders increased by 25%. In addition, Nike repurchased $912 million worth of shares in the quarter, helping to reduce the number of shares outstanding.

The increase in revenue was mainly driven by Nike's strong sales growth in North America and Western Europe. Nike brand sales in North America were up 10% in the fourth quarter, while sales in Western Europe were up 18%, excluding the impact of currency fluctuation.

Nike's Women's Apparel Continues to Drive Strong Growth

Nike's women's business has grown to $5 billion in fiscal year 2014, reflecting an increase of 12% compared to fiscal year 2013. The company expects the women's apparel business to grow to $7 billion by fiscal year 2017. In order to hit that goal, the company introduced an array of products especially for women, like the Legend Tights, the Nike Pro Bras, and the Sky Hi Dunks. The continuous growth in women's business show that the company's expectations of its women's business are quite justified.

Nike's e-Commerce Growth is on Track

The impact of e-commerce and increasing advances in technology has created drastic changes in consumer spending habits. Consumers are moving away from physical purchases to various forms of digital spending. To capitalize on this trend, Nike has been aggressively improving its e-commerce business over the years. The segment grew its revenue by 42% and reached $767 million in fiscal year 2014. It is expected that the company will grow to $2 billion by the end of fiscal year 2017. However, there is still substantial room for growth, as e-commerce only represents 17% of Nike's total direct-to-consumer business.

Nike's Recovery in China

China is expected to hold the key to Nike's future growth, owing to its large population and fast-growing economy. However, Nike's Chinese sales have been hit in the recent past due to its ineffective brand positioning, which led to a long drawn out process of clearing out excess inventory by offering discounts. The company is actively addressing this situation by focusing on its assortment of products, with a greater level of precision on sports and products that are most preferred by Chinese consumers.

Nike has also setup new distribution centers and increased its marketing capacity in the region. The sales figure in the face of this restructuring process will be a key indicator of Nike's health in China. Nike's revenues from China rose 7% in the third quarter and 4% in the fourth quarter of 2014. In addition, the future orders of the NIKE Brand have increased by 6% in the recent quarter. The Chinese athletic apparel market could grow at a CAGR of 17.2% from 2013-2017, thus reaching $32 billion by 2017, due to escalating consumer interest in health and fitness activities leading to an increase in the number of sports and recreational facilities and fitness centers in the country. I believe that the company will gain double-digit growth in China through its effective brand positioning and by better understanding the market.

Shareholder Profits

Nike distributes its cash among shareholders through dividends and share repurchases. Nike repurchased a total of 12.3 million shares for approximately $912 million during the fourth quarter. This repurchasing was done as part of the $8 billion share repurchase program approved by the company in September 2012. Up until the end of fiscal year 2014, a total of 51.9 million shares have been repurchased as part 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.

Conclusion

The company has consistently outperformed and once again beat analysts' estimates of its revenues and earnings per share. In addition, the company continues to dominate with the NIKE Brand in the FIFA World Cup, compared to its close competitor Adidas. Furthermore, as the company plans for fiscal year 2015, it expects to see continued strong growth momentum in 2015, and the Summer Olympics will further fuel the growth in 2016. The company is also improving its online presence to capture consumer trends in digital spending. Additionally, Nike's sales are expected to rise in China, and its share repurchase program is enhancing per share value. Since the company has a decent future prospective, I would recommend buying the stock.

Source: Nike: Decent Future Outlook