Nike Is Well-Poised To Grow

Jul.15.14 | About: Nike Inc. (NKE)

Summary

Nike ended its fiscal year 2014 with a strong performance and the stock increased by roughly 22% in the last twelve months. Investors should be happy with Nike's performance.

Nike's CEO, Mark Parker, is very confident that the company's soccer-related revenues will continue to grow at a rapid pace even after the 2014 World Cup ends.

The 2014 FIFA World Cup has strengthened the company's position for fiscal year 2015, and the Winter Olympics in 2016 will further boost the share.

Global athletic footwear, apparel, and equipment manufacturer Nike Inc. (NYSE:NKE) ended its fiscal year with strong fourth-quarter performance. The Dow-30's newest component has reported fourth-quarter results for fiscal year 2014. Nike heavily invested to target the 2014 FIFA World Cup. This time, Nike remained ahead of its competitor Adidas (OTCMKTS:OTCQX:ADDYY) in terms of sponsorship, as it sponsored ten teams. After making these hard pushes, Nike is ultimately being rewarded in terms of double-digit revenues growth in its latest quarter.

Nike aims to have annual average revenue growth in the high-single digits, with share earnings advancing by a mid-teens percentage rate. It has achieved these goals over the past 10 years, despite fierce competition and a global recession and financial crisis. Over that time frame, the gross margin expanded by 260 basis points and the return on invested capital rose from 18% to 24%. However Nike's margins are still slightly lower than Adidas, and Nike must take the initiative to improve these margins to help the company's bottom line grow further. This performance should be attractive to any investor, and low debt leverage is especially noteworthy for conservative accounts. Though the dividend yield leaves something to be desired, Nike continues to return excess cash to investors through share repurchases.

Big Fourth-Quarter Returns

Nike was successful in adding double-digit revenues growth for the fourth quarter. The company's revenues increased to $7.425 billion, or by 11%, from $6.697 billion in the fourth-quarter of 2013. For the full-year 2014, the company's revenues also increased at a double-digit growth rate, and the company increased from $25.313 billion in 2013 to $27.799 billion, registering 10% growth for the whole year. Nike's impressive top line growth was a result of higher unit volumes, increased average selling prices, and an expanding direct-to-consumer component.

The 2014 FIFA World Cup tournament appears to have provided a major boost to sales. Pricing was supported by innovative new products and an effort to push premium footwear. These campaigns will continue, along with new store and e-commerce expansion. Recovering economic conditions in Western Europe can't fully explain the 18% sales gain in the region. Worldwide future orders were up 12% year-to-year at the end of May.

The top line growth transferred to the bottom line, as the company's gross margins expanded from 43.9% in the fourth quarter of 2013 to 45.6%. These improved margins were due to innovative and premium products for which customers were ready to pay premium pricing and ultimately resulted in a higher demand impact. The excellent gross margin expansion, despite unfavorable currency exchange rates and higher labor costs, was more than offset by an increase in the expense ratio.

Although Nike's dividend yield is not quite impressive, the company has been increasing its dividend payment at a steady pace. In the fourth quarter, the company increased its per share dividend to $0.24, or a healthy 14%, from $0.21 per share dividend in the fourth quarter of 2013.

Nike's Soccer Sales Will Continue to Soar

Nike is pushing hard to compete with Adidas to be the world's biggest soccer brand. After a successful fiscal year 2014, Nike is looking ahead to achieve its 2015 targets to beat its rival. Nike's soccer revenues increased at a tremendous growth rate of 21% to $2.3 billion in 2014, and CEO Mark Parker is very confident that the company's soccer sales will continue to grow at a similar growth rate when the 2014 World Cup is over. Nike intends to target the U.S. and Chinese markets, and expects significant growth potential in these markets.

Revenues for Converse were $410 million, up 15% on a currency-neutral basis, mainly driven by strong performance in the company's largest direct distribution markets: the United States, China, and the United Kingdom. The growth potential is also evident from the fact that Nike's future orders increased 6% in China and 11% in North America. Although significant growth potential exists, Nike must overcome its weaknesses in China to fully benefit from that potential.

Conclusion

A strong outlook and impressive growth numbers aided the stock price. In the last twelve months, the stock price has increased from $63.93 to $77.67, resulting into a gain of 21.5%, and also outperformed the S&P 500 over the same period. Nike's growth for the next fiscal year is expected to continue, as the company is aiming for a 75 basis points improvement in the gross margins in fiscal year 2015. For full-year 2014, Nike's earnings per share received a healthy increase of 11% from $2.74 to $3.05 in 2014. For full fiscal-year 2015, Nike's earnings are expected to grow by roughly 11% to $3.4 per share, with the largest gain in the first quarter, thanks to the World Cup and easier comparisons in Latin America and China.

Keeping in mind the growth potential, the analysts' average per share target price is $86.25, which gives rise to an upside potential of 11%, which may seem a bit conservative when considering the price appreciation of the last twelve months. Nike is set to grow, as the company will continue its innovative and premium product line in 2015, and going further, the 2016 Olympics will also boost Nike's earnings stream. These factors make Nike an attractive stock.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.