Nike: Time To Run?

| About: Nike Inc. (NKE)

Summary

Nike stock has taken a beating in the last three months. So, should you run away?

The company's Q4 earnings are out, and I discuss the results.

There are too many positives following this big pullback to want to bail now.

Nike (NYSE:NKE) is truly a great American company that has grown into a global powerhouse. The stock has recently been at all-time highs before pulling back after some general weakness and, of course, the Brexit pain. To me, it is at incredibly attractive levels. I'm on record as having said in regard to buying this name: what are you waiting for? After the recent pullback, I reiterate: just what indeed are you waiting for? This name has made investors a fortune over the years. It has been one of the most under-appreciated growth stocks that I have ever come across. Nike's track record is simply astounding. Simply put, it is a winner. However, it does not matter where a stock has been. It matters where it is going.

Long term, I think the stock moves substantially higher. All healthy growth stocks need periodic pullbacks. We have gotten that opportunity here. Take a look at any major growth name over the last two decades. They all have pullbacks. Sometimes it is following a soft earnings report. Sometimes it is due to a broader market sell-off. Other times, the weakness is due to the pain of a weak guidance. In the case of Nike, there hasn't been any real catalyst, but rather, a combination of the three after last quarter. So, what is going on here?

Well, to answer this question, I want to address the just-reported fiscal Q4 earnings report. This was another decent quarter. It wasn't perfect, but it was still solid. Diluted earnings per share were flat year over year, but beat by $0.01, coming in at $0.49. Why no growth? Well, strong international momentum was offset by a higher tax rate and a gross margin decline stemming from clearing excess inventory in the Americas. Still, it was a decent quarter. This is because revenue growth was clear. Revenues rose 6% year over year to $8.24 billion. I want to point out that in the fiscal year, earnings were up 17% to $2.16.

As you know, there has been a lot of movement in the US dollar relative to other currencies, which has impacted revenues/earnings on an absolute basis. If we look at things on a constant-dollar basis, revenues were up 9%. Once again, this is strong for a company of this size. Nike brands continue to do well. Revenues here were up 8% on a constant-dollar basis year over year, with revenues of $7.7 billion. Converse brands performed well too. Converse brands saw revenues rise 18% on a constant-dollar basis to $513 million. The company's revenues as a whole barely missed estimates by $40 million overall.

As sales rise, generally speaking, the cost to generate those sales rises as well. Selling and administrative expense increased 7% to $2.8 billion, and operating overhead expense increased 7% to $1.9 billion. Because revenue growth did not outpace expense growth, gross margin narrowed for the company. This time, gross margin was 45.95%, down from 46.2% last year. I want to point out that this is higher than Q3, which saw gross margins come in at 45.6%. Much of this came from higher average selling prices as well as growth in online and direct sales. Finally, Nike saw an effective tax rate of just 21.2%, compared to 17.8% for the same period last year. That hit the company hard.

Was this the best quarter? No. But it was still strong and met estimates. Looking ahead, I continued to be excited by where the company is heading long term. It is growing internationally and domestically. Inventory has been slowly cleaned up. Futures orders remain strong. As of May 31, 2016, worldwide futures orders for Nike footwear and apparel scheduled for delivery from June through November 2016 totaled $14.9 billion, 8% higher than orders reported for the same period last year The company remains shareholder friendly. During the fourth quarter, Nike repurchased 9 million shares for approximately $540 million as part of the four-year, $12 billion program it has in place. As of the end of fiscal 2016, a total of 20.1 million shares had been repurchased under this program for approximately $1.2 billion, at an average cost of $59.21 per share. There is no need to panic. Stay long.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.