Nike: Troubling Signs

| About: Nike Inc. (NKE)


Nike reported FQ4 numbers that continued to show pressure on the top line.

The company made the surprising move to reduce stock buybacks despite declining stock prices.

The stock still trades as if Nike is in fast growth mode.

Nike (NYSE:NKE) reached a peak of $68 roughly six months ago and the FQ4 earnings didn't provide any indication that the athletic apparel leader would rebound anytime soon. At the time, the stock traded for over $100 billion and at a P/E multiple suggestive of a fast growth tech stock.

Source: Nike website

In the after hours, Nike traded down to $50 as both the revenues and future orders disappointed. The problem really isn't that the company isn't growing fast enough for a stock worth nearly $90 billion, but the valuation paid by investors is rather steep for the meager growth rate.

The company reported 6% revenue growth and a flat EPS for the quarter. The revenue numbers were held back by currency and the earnings hit by a higher tax rate. The end result was revenues below expectations and a future orders number suggesting a 11% growth rate at a constant currency that was below the 13% analyst target.

All the numbers suggest Nike is struggling to generate the type of growth to support the high valuation multiple awarded the stock in 2015. The most concerning signal is that the management team didn't take advantage of the lower stock prices to load up on the stock buyback.

During FQ4 that ended May 31, Nike bought 9.0 million shares for $540 million. The company approved a $12 billion stock repurchase program back in November and had $5.5 billion in cash at the end of May suggesting plenty of funds existed to buy the recent dip in the stock.

As the below chart highlights, Nike aggressively bought stock last quarter when the stock price was considerably higher. The company spent nearly $1.5 billion on buybacks and one has to wonder why the company didn't load up last quarter as well.

NKE Chart

NKE data by YCharts

In fact, the buyback amount is actually lower than the anything spent in the prior year. As an example, last FQ4 Nike spent $679 million on stock buybacks when the stock traded at only slightly lower levels.

The key investor takeaway is that troubling signs continue to mount for Nike. Whether due to competition from Under Armour (NYSE:UA) or a peak in the athletic leisure movement, the stock still trades as if the glory days are ahead. Nike trades at 21x 2017 EPS estimates while revenue growth is slated at only 9.5% growth.

Nike still trades at a valuation suggestive that the stock isn't going to revisit previous highs. With management pulling back on stock buybacks, one has to wonder why investors would want to own the stock at these levels.

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