Nike: Panic-Stricken

| About: Nike Inc. (NKE)


Nike is truly a great American company that has grown into a global powerhouse and has been an amazing growth name, but today the stock is selling off.

This morning, I have received several borderline, panic-stricken inquiries into the name.

I discuss the reason for the selloff and the key metrics of the company's fiscal Q3 and guidance.

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. I am on record as having said in regards to buying this name: What are you waiting for? This morning however I have received several borderline, panic-stricken inquiries into the name. Folks, please. 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. The track record of Nike is simply astounding. It is a winner. However, it does not matter where a stock has been. It matters where it is going. And right now, it is pulling back.

Figure 1. 52-Week Share Price History of Nike

Source: Google Finance

So, is the stock set to continue its winning ways despite its seemingly rich valuation at over 30 times earnings? Well, I think the long-term answer is a resounding yes, but all healthy growth stocks need periodic pullbacks. 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 selloff. Other times, the weakness is due to the pain of a weakfish guidance. In the case of Nike, there have been prior opportunities to buy on small dips, but the stock continues to move higher steadily over time. I will reiterate that I believe the best way to own this is to hold a core position and trading around it. But, like any other growth stock, things could turn sour quickly at this valuation. That is what we are seeing today. Thus, the purpose of this article is to discuss the company's performance and the expectations for the name which are driving this selloff.

I want to address the just reported fiscal Q3 earnings. This was another decent quarter. It wasn't perfect, but it was still solid. Diluted earnings per share for the quarter increased 22% to $0.55. This is impressive growth in earnings for a global brand that some have stated has saturated the market. I disagree. The growth is evident and still going strong. The earnings were up, thanks to strong revenue growth that outpaced the growth in expenses. This led to an incredible gross margin expansion, and the company benefited from a lower tax rate as well. Revenues rose 8% year over year to $8 billion.

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 14%. Once again, this is simply stellar for a company of this size. Nike brands continue to do well. Revenues here were up 15% on a constant-dollar basis year over year, with revenues of $7.6 billion. Converse brands continue to show declines. Converse brands saw revenues fall 5% on a constant-dollar basis to $489 million. Further, revenues missed estimates by $170 million overall.

As sales rise, generally speaking, the cost to generate those sales rises as well. Selling and administrative expense increased 8% to $2.6 billion, and operating overhead expense increased 7% to $1.8 billion. Because revenue growth outpaced expenses, gross margin expanded once again for the company. This time, gross margin was flat 45.6%. Much of this came from higher average selling prices as well as growth in online and direct sales. Finally, the company saw an effective tax rate of just 16.3% compared to 24.4% for the same period last year. When we factor in revenues, the growth of which outpaced expenses, we see that there was incredible growth in net income of 20% to $950 million.

I continued to be excited by where the company is heading long term. However, for the short term, we have hit a bump in the road with guidance.

Consensus fiscal Q4 revenue was projected to be up 8.9% to $8.47 billion, but the company is guiding "mid-single digits" now, suggesting a revenue miss may be coming. For earnings per share, it guided growth in the low teens, whereas consensus was for 15% growth. I want to point out that this guidance isn't weak per se, however, it is less than expected, and when a name is priced for perfection, it needs to constantly perform or outperform. Thus, the present selloff is warranted. Take a little profit, it's fine. But be ready to be a buyer if this drops under $60. I must remind you that worldwide futures orders scheduled for delivery have been and continue to be remarkable. Futures orders that are scheduled for delivery from March 2016 through July 2016 showed tremendous growth versus last year. In fact, futures orders are a strong 12% higher than orders reported for the same period last year, and 17% higher on a constant-dollar basis. The growth remains. Stop panicking.

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.

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