Stick With Nike

Summary

• Nike reported strong Q4 results and the stock jumped.
• Near-term consolidation is expected, but the stock has good long-term upside potential.
• Selling through Amazon and focusing on global cultural centers remain long-term tailwinds for the company.

As we had predicted in our earnings preview, Nike (NYSE:NKE) stock rallied after a good Q4 earnings report. Although we think the stock could be due for some near-term choppiness, we also believe the secular growth story remains intact and that multiple expansion will drive this stock considerably higher in a long-term window. We remain bullish.

The quarter was quite good. It was a beat on the top and bottom lines. Sales rose 7%, led by growth across most major categories. Running was up 8%. The Jordan brand was up 13%. Sportswear revenues surged 17% higher. The only category that experienced notable weakness was basketball (down 5%), but management once again sounded very bullish about basketball on the call and we reiterate our confidence in this segment being a huge growth driver in FY18. We see the Kyrie Irving, Paul George, and Kevin Durant lines as huge sellers this summer and into the basketball season in the fall.

Gross margins did slip, but the slippage is more a result of FX headwinds than of competitive pricing pressures, so the gross margin degradation should be looked at as a near-term macro headwind, not a long-term Nike-specific headwind. But even with a 160 basis point compression on the gross margin line in FY17, EPS still rose 16% year-over-year due to revenue growth and SG&A leverage. This level of earnings growth should continue into the foreseeable future.

A particular positive from the report is that even though global future orders missed (flat versus expectations for a 1.25% gain), the stock still rallied. This shows that investors are finally buying the company line that global future orders don't carry as much weight anymore considering the seismic sales shift Nike is seeing towards the web and it's branded stores. This is a huge sentiment shift, and removes some of the pessimism surrounding NKE stock recently.

Put it all together, and the stock jumped big on the report. It is now up about 9% over the past 5 days. Although this rally may be due for a near-term pullback, the fundamentals support a higher share price by the end of the year.

NKE Price data by YCharts

The trailing earnings and EBITDA multiples have bounced off their near-term lows, but remain depressed relative to the trailing 3-year highs. The current 24x trailing P/E multiple is a far cry from the above 30x multiple the stock received late in 2015, and is also far off from the ~27.5x multiple the stock sported for most of 2015 and 2016.

NKE data by YCharts

We argue that although there may be some near-term choppiness now that the stock is up from a valuation trough, the P/E multiple does have room to run back up to a high 20's level by year-end.

We reiterate that Nike is making two critical changes which will drive significant market share gains over the next several quarters and years. First, Nike is beginning to sell on Amazon (AMZN), and that gives NKE access to the world's most robust and fastest growing distribution channel. Inevitably, this is a long-term sales tailwind for the business and allows Nike to evolve with changing shopping habits.

Second, Nike's focus on global cultural centers will once again put the brand at the epicenter of fashion trends. This will streamline investment costs and level the playing field between Nike and Adidas (OTCQX:ADDYY) on the "trendy" front.

Overall, we remain bullish on NKE. We think this stock has a lot of room to run higher, but don't think it will happen overnight. We just got a big move in the stock, so we expect some consolidation here before another leg higher.

Analyst’s Disclosure: I am/we are long NKE, AMZN. 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.