Nike (NKE) is only about two weeks away from reporting the results of its fiscal 1Q20. Analysts are anticipating revenues to grow at only a modest pace of less than 5% over very tough 2018 comps (second best quarter of sales since 2014) that were propelled by the popularity of last year's FIFA World Cup, while currency pressures should also play a role in dragging sales growth. Regarding the bottom line, EPS is forecasted at $0.71 for an implied 12% increase YOY.
Credit: HQ Corporate Office
My projections for fiscal 1Q20
I expect some of the same themes to repeat in the first fiscal quarter. Nike has been very successful at growing its direct-to-consumer channel, which last fiscal year represented an impressive 32% of sales vs. 30% in the previous twelve-month period. Further DTC expansion will likely have the secondary effect of boosting total company margins, since gain of scale has made the channel increasingly more profitable.
The Air Max 270 and Vapor Max, the "poster children" of Nike's 2017-2018 recovery, should continue to support footwear sales. Within the same segment, it will be interesting to see if Jordan will continue to perform substantially better than it did a few years ago, while the slow-to-react Converse brand may benefit from new product releases.
Source: DM Martins Research, using data from company reports
Further down the P&L, I expect gross margin to expand, in great part as a result of Nike's trademark ability to protect pricing. Whereas tariff-related costs were once one of my key concerns, Nike has proven competent at limiting the impact of the trade wars by adjusting its supply chain accordingly.
Lastly, I also expect SG&A to rise at a faster pace than revenues. This has been the case for the past few quarters, as the company continues to invest in growth - e.g. digital channel, brand campaigns, etc. To arrive at my consensus-beating EPS target of $0.72 for fiscal 1Q20, I assume that SG&A as a percentage of revenues will increase by about 120 bps. I calculate that each one percentage point of upside (or downside) to my projection should impact EPS by five cents.
Buy the stock?
Since I started covering NKE, in June 2017, I have maintained a generally positive stance towards the stock, having turned more decisively bullish later that same year. My appreciation for the name is grounded on the fact that athleisure brands in high demand around the world, armed with a healthy DTC channel, will likely be long-term winners in the apparel retail space. The same argument, by the way, also justifies my interest in Lululemon (LULU).
|Co./Ticker||Current PE||LT PEG||FCF Yield|
|Nike - NKE||30.0x||2.1x||3.4%|
|Under Armour (UA)||54.0x||2.0x||5.2%|
Certainly, there are a few areas of risk that investors should not ignore. For example, Nike generates nearly one-fifth of its revenues from China, a market that has been exposed to macroeconomic uncertainties lately, and another 40% from regions outside Greater China and the United States that have experienced slower economic growth - Europe and Latin America stand out. Second, valuations may seem a bit too rich at first glance, at least for most value investors, as the chart and table above depict.
But to the first point above, Nike has yet to show much top-line weakness recently, even amid worries triggered by the trade wars. It looks like the company's efforts to fix the product innovation issues that it faced a couple of years ago have more than offset any potential dip in demand driven by a slowing global economy.
To the second point, NKE has traditionally traded at a P/E multiple that is higher than market average. In fact, a next-year multiple of 25.6x is only slightly higher than the twelve-month trough of 23x reached around May 2019, while long-term PEG of 2.1x is very much in line with LULU's and UA's comparable metric.
For these reasons, and until Nike shows any sign of having "lost its mojo", I believe an investment in the stock makes sense at current levels.
I do not yet own NKE because I believe I can create superior risk-adjusted returns in the long run using a different strategy. To dig deeper into how I have built a risk-diversified portfolio designed and back-tested to generate market-like returns with lower risk, join my Storm-Resistant Growth group. Take advantage of the 14-day free trial, read all the content written to date and get immediate access to the community.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NKE, LULU over 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.