Nike's Dip Highlights Investor Opportunity
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It appears that Christmas does in fact come early in 2012, and this July (well, late June) investors should take a special opportunity to get into Nike (NYSE: NKE) stock on the cheap.
Nike finished the trading week of June 25th on a sour note with the release of its fiscal year-end 2012 financial results. Shares plummeted by as much as 12% following the public’s grading of the results, and the world’s largest and most iconic sports apparel manufacturer lost close to $4.5 billion in market value at the close of the trading day.
Was the year-end filing that disturbing? Nike’s sales in the quarter surged to $6.47 billion – very close to the average analyst expectation of $6.51 billion – representing a significant 12.2% jump over fiscal 2011’s fourth quarter top line. Full year sales, surging 16% year-over-year, represent the highest annual growth rate the corporation has enjoyed in nearly fifteen years. Likewise, the growth was attractively spread around all of Nike’s divisions, both on a geographic and product category basis.
Quarterly revenues experienced double-digit growth in North America, Central/Eastern Europe (despite the region’s disturbing debt issues), China, Japan, and the emerging markets reportable segments. Similarly, the flagship Nike-branded division enjoyed double-digit jumps in all three of its subunits – footwear (12% growth), apparel (10%), and sports equipment (20%).
The more troubling issues can be found as one progresses down the income statement. Gross margins, for example, fell 153 basis points year-over-year to 42.8% in the quarter on higher per unit production costs that more than consumed the pricing increases Nike attempted to establish in key markets. This is actually the sixth consecutive quarterly drop in gross margins on a year-over-year basis, and margins for the year were down close to 220 basis points from fiscal 2011 levels.
Increased investments in several of Nike’s new upcoming product launches as well continued preparation for the 2012 Summer Olympics also made marketing expenses increase at twice the rate of revenues for the quarter. Coupled with the weak gross line, EPS of $1.20/share naturally fell short of average analyst expectations of $1.37/share for the quarter.
The reaction that fueled Nike’s largest single trading day drop in close to four years is likely to be over blown. First, Nike is almost a victim of its own recent success. The corporation has made a huge post-recessionary resurgence after skipping a slight beat in its fiscal 2009 and 2010 operating periods, and prior to this latest quarter’s hiccup, Nike beat analyst EPS estimates in 22 out of the past 23 quarters. Expectations regarding the manufacturer’s capabilities naturally become more optimistic as the streak progresses.
Likewise, the primary culprit behind the earnings “miss” – gross margin contraction – was easily foreseeable even prior to the earnings announcement. Nike entered into a rather troublesome inventory buildup in mid-fiscal 2011 that forewarned of such an event. Inventory levels (in terms of dollar amounts) over the past six quarters, for instance, grew at rates at least twice as high as the corporation’s top line growth. The largely negative market reaction, therefore, is likely to be more of a function of comparing the corporation’s results to overly optimistic analyst expectations than it is finding a fault in Nike’s long-term growth story.
The inventory build up should be considered almost a non-event for long-term focused investors locking into today’s prices. Nike has shown time and time again that it retains significant pricing control over its products, input costs including cotton and fuel have already begun their cyclical easing, and the corporation has several very exciting material-saving technologies on the horizon.
The dramatic price drop now makes Nike stock around half as cheap as other athletics apparel manufacturers in the publicly-traded arena. Under Armour (NYSE: UA) and Lululemon Athletica (NASDAQ: LULU), even after their meaningful falls from year-to-date price highs, still both sell for around 30x next year’s earnings. Even despite its more mature standing in the athletics apparel industry, Nike still has several key catalysts on the near-term horizon that make its growth story as exciting as the 'young guns.’
Nike recently usurped Reebok’s (NASDAQOTH: ADDYY) position as the exclusive provider of NFL uniforms. The five year deal does not only mean Nike will sell more jerseys to loyal NFL enthusiasts, but the corporation will have the opportunity to shine in front of some of the largest audiences in the world. In 2011, for example, 90% of the top ten television broadcasts (in terms of viewing audiences) were NFL-related, and the Super Bowl alone garnered more than 110 million viewers (source: Nielsen). The continued growth of key athletic apparel retailers including Foot Locker and Finish Line – both grew top lines by double digits in the most recent fiscal year – shows that such apparel categories are hotter than ever.
Whereas broadcast NFL games are generally enjoyed strictly within U.S. borders, the Summer Olympics is the event the entire world highly anticipates every four years. The 2012 games in London begin this July, and Nike is once again on the forefront of athlete sponsorship. Investors should be on the lookout for new athletics technologies as well as eye-catching apparel designs as the corporation attempts to once again outdo itself from its impressive display at the 2008 Beijing games. Investors should also anticipate significant share price action during the near three-week period in which the games are aired. Nike has, after all, beaten the S&P 500 six times out of the past seven Summer Olympics throughout the several week duration of each gaming event.
It is not every day that such a massive and globally renowned enterprise takes such a large single-day beating. Investors should take a closer look into Nike as the long-term growth story has changed very little, even after the single quarter hiccup. The corporation has always been (and will be for the foreseeable future) on the cusp of athletics technology innovation, and is really one of the only athletics enterprises with a deeply engrained presence all over the world. Likewise, with several key catalysts on the near-term horizon, there is plenty of reason why Nike will be one of the most impressive summer stocks any investor can pick.
gibbstom13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Lululemon Athletica and Under Armour. Motley Fool newsletter services recommend Lululemon Athletica, Nike, and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.