Why Nike Will Beat Revenue Estimates
Julian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This Thursday, Mar. 21, the sports apparel and footwear behemoth from Beaverton, Oregon, known as Nike (NYSE: NKE), will report third-quarter earnings at 1:15 p.m. Pacific Time, followed by a conference call with management to run down the results. Nike management has stated that it expects revenue to grow at a low double-digit rate for the third quarter of 2013. According to the Thomson Reuters Institutional Brokers' Estimate System, or I/B/E/S, analysts are expecting Nike to report total revenue of $6.1 billion for the third quarter of 2013. Below are four key reasons why Nike will beat revenue estimates and send its share price higher.
1. Consumers are regaining confidence
On Mar. 13, the U.S. Commerce Department reported a 1.1% increase in retail sales for the month of Feb. 2013, the fourth consecutive month of gains. This unexpected rise means consumers are regaining confidence in the American economy. A 110 basis point uptick is even more encouraging, when compared year-over-year. As compared to Feb. 2012, retail sales soared an amazing 4.6% in Feb. 2013. To brighten the economic backdrop even further, the Commerce Department also reported that U.S. business inventories in Jan. 2013 also grew by 1%, suggesting that American companies are seeing increased demands for their products. A senior economist with Capital Economics, Paul Dales, believes "the pickup in both employment and earnings growth bodes well for consumption growth later in the year."
2. Future customer orders are cruising higher
Due to its size and global reach, Nike has a considerable window into future revenue through future customer orders. According to Nike's Dec. 20, 2012 third-quarter press release, "worldwide future orders for Nike brand athletic footwear and apparel, scheduled for delivery from December 2012 through April 2013, totaled $9.3 billion, 6% higher than orders reported for the same period last year." If Nike can capture just a percentage of these global future orders as total revenue, than top-line revenue should also sprint ahead for the third quarter.
3. Operating margins remain strong
Despite a challenging consumer environment, Nike continues to lead its competitors in operating margin, a key metric for sports apparel and footwear companies. According to Capital IQ, a Standard and Poors company, Nike has a healthy operating margin (ttm) of 11.82%, more than 400 basis points higher than its largest competitor, Addidas (NASDAQOTH: ADDYY), which has posted a smaller margin of 7.69%. Addidas, which also manages the Reebok, Rockport, Taylor-Made and Y-3 brands, is also significantly underperforming Nike in gross profit margin by nearly 500 basis points. Nike is also trouncing stand-alone shoemakers, such as Wolverine (NYSE: WWW), in the all-important operating margin metric. Wolverine, which is based in Rockford, Missouri, offers products under trademarks such as Hush Puppies, Keds, Saucony, and Sperry Top-Siders, and continues to post margins in the single digit range, most recently delivering an operating margin of 9.43%, more than 2% behind Nike.
4. Renewed focus on its core brand
Over the last several years, Nike brought several new brands under its umbrella, which distracted management from ramping its core business and focusing on its own brand's global growth potential. It's encouraging to see Nike sell off these underperforming entities and consolidate its efforts. In Nov. 2012, Nike completed a sale of certain assets of Umbro to Iconix Brand Group for $225 million and sold all of Cole Haan to Apax Partners for $570 million. These moves should allow Nike to concentrate on Nike and continue to evaluate Converse and Hurley, to see if these subordinate brands make continued sense. Addidas, like Nike, has brought other large apparel and sneaker brands underneath its watch and is learning the difficulties of managing these holdings. On Mar. 7, Addidas blamed a $356 million fourth-quarter loss on a weakening Reebok brand and a lack of transparency into growth assumptions for the subsidiary.
With improvements in consumer confidence and future customer orders, healthy operating margins and a renewed focus on its own NIKE brand, Nike should be able to beat I/B/E/S third quarter revenue estimates of $6.1 billion. If Nike can capture just a 2% uptick in total revenue as compared to the third quarter of 2012, the Beaverton company will post more than $6.3 billion in top-line revenue and send shares higher into its final quarter of 2013.
Julian Willis has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!