Despite Disappointments, This Retailer is Ready to Run!

Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As discussed in my recent post, the footwear industry has been performing well and is expected to continue to do so. However, there will be small hiccups in the journey which have been well demonstrated by one of the prominent players. Nike (NYSE: NKE) posted its first quarter results, which beat Mr. Market’s expectations, but did not satisfy investors. Let’s understand what happened.

More Than the Past, it’s the Future…

Even though Nike’s revenue surged 10% to $6.7 billion and earnings were ahead of expectations, it failed to please investors mainly because of concerns over Chinese and European markets. Though revenue from China and Europe grew, future orders from both markets fell 5% and 1% respectively, highlighting weak demand in the coming months. China and other emerging markets have been attractive to most retailers, especially for the ones who wanted to diversify risks of weak European demand. But slowdown in the Chinese market was a surprising one indeed, adding to the woes of Euro crisis.

A Decent Quarter…

The quarter was good with growth in revenue due to windfall gains from various sports events such as European Football Championships and Olympics. However, these events had a negative impact on the bottom line. Since the company increased its marketing budget for promoting its products during the events, costs jumped drastically and impacted earnings for the period.

Along with advertising costs, increased input costs and labor charges also impacted Nike’s results. The footwear retailer has taken initiatives to pass on the rising costs to the consumers by increasing its product prices. Also, input prices are expected to moderate which will be a relief to Nike’s margins.

Innovation Makes Nike Different

Moreover, Nike was involved in a number of new product launches, such as Nike+ and its new Flyknit technology, which involved some additional costs. The benefits of these new introductions will be realized in the months to come. In fact, Nike’s efforts to bring new products to consumers and increase advertising have helped the company attain a grand image as compared to its peers such as Wolverine World Wide (NYSE: WWW) and Foot Locker (NYSE: FL).

Both Wolverine and Foot Locker had a different approach to improve demand and strengthen their financials. Wolverine too has been eying growth in emerging markets but not through innovation. It has done so through buyouts. It has acquired the Performance and Lifestyle business from Collective Brands which increased its portfolio of brands catering to children and females. This acquisition is expected to add 25 to 40 cents to Wolverine's earnings per share. In fact, the Performance and Lifestyle segment was the strongest one for Collective Brands. Hence, Wolverine will be benefitting from this star performer soon.

Even Foot Locker plans to expand its offerings for women and kids along with expansion in the international markets. However, it does not intend to do so through acquisitions but through expansion of new stores. The athletic products retailer added 20 new stores in Europe where its sees great potential. Moreover, Foot Locker has a different way of driving traffic. It flooded the market with a variety of bright colors which drew customers’ attention. This helped Nike in registering comparable store sales growth of 9.8% in its recent second quarter.

Hence, if we talk about product innovation in terms of new technology products, Nike is a sure fire winner against industry peers. Moreover, the retailer’s heavy promotional expenditures during the Olympics create a valued impression in the minds of customers. Along with a decent quarter, Nike has announced a share buyback plan over the next few years.

The Takeaway

Driven by growth in online business as well as 15% comparable store sales, Nike has yet again showed its strength of innovation. Its continuous drive for innovation has always attracted customers enabling it to stand out from the rest of the footwear brands. Future orders might be a small hiccup in the footwear giant’s road to success. Its new technological advancements in the footwear and the apparel business might change the picture in the next quarter. Hence, investors should think beyond a particular metric since Nike looks good to go in the long term.

 


justhimanshu has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Nike. 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.

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