Is This Company an Amazing Buy?

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

 

The American market is not exactly sizzling with demand as evidenced by muted holiday spending. Retail sales turned in their weakest ever growth during the holiday season since 2008, as consumer confidence remained dented due to the looming fiscal cliff and Hurricane Sandy. Despite such headwinds, Nike (NYSE: NKE) managed to perform very well and presented investors a stellar second quarter. Its results pleased the Street and sent its stock price soaring. But can Nike continue to run against the odds? Let's check.

A Stellar Performance…

Even though the footwear industry has been fighting problems of increased labor costs and unfavorable currency movements, Nike managed to register revenue growth of 7% and clocked $6 billion in the quarter. This was due to its efforts of increasing product prices and operational efficiency, which led to a better than expected bottom line. However, margins decreased slightly because of an increase in labor costs.

The key driver for Nike's performance was solid demand in the North American market, which accounts for 50% of its revenue. The region has been doing well for quite some time now with great revenue growth each quarter. However, both Europe and China have been a drag. Both regions are witnessing lower volumes as customers are not willing to spend.

Moreover, this is not the first time that the company is facing such as problem. Even its first quarter results were weighed down by low revenue from both Europe and China along with a decline in future orders. This metric is a key performance indicator in the footwear industry.

Europe has been an area of concern for not only Nike, but also its peer Deckers (NASDAQ: DECK). Deckers’ last quarter’s top line suffered mainly because of lackluster demand in the European market, leading to revenue decline of 9%. The primary reason for both has been price hikes, as a result of increased costs, which are not readily accepted by buyers. This led Deckers to not only lower its outlook, but also lower its prices in order to lure customers.

Although Nike’s future orders in China have declined, the overall metric grew 6% mainly because of the American market. A reason behind growing American demand for Nike’s offerings is its drive for introducing innovative products.

Its new products such as Nike+ and other kinds of sports shoes with new techniques have been doing really well. In fact, Nike has been the most active player in terms of innovating new products. Even peer Wolverine World Wide (NYSE: WWW) has adopted a similar path and has started focusing largely on innovation. It recently announced its plans to introduce M-Connect next year which has already added to consumer excitement. Additionally, it has been focusing on enhancing its products through providing more color variants, especially in the women's segment. These efforts seem to strengthen Wolverine’s position in future.

Efforts in Line…

Nike has also been planning effective strategies to make competition tougher. It has already divested its Umbro brand and expects to sell Cole Haan soon so that it can focus on its core brands even better.

The footwear player is also eyeing expansion in a big way. Its expansion in Oregon is all set and should be online in a few months. This further expands Nike's addressable market.

Moreover, it plans to expand its global operations through direct-to-consumer operations which will give exposure to greater markets at lower costs. All these moves, along with its innovation, should enable Nike to perform better going forward. 

Bottom Line

If you would have invested money in Nike three months back, you would have been sitting on a 10.7% return. Nike has been an exemplary performer with some new moves each quarter. This has made Nike a desirable company. Its strategic initiatives for tackling economic problems and continuous strive for innovation makes it a company worth noting. Moreover, input costs have also come down to moderate levels, making the footwear company’s prospects even better. Investors should definitely take a look at this stock.


justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of Nike. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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