Is it Time to Just Buy Nike?

By Ryan Guenette - August 6, 2012 | Tickers: CROX, DECK, KSWS, NKE, UA | 0 Comments

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On June 28^th, 2012 Nike (NYSE: NKE) reported fourth quarter financial results. The report is as described below.

• Nike earned $549 million in its fourth quarter, which was down from last year’s earnings of $594 million, during the same period.  
• Nike earned $1.17 a share in its fourth quarter, which was down from last year’s earnings per share of $1.24, during the same period.
• Revenue estimates ranged from $6.39 billion to $6.60 billion, with the consensus coming in at $6.52 billion, Nike’s reported revenue was $6.5 billion, just below the consensus.
• Gross margins fell 1.5 percentage points in the fiscal fourth quarter, as gross margins have been declining for more than a year. These margins have been damaged by increased costs in materials utilized in shoes and T-shirts.
• Orders of Nike shoes and clothing scheduled for delivery from June through November, “futures,” rose 7%, which is less than half of the orders in the fiscal third quarter.
• Nike stated that they anticipate fiscal 2012 revenue to grow in the mid-teens year over year, from last year, 2011’s $20.629 billion revenue figure. Analyst estimates are expecting fiscal 2012 revenue to reach $23.817 billion.
• Nike Incorporated announced for its fiscal 2013, it expects revenue growth at or slightly above its high single-digit range. Nike also projects earnings per share growth in the high single digits.

Simply put, the earnings report was terrible. Nike missed revenue and earnings estimates, citing higher input costs in its products and a slowdown in international demand, and lowered guidance significantly. The report resulted in a huge 13% decline in the stock, to levels not seen since last year, so is it time to just buy Nike Incorporated.

Growth is a “Swoosh”

In 2010, Nike Incorporated reported earnings per share of $3.86. In 2011, Nike stated that earnings per share had grown $0.53, to $4.39, representing 13.73% year over year earnings per share growth. A slowdown in growth is seen in 2012, as the global demand slows. In 2012, the average consensus believes Nike Incorporated’s earnings per share will expand 7.74%, to $4.73. High single digit growth is projected in 2013, as Nike Incorporated’s earnings per share reaches $5.13, displaying 8.46% year over year earnings per share growth. A huge acceleration in growth is projected in 2014, as the average analyst estimation shows Nike Incorporated’s earnings per share rising to $5.97, show-casing 16.37% year over year earnings per share growth. Nike’s earnings per share growth rate is not persistently in the double digits, but is heading in the right direction each and every year in the foreseeable future. Nike Incorporated also pays out a dividend that currently yields 1.58%, equaling the 10 year treasury rate. If prices remain steady, by 2015 Nike Incorporated’s dividend is anticipated to be nearly yielding 2.00%. Nike Incorporated’s dividend is not substantially significant, but is a reward for waiting for the turnaround in the global economic environment. The chart below displays Nike Incorporated’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the foreseeable future.  

2015 Global Growth Strategy

On May 5^th, 2010, Nike Incorporated hosted its investors meeting in New York. The main highlights of the meeting were Nike Incorporated’s targets of $27 billion of revenue and more than $12 billion of cash flow by 2015. These goals included a financial model that displays single digit revenue growth, mid-teens earnings per share growth, and expanding returns on capital. “We’ve never been more inspired, innovative and aligned to achieve our goals,” stated Nike Incorporated President and CEO Mark Parker. “We have powerful competitive advantages in our portfolio – innovative and compelling products, brands that are distinct and relevant to their consumers, and the world’s greatest athletes and teams. Our focus is to build, fuel, and accelerate the power of our portfolio.” Goals set during the meeting are shown below.

• High single-digit revenue growth (average annual rate)
• Mid-teens Earnings per Share growth (average annual rate)
• Return on Invested Capital of 25%
• Increasing Dividends within a target calendar year payout range of 25-35% of trailing four quarter earnings per share

The majority of Nike's growth will be derived from emerging markets such as China and India. Nike is already a globally recognized brand and is viewed as a premium brand for superior athletes. With growing middle classes in these countries, more and more people will be able to purchase Nike, and carry a sense of pride with them. All in all, to accomplish their goals Nike must continue to innovate and be a trailblazer in developing new technology in the world of shoes and apparel, which I believe it will be able to.

Who Wins the Race for the Athletes Dollar?

Compared to some of Nike's most prominent competitors, such as: Crocs Incorporated (NASDAQ: CROX), K Swiss Incorporated (NASDAQ: KSWS), Deckers Outdoor Corporation (NASDAQ: DECK), and Under Armour Incorporated (NYSE: UA), Nike Incorporated stacks up relatively in line.

In terms of growth, Nike is last in the industry because of a more developed brand, while Crocs leads the sector. Nike Incorporated is the only company in the industry that pays out a dividend, and is growing its 1.58% dividend at a sizable rate. In the fundamental ratio comparison, Under Armour appears to be the most expensive company in the industry, while Deckers appears to be trading at a bargain price. When growth is taken into account, both Crocs and Deckers seem to be trading at prices well south of where they are fairly valued. In the net profit margin comparison, K Swiss stands out to the downside, while Deckers stands out the upside.

The Foolish Bottom Line

Nike has faced some recent volatility due to its disastrous earnings report, and may continue to face potential downside due to weakness in the global consumer. Despite these fears, Nike Incorporated is still anticipated to grow its earnings in the high single digits or low double digits over the coming years, and possesses extreme consistency, with a dividend that matches the 10 year treasury rate. Additionally, Nike may find short term strength from increased sales due to its Olympic presence. Investors may find more rewarding returns in other companies, but Nike Incorporated is a global dominant brand, and is a tremendous addition to any long-term portfolio.     

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