Nike Needs to Overcome These Hurdles

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

Nike (NYSE: NKE) shares have done very well this year by providing a return of 22% to investors. The company's array of brands and presence across various markets have proven to be a big advantage and have helped the company march forward without much difficulty. So it was not surprising when Nike yet again released solid results for its fourth quarter recently, after which the share-price appreciation should continue further, but will it?

Strong performance

Strong demand for Nike's products continues to push its business higher. Fourth- quarter revenue increased to $6.7 billion, up by 9% excluding the impact of changes in foreign currency. Fiscal 2013 revenue from continuing operations was up by 8% to $25.3 billion, or 11% excluding currency changes.

Fourth-quarter earnings were up by 27% to $0.76 per share and for the full year, earnings increased 11% to $2.69 per share. Its results were driven by innovation and brand strength.

Revenue was helped by a good performance from running, basketball, men’s and women’s training products, and these segments offset slight declines in sportswear, action sports and soccer. In spite of this, revenue from other businesses grew by 10%. The company continually evaluates its existing portfolio to ensure resources are invested in those businesses that are accretive to the Nike brand and represent potential growth and the highest returns.

Way forward

As mentioned earlier, Nike's range of brands gives it diversification, which helps it withstand fluctuations in any one single region. But the company is now facing trouble in one of the world's fastest growth markets in China. Of late, the Chinese business has been under pressure with falling sales, and Nike expects declines in the next couple of quarters as well. The North American market has been acting as a hedge against trouble in China, but the company might be in more trouble if moves of its competitors are taken into account.

A slowing Chinese economy does not bode well for Nike and this has led consumers to search for cheaper alternatives. The company's home market has been holding up well, but with the likes of Under Armour (NYSE: UA) making good strides, Nike will have to be on its toes. Under Armour has been doing well of late and the company's latest results tell us that it would prove to be a strong competitor for Nike.

Under Armour has been growing both apparel and footwear revenue impressively. Apparel revenue increased 23% last quarter and footwear sales jumped 21%. The company is looking to hit revenue of $4 billion in the next three years and the fact that its marketing budget as a percentage of revenue equaled Nike last year justifies its intent. The company beat estimates in its latest quarterly report and also bumped up its guidance, which means that its business is witnessing good momentum.

Also, Nike needs to keep a close eye on yet another competitor in North America, which is the formidable Adidas (NASDAQOTH: ADDYY). The company's $150 running shoes, which are supposed to provide more comfort to the runner, might hurt Nike in the long run. Adidas is a far smaller player than Nike but the company is following a good strategy to take market share away from Nike. Adidas is looking to use its "Bounce" technology in tennis, basketball etc. after its running shoes hit decent adoption rates.

Adidas might be way behind Nike in North America, standing in sixth place, but the company's latest move of introducing its new technology might help it gain momentum. In fiscal 2012, Adidas' North American revenue grew 2% on a constant currency basis, which by no means is stellar. But with the new technology and the fact that Adidas will be making a solid push to sell them through partnerships with the likes of Foot Locker, there is the probability that it can eat into Nike's share.

But to counter such competitors, Nike is diversifying and focusing on innovation through different products such as Nike+ App, GPS sports watch, Nike+ Fuel Band, Sweat free apparels, etc. which would track daily routine workouts and intakes.

Conclusion

Nike has been a good performer so far but it faces some challenges. A slowdown in the Chinese economy and the rise of potent competitors in North America might trouble the company going forward. But its diversification and presence across different market is still a good reason why investors might continue to stick with their long positions in Nike.

The company does have a strong brand and it is yet another reason why it is an attractive stock to buy. But if you do want to add to your Nike position despite the challenges, you would be better off monitoring the situation in China and moves of its competitors and decide to what extent they might trouble the company.

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Amal Singh 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!

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