Nike: A Brand that Travels
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The headlines from Nike’s (NYSE: NKE) last earnings announcement were focused on the great numbers the company put up in the U.S., which fit the late March narrative of a U.S. recovery perfectly. And while sales in the U.S., which account for more than 36% of total revenue, were up 17% overall with strong growth in shoes, the growth numbers coming out of China and "Greater Asia" are a signal of where their business will be going.
Reaching for the Skies
In the most recent quarter China’s growth in both shoes and branded products grew at far faster rates than U.S. revenue. Year over year revenue from footwear grew 35%. Total China sales were up 25% and in emerging markets overall, 23%. China’s share of Nike’s global revenue rose from 6.5% to 11% of total revenue. With a dominant position in the fastest growing market in terms of both sales and total potential market, China’s importance to Nike will continue to grow.
Nike announced it would retain its $0.36 per quarter dividend, which they have raised twice since 2010, up from $0.27 per quarter, which has kept pace with the share price at around a 1.25% yield. For that yield, though, you’ll pay a forward multiple of 22, compared to 17 for German competitor Adidas (NASDAQOTH: ADDYY).
Adidas reported very strong results in China as well with sales rising 26%. All is not rosy for Adidas as they had to close one third of their Reebok stores in India due to undisclosed irregularities. Adidas’ loss will likely be Nike’s gain as they just extended their deal with the Asian Football League’s television sponsor.
Sporting Chance
Part of Nike’s long-term success comes from its nearly untouchable brand, which is one of the brands even Steve Jobs was envious of. Nike makes a commodity that they can sell at premium prices. Like Apple their marketing is brilliance, never emphasizing the shoe, but rather tantalizing you with your personal potential. To that they mix the hero-worship of professional athleticism and we have a ready-made marketing case study for financial analysts and academics alike.
For Nike the question, of course, is can they sustain it. Competitors like Lululemon (NASDAQ: LULU) are charging up the chain very quickly, capitalizing on a segment of the market that is not the driver of Nike’s profitability, namely women. I don’t see Lululemon as a direct competitor to Nike but they can be a source of leakage for their business, especially in non-footwear apparel.
Between rising commodity costs, further moves to improve the working conditions of their contracting factories and competition in areas where they are weaker, Nike’s current price may be fully valued in the near term until the China sub-plot of their story blossoms.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Lululemon Athletica. Motley Fool newsletter services recommend Lululemon Athletica and 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.
