Nike Stealing the Olympic Show
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While they aren’t on the official list, Nike (NYSE: NKE) certainly was a sponsor at the London Olympics. For example, their "Find Your Greatness" campaign topped ViralVideoChart.com’s viewership leaving arch-rival Adidas (NASDAQOTH: ADDYY) "Take the Stage" campaign in the dust. The results haven’t even been close. Nike’s affiliation with Olympic athletes has been so strong that it has people associating them with the games at a 20x clip in social media conversations according to Brandwatch over Adidas. The Nike brand, one of the strongest in the world, is in no danger of losing relevance.
Nike had planned a whole new line of tech gear for the Olympics. For example, their Ultra-light shoes were worn by athletes from the U.S., U.K., Russia and Kenya. It had also introduced FlyKnit lightweight shoes, in which the top layer is made with a single piece of yarn. It also planned to sell Nike+ technology-equipped basketball and training shoes, which collects and sends data on the wearer's athletic performance to mobile apps, which they have been previously capacity constrained in sales for months after launch.
Walking Through the Numbers
Nike expects all of these new technologies to continue to put strains on their supply chain. On June 28th, it reported a 12% increase in revenue to $6.5 billion in its most recent quarter, the largest revenue quarter in its history. But net profit dropped by 8% due to declining margins and increased expenses. It was a rare miss by the world's largest athletic shoe and clothing company, which previously have beaten analyst expectations in 17 of the last 18 quarters. Full year results were excellent with revenues up 16% to $24.1 billion.
Two units, Cole Haan and Umbro, it announced the company would divest its stakes in, lost a total $43 million FY 2012. Nike has guided, however, even without those brands, it will achieve $28 to $30 billion in revenue by 2015, mainly on the back of their 18% YoY growth in China which rose to $667 million in the 4th quarter and$2.5 billion in FY 2012. Emerging markets like Mexico and Brazil are growing similarly.
Regardless, the market has punished the stock outperforming the SPDR S&P 500 ETF (NYSEMKT:SPY) through June by as much as 6% but now is trading down 1% year to date versus the S&P 500 which is up nearly 11%. Trading at a forward P/E of 18.6 in a deteriorating economy has investors rightly looking for value elsewhere.
The reasons that Nike cited for its performance included a higher effective tax rate, rising materials costs and an increase in marketing expenses for events the like the Olympics and soccer's European Championship, of which they were not an official sponsor either, focusing instead on stealth and guerilla marketing techniques and foregoing the, frankly, vulgar display of their logo everywhere enriching the IOC and the UEFA. It also had to bear a $24 million restructuring charge in Western Europe.
Running from Rising Costs
Nike’s second biggest business vertical, Running, reported 31% growth YoY. North America, Nike’s largest market, contributed 37% of total revenues and grew 17% over the previous year. However, as a leading indicator of a serious slow-down in the U.S., quarterly growth declined 13%, with an alarming 23% rise in inventory, which will put stress on first quarter FY 2013 margins as they will have to clear this via discount channels.
This worry over the second half of 2012 has been a recurring theme this earnings season with companies from Apple (NASDAQ: AAPL) guiding far lower margins to even McDonald’s (NYSE: MCD) citing slowing comps coupled with rising food costs weighing on their guidance as well. Rival Adidas reported excellent earnings for the quarter but have paid handsomely for the privilege; gaining Official Sponsor status for both the Olympics and the World Cup.
The latest surprise, or stealth move by Nike in the market, is their shifting production capacity. In 2010 Vietnam became their largest supplier, overtaking China, with 37% of their products being produced there. That has since risen to 41% as of July. These shifts are completely consistent with Nike’s history having moved all around ASEAN over the past 30 years. One would have to expect them to shutter other plants and move them to Cambodia next. It would not surprise me to see them be among the first factory-oriented U.S. businesses to invest in Myanmar and Laos in the coming years as well.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and McDonald's. Motley Fool newsletter services recommend Apple, McDonald's, 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.