Investors Are Still Trying To Catch This Stock From Behind

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

On a couple of occasions last year, I missed out on opportunities to establish positions in Nike (NYSE: NKE) at much cheaper levels. This was prior to the 2 for 1 stock split enacted on December 26. Since reaching a low of $89.65 (pre-split) per share on November 14, the stock has risen almost 20%. And if Nike’s Q2 report was any indication - shares are only going to go higher from here.

An Impressive Second Quarter

The company posted $6 billion in revenue, which was a 10% year-over-year improvement in constant currency. Earnings per share arrived 11% higher to $1.14 – topping the $1.05 per share posted a year ago and enough to beat Street estimates of $1 per share.

The company performed much better than expected. This is despite continued struggles in China where revenues dropped roughly 12%. And performance in apparels was much worse – shedding 16%. On the other hand, this dismal output was offset by strong North American sales, which soared 17% on a reported basis.

Nike also executed well in footwear and apparel as both advanced by 6%. Remarkably, equipment sales also surged up 24%. Unfortunately, this segment represents only 5% of Nike’s total revenue. Likewise, in geographical area such as Japan and Emerging Markets, the company continues to make meaningful progress.

Profitability was mixed however, with gross margins shedding 30 basis points year-over-year to 42.5%. Although declining margins would raise some red flags, but this was due to a shift in the mix of the company's revenues to lower margin products and businesses. That perspective appeased investors.

On the other hand, the company showed a slight improvement in operating margin, which was helped by the fact that growth in revenue lagged growth in operating income - interesting twist there. In other words, an unfavorable performance in sales actually helped the report.

Moving Forward

In constant currency, the company’s future orders increased 7%. This included double-digit growth in areas such as Central Europe, North America and Emerging markets. For full fiscal 2013, the company continues to expect low double-digit revenue growth on a constant currency basis. Will it be enough?

These numbers appear extremely conservative. And it speaks to the company’s cautious views and the overall health of the industry. Plus it does not help that a trendy name like Lululemon (NASDAQ: LULU) has recently set the bar pretty high with 37% jump in revenues.

It’s also a concern that Lululemon’s popularity in the U.S. has the company thinking of international expansion where Nike is now dominant. And if Lululemon can gain any traction abroad, this may thwart Nike’s efforts to mount a recovery in weak areas such as China. Surprisingly, it doesn’t appear as if Nike is concerned about this.

It is not so certain that Nike feels threatened by Lululemon at all. But Under Armour (NYSE: UA) is a legitimate threat and the company has been gaining traction and stealing market share – particularly with its trademark moisture-wicking materials. I think Nike would be wise to not take Under Armour for granted even if it feels Lululemon still has some catching up to do.

Bottom Line

During the quarter, the company announced the repurchase of a total of $4 million shares for almost $390 million. So the company continues to see the value in its own stock and this should serve as confirmation for why investors should do the same.

What’s more, for a company the size of Nike that is still growing revenues in the mid double-digit levels solidifies its status as the leader with a superior brand. This is despite the looming threats. At current levels, the shares are cheap and investors would do well to buy the stock now and stop waiting for a better entry – just do it. Sorry, I couldn’t pass that up.

rsaintvilus has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, 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!

blog comments powered by Disqus