It’s become fashionable to say that Nike Inc. (NYSE:NKE) is past its prime as upstarts and more fashion-conscious brands continue to take market share. But Nike stock is still a winner.
It might not become apparent in the immediate aftermath of NKE’s after-the-close earnings report, but the athletic footwear and apparel behemoth has only stumbled. It hasn’t fallen out of the race.
The bear case on Nike stock is well known. Rivals such as Under Armour Inc (NYSE:UA), adidas AG (ADR) (OTCMKTS:ADDYY) and Puma SE NPV (OTCMKTS:PMMAF) are stealing market share, especially in NKE’s most important market of North America. Although performance matters, fashion is becoming increasingly important, and that has been giving an edge to Nike’s rivals, the critics say.
Maybe.
But a number of issues that Nike has been struggling with in quarters past look to have run their course. New styles and lower price points in popular collections like LeBron James and Kevin Durant appear to have been well-received.
Consider that Foot Locker, Inc. (NYSE:FL) and Dicks Sporting Goods Inc (NYSE:DKS) are major customers. Indeed, more than 70% of FL’s merchandise comes from NKE. Both chains have been delivering robust growth in all-important same-store sales. Dick’s expected same-store sales to fall anywhere from 1% and 4% in the most recent quarter. Instead they rose 2.8%. Foot Locker, meanwhile, posted a rise of 4.7%, beating the 3.9% analysts polled by Thomson Reuters had expected.
In addition to picking up the pace on the North American consumer front, NKE is cutting costs. Last month, Nike inked a supply-chain partnership with private-equity firm Apollo Global Management. That should address retailers’ concerns about product delays, as well as cut down on expenses.
Don’t forget, the market loves cost cuts.
Nike Stock Will Come Back
NKE is off 13% for the year-to-date, and it’s probably going to take more than one quarter to revive sentiment on the name. That said, the quarterly report should once again deliver a positive surprise on the bottom line. Nike should make its numbers on the top line, too.
Nike has exceeded analysts’ average earnings estimates for eight straight quarters. Fair warning, though: At the same time, it has come up short of revenue forecast for three consecutive quarters. If the brisk business reported by major chains like Dick’s and Foot Locker are borne out, though, NKE should easily hurdle analysts’ lowball mark for sales.
Foreign exchange will continue to weigh in Nike’s top line, but that’s true for every U.S. multinational as long as the dollar retains its strength. Regardless, NKE is delivering enviable revenue growth for such a massive company in this environment.
Analysts expect revenue to rise 5.4% in the most recent quarter to $8.87 billion. That compares quite favorably to the S&P 500, which saw revenue fall during the most recent quarter.
Lastly, Nike stock is a fashion name and fashion is fickle. Its ebbs and flows are just part of the business cycle. NKE is a company with world-class brand equity. It has stumbled — and come back — before.
With reasonably priced shares, Nike stock is an attractive bet no matter what quibbles the market has with its earnings.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
