The last twelve months haven’t been particularly kind to Nike Inc (NYSE:NKE) shareholders. Nike stock was red hot from early 2014 through the third quarter of 2015, but since the beginning of November of last year, NKE stock has given up 20% of its value.
One would think such a pullback would reflect a clear deterioration of revenue, partially stemming from broad economic malaise, partially the result of the ongoing growth of rival Under Armour Inc (NYSE:UA), and even partially in response the impact of Sport’s Authority’s bankruptcy.
As it turns out, however, fears about NKE’s future have been mostly unmerited. Sales as well as income have grown (year-over-year) in each of the last four quarters.
Better still, profit margins have also widened in each of those quarters, indicating the company is far from struggling. Perhaps it’s time to hold your nose and dive into Nike stock before the rest of the market figures out how great this iconic company still is … if you can just turn a blind eye to the rich trailing price-to-earnings ratio of 23 NKE stock is still sporting.
Good Growth for NKE Stock
Just for complete perspective, the $33 billion worth of business Nike has done over the course of the last four reported quarters is only 6.5% better than the $31 billion worth of revenue the company generated over the course of the four quarters before that. Income of $2.22 per share for the last twelve months is 12% stronger than the profit of $1.98 per share of Nike stock earned during the twelve month span before that.
Those aren’t superb growth numbers. They’re better than the market’s average growth for that timeframe, however, and they’re reasonable given the sheer size of NKE.
Yet, it should be noted a couple of red flags did finally start to wave last quarter.
The most notable of those red flags was the 11% year-over-year buildup of inventory levels. Higher levels of on-hand stock potentially means deeper discounts later, and gross margins were indeed crimped.
A closer look at the detailed data, though, reveals the inventory level surge was more in value than units; the number of different pieces in inventory only grew 3%. The increase reflects higher average retail prices for those goods, which ultimately sets up wider per-item margins.
Said another way, Nike knows what it’s doing (and much of that inventory buildup is aimed at meeting a soaring e-commerce business).
Rethinking Everything
It’s not just a move towards higher-end goods and online sales that’s part of the evolution Nike has been pulling itself through, however. It’s rethinking how it designs products, and enters new categories.
Case in point: Although it has been discussed in passing for years, it’s only been within the past few months the company’s manufacturing revolution — or “ManRev” — has taken a clear public shape. Among some of the more interesting end-goals are zero waste from its contracted manufacturers. It’s also now using 3D printing technologies for production, and that’s only going to expand now that it’s partnered up with Flex Ltd (NASDAQ:FLEX).
Flex is a high-tech manufacturer of all sorts of goods, and the “partnership with Flex advances this work [the manufacturing revolutions] by bringing new capabilities and expertise outside of the existing footwear industry to create future systems for making product and to catalyze innovation across NIKE’s global supply chain.”
The partnership is expected get products from design to store shelves faster than current methods, and improve performance.
Even more recently, NKE has waded deeper in the wearable waters, teaming up with Apple Inc. (NASDAQ:AAPL) to create the Apple Nike+ smartwatch. It’s a device that’s admittedly not too unlike fitness trackers already on the market, but the Nike technology is community oriented. It also has the potent Nike brand behind it.
Bottom Line for Nike Stock
Granted, none of the product and operational initiatives NKE has taken on will boost the value of Nike stock directly, or immediately. NKE stock is a “long game” kind of stock though. More than that, it’s a company that has defied the market’s apparent expectations, continuing the growth of the top and bottom line, even as the stock lost ground for a year.
Besides, it’s not as if CEO Mark Parker isn’t thinking along those same terms.
Earlier this year, Parker laid out a goal of growing the company’s top line to $50 billion per year by 2020. That’s a 51% improvement on Nike’s total top line for the last four quarters, and as such was a bit laughable … at the time. Now, not so much. Parker isn’t just making incremental improvements. He’s driving paradigm shifts, and they’re working even when many think they shouldn’t — six of the nine analyst actions since May were downgrades.
It’s increasingly looking like that tide could turn soon, along with Nike stock. NKE stock is still not cheap, but sometimes you have to pay for quality.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
