This week, Nike (NYSE:NKE) scored some big points with Wall Street late Monday. Following the company’s fiscal fourth-quarter report, the stock price spiked 5.7% to $87.21.
The company’s profit increased by 14% to $594 million, or $1.24 a share. This handily beat the consensus estimate of $1.17 a share.
It certainly helps that demand has been strong — revenue increased by 14% to $5.77 billion, beating the Wall Street consensus expectation of $5.54 billion.
It’s tough to argue with that performance. Yet the stock has been volatile this year.
Can Nike give shareholders some more gains? Here’s a look at the pros and cons:
Pros
Mega brand. What started as a shoe company has morphed into a global powerhouse, with products that now include apparel, equipment and accessories. And Nike continues to be the world’s largest athletic footwear and apparel operator.
Like Apple (Nasdaq:AAPL), Nike focuses primarily on marketing, design and product innovation. Other factors – such as manufacturing – are outsourced.
With its strong cash flows, Nike has purchased other brands like Converse, Hurley International and Umbro (a top firm in the soccer market).
Research and Development. Nike makes large investments in this category. As a result, the company is often an innovator in areas that improve performance and comfort. This requires a staff with deep expertise in biomechanics, engineering and exercise physiology.
Emerging markets. For some time, Nike has been making investments in markets like China, India and Brazil. These countries are undergoing strong increases in wealth – which should bode well for premium athletic wear.
Cons
Competition. Even with its scale, Nike has lots of pressure from rivals. The main ones include companies like Adidas and Puma. However, there are upstarts that are making inroads. An example is Lululemon Athletica (Nasdaq:LULU), which has built a strong franchise with yoga apparel.
The Tiger factor. A critical part of Nike’s brand has been its aggressive endorsement strategy. The power of this was demonstrated when the company signed Michael Jordan back in the late 1980s.
However, the strategy is extremely expensive and far from fool-proof. As seen in the example of Tiger Woods, it can potentially be problematic for the brand.
Costs. Nike has felt the pressure from the inflation in raw materials, such as cotton. Transportation costs have also been rising.
To deal with these problems, Nike has increased prices and cut its marketing budget. However, this could hurt the long-term growth of the company.
Verdict
Nike has an extremely versatile brand. While it is primarily focused on athletic footwear, the company’s products have also become pervasive for casual purposes. Plus, there should be some nice opportunities from its investments in the soccer market.
Yet the big opportunity is in foreign markets. This should be a nice source of growth for the next few years and Nike is nicely positioned to benefit from the trend.
In light of these factors, the pros outweigh the cons on the stock.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
