Should I Buy Nike? 3 Pros, 3 Cons

Right now, it's tough to see past Nike's problems in China

By Tom Taulli, InvestorPlace Writer & IPO Playbook Editor

Nike NYSE:NKENike (NYSE:NKE) reported a lackluster fiscal first quarter, with net income falling about 10% to $567 million, or $1.23 a share. Revenues, however, increased by 10% to $6.67 billion.

All in all, the year has been fairly tough for Nike. The shares are down about 1%. A big problem is the continued deterioration in the Chinese market as well as rising costs.

Wait — RIM Is Still Breathing!
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But despite all this, is the stock now a bargain? To see, let’s take a look at the pros and cons:


Global mega-brand. For decades, Nike has certainly lived up to its mission: “To bring inspiration and innovation to every athlete in the world.” But the company has been able to expand beyond the Nike brand, such as with Converse, Hurley and Jordan.

Besides being the world’s largest seller of athletic footwear and apparel, Nike also has large businesses in equipment and accessories. Its products are available in about 190 countries.

Innovation. Nike has also been on the cutting edge of sporting goods technology. For example, Nike+ FuelBand is a bracelet that tracks a person’s activities and helps him or her to achieve goals. Of course, it hooks into Apple’s (NASDAQ:AAPL) iPhone.

Nike also continues to create new technologies for its shoes, such as with Flyknit, which helps create ultralight performance and an adaptive fit.

North America. The nagging concern is that this market is saturated. But so far, it seems to be far from the case. In the quarter, Nike’s North America revenues spiked by 23%. The fact is the company keeps launching products that customers love and are willing to pay premium prices for.


Competition. It’s fierce. Nike must fight against tough rivals like Adidas and Puma. But as the company moves into new categories, such as performance apparel, it also faces new competition from players like Under Armour (NYSE:UA) and Lululemon (NASDAQ:LULU).

Costs. They continue to rise. For example, gross margins declined from 44.3% to 43.5% over the past year. Simply put, it’s getting more expensive to procure raw material. What’s more, labor costs continue to be a problem.

Global markets. As should be no surprise, Europe has been a drag. In the quarter, sales there fell by 5%.

But China is also a concern. While there was revenue growth of 8%, that was disappointing. Shouldn’t there be double-digit ramps?

True, part of the reason is that the Chinese economy is slowing down. But another factor could be that Nike’s products may not command much premium pricing power in the country.


For the long haul, the prospects for Nike are bright. Again, there’s probably lots of room for growth in North America as the company continues to offer cutting-edge products.

But in the near term, things could be shaky. The situation in China isn’t clear, and the drop-off could be prolonged. Thus, there could be some risks for investors. After all, NKE’s valuation isn’t cheap, coming to about 20 times earnings.

So, in light of all these factors, the cons outweigh the pros for now.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

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