Nike Inc’s (NKE) unmatched popularity on the grounds makes it every sportsman’s favorite as a result of which it has garnered an image of reliability as a sports brand. The Swoosh logo has long been synonymous with sportspeople all over the globe.
Moreover, its tradition of beating stiff competition, makes it the no. 1 athletic footwear choice.
With such a performance oriented background, the company recently surprised the investor community, when it underperformed the Dow Jones Industrial Average in 2016. In the past year, the company’s shares declined 17.38% to close at $50.83 on Dec 30, 2016, against the Dow Jones Industrial Average’s growth of 19.03% to $19,762.60.
This makes NIKE the worst performing stock among the 30 Dow components.
The market ascertains that this paradoxical decline was primarily because of the collapse of NIKE’s basketball shoes, which failed on grounds of its exorbitant price.
Further, the waning ‘athleisure’ trend due to a shift in consumers’ tastes and preferences toward more fashionable assortments played foul.
The impact of these factors reflected well in the company’s top-line performance in the third and fourth quarters of fiscal 2016.
Moreover, NIKE’s sluggish future orders throughout 2016 remained a drag on its performance. Additionally, foreign currency headwinds continued to hurt its results as international sales continue to become a bigger part of its revenue stream.
What Are the Chances of a Rebound in 2017?
Though NIKE’s recent performance has been under pressure and a cause of concern, we believe this a temporary phase and the company has the potential return with a renewed fervor in calendar 2017. The company cleared dark clouds with regard to the performance of its basketball shoes category in the second quarter of fiscal 2017 results that were reported on Dec 20.
The company revealed that its basketball shoes category is picking up and ready for a recovery in the second half of fiscal 2017. Notably, the second quarter of fiscal 2017 sales growth came on the back of eCommerce growth as well as a revival in its basketball shoes category.
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Further, Nike’s growth potential is evident from the top line beat in the last two quarters. This is attributable to its constant innovations, efficient supply chain, a great sync between digital and physical worlds and strategic investments.
Furthermore, the company has taken the necessary measures to remove investors concerns regarding the future orders. It has decided upon the discontinuation of reporting future orders as a stand-alone metric in its earnings release, effective the second quarter of fiscal 2017.
Moreover, it has been enlightening investors of the fact that this metric no longer holds relevance due to the growth of eCommerce and the non-inclusion of sales of its Converse brand, NIKE Factory Stores and shorter lead-time businesses in this metric.
That said, investors would argue that one major concern still lingers on the Swoosh stock, the adverse impact of foreign currency. A fact we completely agree with but the catch here is that the solid demand for the NIKE brand and the strong eCommerce growth are enough to offset this impact. The company’s recent sales performance is a testimony to this fact.
NIKE’s sales in the second quarter of fiscal 2017 grew 8% on a currency-neutral basis and 6% on a reported basis, despite the lingering currency headwinds.
Further, the company’s high single-digit revenue growth guidance for fiscal 2017, along with high single-digit to low double-digit currency-neutral revenue growth, speaks a lot about its growth appetite.
Conclusion: NKE Stock Should Recover for 2017
While the collapse in the NIKE stock in 2016 is disheartening, we cannot ignore the uptrend in the stock performance at the end of 2016. We believe NIKE is steering its ship in the right direction with focus on innovations, customer demand, market share growth and strategic investments to boost shareholder values. Further, more caution in tackling competition should help the stock rebound this year.
Though the debate over the company’s stock performance will continue endlessly, our Zacks Rank #3 (Hold) suggests the stock is a must hold right now.
Stock to Consider
A better-ranked stock in the same industry is Francesca’s Holdings Corp (FRAN), sporting Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
With a long-term EPS growth rate of 13.8%, Francesca’s Holdings has outperformed earnings estimates consistently in the last five quarters, with an average four-quarter beat of nearly 26.6%. Further, estimates for the current fiscal have witnessed an uptrend in the last 30 days.
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