The Best Is Yet to Come for Nike Inc Stock

Global athletic retail giant Nike Inc (NYSE:NKE) reported second-quarter numbers last week, and they were pretty unexciting for NKE stock investors.

It was a headline double beat with earnings coming in 6 cents above expectations and revenues coming in $150 million above expectations. But the underlying numbers weren’t great.

Revenues inched up just 3% in constant currency. That is better than last quarter’s 2% growth rate, but it continues a broader trend of slowing revenue growth (up 8% last year and up 12% the year before that). The North American business continues to be weak, and it is actually getting weaker (down 5% this quarter versus down 3% in the first quarter and up 3% last year). The guide doesn’t point to much strength for NKE stock.

Meanwhile, gross margins continue to be under pressure. The headwinds dragging on gross margin — unfavorable exchange rates and higher per-unit product — are expected to persist. Gross margins are expected to fall 50-100 basis points this year. Operating expenses are swelling, with SG&A growth (10%) outpacing revenue growth (5%). All in all, earnings-per-share fell 8% year-over-year.

The big picture for NKE stock? Second-quarter numbers weren’t great.

And yet Nike stock, which had rallied about 30% in the months leading up to the report, hardly budged. It dropped a bit the day after the report, but it has rebounded since then to trade just below pre-earnings levels.

This illustrates a unique resilience in NKE stock. This resilience tells me that when it comes to NKE stock, investors are ignoring quarter-to-quarter noise and are instead focusing on the long-term game with Nike.

Fortunately for Nike stock investors, that long-term game is promising.

Nike Is Successfully Fighting Against Adidas

Lets look at the big picture here. Without question, Nike is the dominant player in athletic retail. That has been the case for several years.

Recently, though, Nike’s dominance has been challenged by a resurgent adidas AG (ADR) (OTCMKTS:ADDYY). Retro came back in style over the past several years, and adidas is the face of athletic retro. Consequently, adidas ate dramatic market share, especially in North America, where Nike’s dominance started to recede.

But signs are pointing to this huge adidas run coming to a close soon.

Adidas isn’t dead. Far from it. The company actually ran a really great ad during the NBA’s Christmas Day games (which drew high ratings). Just watch the ad, and you will know that adidas will remain relevant in the athletic world by meshing sports with other art mediums (fashion, music, etc).

But athletic apparel retailer Foot Locker, Inc. (NYSE:FL) noted on its most recent earnings call that for the first time in several quarters, adidas styles didn’t sell as well as expected. Meanwhile, FL said that Nike is on the “verge of a major breakthrough in terms of product innovation.”

Google search interest trends seem to support this. For years, adidas has narrowed the search interest gap with Nike. But it looks that run is over. Nike is actually beginning to once again widen the search interest gap.

What is happening under the hood? NKE is successfully fighting back against adidas through streamlining investments into key global cultural centers, accelerating product innovation, and pushing a direct sales strategy. As Nike continues to pour resources into its new Consumer Direct Offense initiative, the company should be able to recapture lost market share from adidas.

Nike is, after all, the bigger player with more resources, more reach and a more robust athlete portfolio.

Watch Out for Nike Basketball

One part of Nike’s business, which I’m particularly excited about over the next several years is Nike Basketball.

Nike has long been king of the highly lucrative basketball sneaker market. But the recent success of James Harden with adidas and Stephen Curry with Under Armour Inc (NYSE:UAA) has eroded Nike’s dominance.

That won’t last long.

Nike’s athlete portfolio includes essentially every young and rising talent in the NBA (see here). That means that Nike has a clear, multi-year pathway to launching new signature shoes with new headline NBA players and extending its dominance in the basketball market.

This is exactly what Nike is doing. Next year, Nike plans to release signature shoes for the NBA’s reigning MVP Russell Westbrook and young superstar Giannis Antetokounmpo. Both shoes should do well, but the Westbrook shoe should do particularly well given that guards’ shoes usually sell well and that Westbrook is already somewhat of a fashion icon in the sports world.

Bottom Line on NKE Stock

Despite middle-of-the-road numbers, NKE stock didn’t get punished after a 30%-plus rally into the second-quarter print.

That is because the best is yet to come for Nike stock. Near-term price action may be shaky, but this stock will head materially higher in the long-term.

As of this writing, Luke Lango was long NKE. 

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