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Why Nike Is a Good Buy

June 08, 2014 | About:
FinanceGuru

FinanceGuru

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Footwear retailer Nike (NKE) seems to be immune to the economic environment in the U.S. and customers' unwillingness to spend. After earnings beats in each quarter over the last one year, Nike once again showed its power to stir customer demand when it reported its second-quarter results recently. The numbers were ahead of the Street's estimates, sending its stock higher. The same could continue going forward as Nike hasn't run out of steam yet.

Numbers in detail

Revenue grew 8% to $6.4 billion over last year as customers went gaga over the retailer's products. Nike largely benefited from an increase in product prices and growing interest in its products. The company's efforts in product innovation have been instrumental in driving its growth. Nike+ FuelBand and Fuel Band SE in footwear and Dri-FIT knit and Aeroloft in apparel were among the new introductions which attracted customers.

Nike's focus on bringing in new products and marketing them adequately led to growth across all products and geographical segments. Both the Nike brand and the Converse segment grew 7% and 14%, respectively. Geographically, sales from North America and China surged 9% and 8% to $2.8 billion and $629 million, respectively. In fact, revenue from Europe also went north with the Western and Eastern parts growing by 18% and 17%, respectively.

Earnings, too, increased over last year to $537 million from $384 million because of an increase in selling price and a decrease in input costs. This also helped in expanding the company's gross margins by 140 basis points. Nike's focus on higher margin products was one the key drivers of margin expansion.

A few hiccups

Nike faces stiff competition from other players such as Adidas (ADDYY) and Under Armour (UA) . In the global sporting goods market, Nike commands 14.6% and Adidas has a share of 11.4%. Also, both the players will be competing in the FIFA World Cup 2014 as each of them takes a number of initiatives to outpace the other. Similar to Nike, Adidas has also been pretty active on the innovation front. In addition to NBA's short sleeved jerseys, Adidas has introduced many new products such as Springblades and Energy Boost, which use new technology to deliver more comfort to runners.

Under Armour, too, has been making new innovations such as ColdGear infrared technology, Charged Cotton, and Storm that drove its revenue 26% higher in the last quarter. However, Under Armour derives most of its revenue from apparel sales, with women's apparel being one of the key drivers.

Under Armour's efforts in new products, new designs for its apparels, and expansion in the international markets have been quite helpful in its growth. Moreover, the retailer plans to expand its business, especially women's apparel by aggressively spending on marketing its new products . Therefore, it will be interesting to see how these players will fare in the future with each one trying to outpace the other.

Looking ahead

Nike has a bright future as it plans to continue to focus on its marketing strategies in order to promote its new products. The company plans to establish new concepts at its DTC stores in order to attract more customers. For example, it has refined its merchandising and changed its fixtures in collaboration with its wholesale partners. The footwear retailer is also expanding its online reach by launching websites in various regions since its e-commerce segment grew 33% during the quarter. It recently launched its website in Japan which, according to the company's CEO Mark Parker, is the third largest e-commerce market.

With the success of training clubs for women, Nike plans to expand the number of NTC doors to more than 40 by the end of the year. It currently has 20 doors which were launched in August 2013. Also, it has been focusing more on higher margin products, which should continue to expand the footwear retailer's margins. In fact, the retailer's CEO announced its plans to introduce more of premium products such as $160 Flyknit running shoes in order to expand its margins. This is mainly due to the success of high-end products such as Hypervenom soccer cleats.

Also, Nike is well equipped for the upcoming sports events in 2014 such as the soccer World Cup and the Winter Olympics. It has been increasing its advertising spend by sponsoring such events in order to increase its revenue. In fact, the retailer has launched uniforms for the French and the Brazilian World Cup teams which use a new technology. These uniforms are called "kits" and are 16% lighter than the uniforms made for the Euro Championships in 2012.

Additionally, the company reported an increase of 12% in its future orders, which highlights the increase in demand for the upcoming quarter. This was accompanied with a bright outlook, highlighting the growth prospects of Nike.

Thetakeaway

Nike has been a good investment in the last year. Its innovative efforts have been the most important driver of revenue. Also, its promotional efforts and concentration on higher margin products have been helpful. Moreover, a bright guidance, an increase in future orders, and 2014 sports events should make Nike even more rewarding. Hence, this footwear retailer can be one of the best stocks in your portfolio.


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