During the three months ending Feb. 28, sports apparel giant Nike Inc. (NKE, Financial) reported net income of $1.1 billion and diluted earnings of 68 cents per share, outperforming comparative values from the prior-year quarter. High revenue growth and lower operating expenses drove the company’s earnings performance. As the company has consistent revenue and earnings growth, Nike has strong growth potential for 2017.
Brief summary of earnings report and earnings call
Nike reported strong revenue and earnings growth in its latest fiscal quarter, including a 24% increase in diluted earnings per share. On a constant-currency basis, total revenues increased 7%, driven by “double-digit growth in Western Europe, Greater China and the Emerging Markets.” Even though the company’s gross margin slightly contracted during the quarter, Nike decreased its SGA expenses by 3%, contributing to a 20% increase in net income.
During the next few months, Nike’s management team expects to double three core areas of its business strategy: innovation, speed and direct consumer interaction. CEO Mark Parker described the “Triple Double” strategy as a “relentless flow of innovation through performance and style, increasing speed throughout the business and creating more direct connections with consumers leveraging digital and membership.”
Parker further detailed the company’s business strategy in the earnings call, including the design and manufacturing of two new footwear products, AirMax and ZoomEx. Both products contain Nike’s new cushion platform that tailors to customers. The chairman also discussed “innovation beyond the court,” which consists of adding products that blend NBA with everyday life.
Nike also expects to accelerate its direct service interaction with its customers, including offering one-on-one customer service at Nike stores around the world. Customers can sign up for NIKE+ membership clubs and try on Nike’s innovative products.
Company has strong growth potential for 2017
Nike maintained a GuruFocus business predictability rank of four stars, suggesting consistent revenue and earnings growth over the past 10 years. The company also has strong financial strength and high profitability potential.
The company’s profit margins and returns are currently near a 10-year high: Nike’s operating margin and return on equity outperform 87% and 93% of global footwear and accessories companies. Additionally, the company’s ROE, operating margin and net margin have generally increased since 2009.
As the company offers strong growth potential, several gurus invested in Nike during the past six months. John Buckingham (Trades, Portfolio) and Robert Olstein (Trades, Portfolio) purchased 90,661 and 66,000 respective shares of Nike, which averaged $51.30 per share during fourth-quarter 2016. Nike currently trades at $58.01 per share, about $6.70 per share higher than the fourth-quarter average share price.
Disclosure: The author currently has no position in Nike but may initiate a position in the upcoming months.
Start a free 7-day trial of Premium Membership to GuruFocus.
