Nike (NKE, Financial) recently came off a quarterly earnings miss in terms of revenue, but it's worth noting that its EPS still beat expectations. While 2016 was a bad year for Nike investors, there are reasons to believe that 2017 could see the stock continue its upward march. Here are five reasons why we are bullish on Nike shares:
1. Next-day rebound
Usually when a company misses earnings estimates, the stock decline goes on for more than a day or perhaps even a week. This wasn't the case for Nike as investors took the post-earnings dip as a chance to increase their holdings at cheaper prices. Bargain hunters were able to push the stock back up by 2.7% the following day.
This underscores the level of fundamental support that investors have for this company, particularly with the stock trading above the psychological support level of $50.
The company's latest EPS growth is partially due to a low tax rate of 13.8% since more than half of Nike's revenue is in lower-taxed regions. Investors know this, and it's something that could keep proving beneficial for the company's bottom line.
2. Stable international sales
Even with a dip in sales in some parts of the world, Nike is likely to stay afloat since its products are sold worldwide, and it could benefit from a pickup in purchases in other regions. In particular, the company is expanding its reach in China and Western Europe with the former accounting for nearly 15% in sales gains in the latest quarter and the latter reporting its 14th consecutive quarter of double-digit growth.
3. Potential increase in margins
One point of concern for Nike investors is declining margins, spurred by higher input costs and rising inventory. However, management has clarified that it is already addressing this issue, with its short-term plan involving cutting 25% of its styles that aren't contributing much to sales. In other words, it will focus its efforts on 75% of the products that make up 99% of the company's sales.
In the longer run, Nike is investing in better product materials that could lead to wider cost reduction. One of its plans is to focus on advanced automation, local sourcing and technologies like 3D printing. Not only will this trim input costs, it could also allow the company to save on transportation and other operational expenses.
4. Athleisure trend
It looks like the fitness trend is here to stay as it complements the rise in health consciousness and nutritional awareness. Some brokers and analysts like to play up this trend, sometimes more than necessary, but the fact remains that Nike is on top of this particular game. Even with competition from cheaper brands, Nike continues to produce gear that is of top quality and invests in athletes and celebrity endorsers better than any of its peers.
Nike continues to invest in innovation and pursues various marketing strategies to reach different niches. For instance its "Breaking 2" project has gained a lot of popularity as it helped three runners be the first to break the two-hour marathon record with the use of innovative running gear.
5. 'Triple Double' initiative
Last but certainly not least is Nike's plan to double its rate of innovation, speed to market and direct-to-consumer initiatives. It is set to launch additions to its Air Max shoes and is leveraging its FlyEase and HyperAdapt technologies.
Personalization through NikeID and accounts with apps like Nike Run or Nike Training Club enhances the consumer experience and creates brand loyalty. It also helps create hype for future releases by keeping customers in the loop. It could be a slow climb for Nike stock in the short term, but the underlying uptrend remains there as it continues to strengthen its foundations.
Disclosure: No positions in any stocks mentioned.
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