Nike, Inc. (NKE, Financial) reported earnings results that simply blew away what Wall Street analysts had anticipated. Investors responded to the release by driving the share price higher by nearly 16% on the trading day. I was one of them - I purchased additional shares of Nike at $154.08 on Friday.
In this article, we will examine the company's recent earnings and why I added to my position even as the stock now trades close to its all-time high.
Earnings highlights
Nike reported fourth-quarter and full fiscal year 2021 results on June 25. Revenue for the quarter grew 96% year over year to $12.3 billion, beating estimates by $1.3 billion. The company had net income of $1.5 billion, or 93 cents per share, which compared favorably to a loss of $790 million, or a loss of 51 cents per share, in the prior-year quarter. Earnings per share came in 42 cents better than expected.
For the fiscal year, revenue increased 19% to $44.5 billion. Net income of $5.7 billion and earnings per share of $3.56 more than doubled from the prior year. Earnings per share also notched a new high for Nike.
Growth was found in almost every aspect of Nike’s business. The Nike Brand surged 88% to $11.8 billion as the company’s wholesale business and Nike Direct both displayed incredible growth rates. The company’s wholesale business has doubled since fiscal year 2019. Converse revenues spiked 95% to $596 million.
By region, quarterly revenues for North America were up 141% to a record $5.4 billion as footwear, apparel and equipment all more than doubled. Greater China improved 17% to $1.9 billion. Asia Pacific and Latin America grew 82% to $1.5 billion due to demand in apparel and footwear. Europe, Middle East and Africa was higher by 124% to just under $3 billion.
For the fiscal year, all regions were up at least 19% except for Asia Pacific and Latin America, which grew 6%. North America was higher by 19%, Greater China grew 24% and Europe, Middle East and Africa was up 23%
Gross margins expanded 850 basis points to 45.8% for the quarter and 140 basis points to 44.8% for the fiscal year. Dating back to pre-pandemic times, gross margins improved 30 basis points and 110 basis points compared to the fourth-quarter and fiscal year of 2019, respectively.
Nike’s balance sheet continues to be in excellent position. Total assets were $37.7 billion, with current assets of $26.3 billion. Cash and equivalents of $13.5 billion was $4.7 billion above the prior year’s total. Inventories decreased 7% to $6.9 billion due to heightened customer demand. Total liabilities were nearly $25 billion, with current liabilities of $9.7 billion. Long-term debt stood at $9.4 billion, but just $2 million of debt matures within the next year.
Takeaways
It is true that the most recent quarter’s numbers were going up against the company’s weakest quarter last year as the pandemic caused the closing of many store locations worldwide, but results showed growth compared to both the fourth-quarter of fiscal year 2019 and on a sequential basis as well. Compared to the third quarter of fiscal year 2020, revenue grew 19%, net income improved 4.2% and earnings per share was up 3.3%. In comparison to the fourth quarter of fiscal year 2019, revenue was up 21%, net income was higher by 52% and earnings per share soared 50%.
North America returned to growth in a big way as well during the fourth quarter, a positive sign following a reopening of the vast majority of stores. Fears over a possible boycott in China also seemed to have dissipated, as sales for the region were up a high double-digit percentage.
Nike’s improvement in recent years shows up in the gross margin expansion compared to more normalized conditions, showing that the company isn’t just taking advantage of soft comparable figures.
The company’s investments in its business, specifically Nike Direct, are driving a significant portion of growth. Nike Direct revenue grew 32% for the fiscal year, which was above the company’s total revenue growth rate. Growth above the overall rate has been the story for Nike Direct since the company initiated the business.
Some might argue that eventually this growth in these areas will slow, but Nike Direct has more than tripled since fiscal year 2014, and results in the most recent quarter show that gains aren’t slowing down all that much.
The company’s digital business continues to shine and has doubled to $9 billion in just two years. Digital benefited from increased member engagement, higher average sales orders and an uptick in buying frequency.
Valuation analysis
Given all of the strength seen in the quarter, the soaring share price appears warranted, in my opinion. That said, the stock was already pretty expensive beforehand and is now even more so.
Analysts are expecting earnings per share of $4.29 for fiscal year 2022, which would be a 20.5% improvement from the prior year. This level of growth on top of last year’s result would be very impressive.
But growth comes at a cost. With the stock trading at $154, Nike has a forward price-earnings ratio of 35.9. Excluding last year, Nike has had an average price-earnings ratio of approximately 24 since 2011.
Shares can also be considered expensive using GuruFocus’ GF Value chart:
Nike has a GF Value of $100.33, giving the stock a price-to-GF-Value ratio of 1.53. Nike has rarely traded with this type of premium to its intrinsic value. Shares are rated as significantly overvalued by GuruFocus.
Why I added more Nike
So, why did I purchase shares of Nike on a double-digit price spike? Some of it has to do with the company massively outperforming analysts’ estimates. The company also posted record results in North America and had a very productive showing in China, which will likely be Nike’s most important growth market going forward. Gross margins improved even from 2019 levels.
Nike also appears to have weathered the Covid-19 storm fairly well. Besides the fourth quarter of fiscal 2020, revenue was essentially flat or higher during the other quarters during the worst of the pandemic. This stands as a sign of business strength to me as the company leveraged its direct and digital businesses even as stores faced intermittent closings around the world. The most recent quarter showed how much of a tailwind those channels can be when economic conditions improve.
Another factor in my decision was the company’s shareholder returns. Nike repurchased $1.6 billion of shares during the year and still has $10 billion, or 4.1% of its market cap, remaining on its share repurchase authorization. Nike has also increased its dividend for the past 19 years. The dividend was raised 12.2% this past November, which is in line with the 10-year compound annual growth rate of 12%.
The last, and perhaps most important, aspect of my rationale for adding more Nike was the company’s updated guidance through fiscal year 2025.
Source: Nike's Financial Outlook
The company expects to grow sales in a high single-digit to low double-digit range through fiscal year 2025. For context, Nike has a compound annual growth rate of 6% for revenue since 2011, so the company expects its business to remain operating at a higher than usual rate.
Earnings per share are expected to grow with at least a mid-teen percentage. Again, this is above the company’s long-term track record. Using the 10-year period that predates the Covid-19 pandemic, Nike’s earnings per share grew at a rate of 9.9% annually.
In management’s view, Nike is positioned to outperform its long-term track records on both the top and bottom-lines over the next few years. This is due to a combination of higher growth rates from its direct and digital businesses as well as improvements in key markets. The impact of store closings during the worst of the pandemic hasn’t slowed down the company’s outlook for the future.
In fact, it can be argued that Nike has emerged stronger. If this wasn’t the case, then the outlook for the next four fiscal years would have remained the same or lowered. Instead, nearly every metric that the company has offered guidance for was raised and nearly all expected growth rates are above long-term trends.
In conclusion, there were so many positives related to Nike’s business performance, outlook and shareholder returns, and in my view, all of these factors combined justified paying a premium price for the premium company.
Author disclosure: the author maintains a long position in Nike.
