Nike’s (NKE, Financial) shares are down by nearly 11% since the start of the year, a decline that started after the company reached its all-time high of $68.20 in November last year. The stocks are edging lower and lower despite the fact that the company reported 8% revenue growth during the third quarter and 6% during the fourth quarter. So is there something that is happening at Nike beyond what we can see on the outside? Let’s take an in-depth look at fiscal year 2016 numbers to see what is happening beneath the surface.
Has Revenue Growth Really Slowed?
The one crucial number that stands out is their quarterly revenue growth this year compared to last year. From the above 10% range Nike grew during last year, they have come down to the less than 8% range this year.
Nike’s revenues grew 10.08% during fiscal year 2015, while growth shrank to 5.80% during fiscal year 2016. Not really a bad number considering the fact that the footwear and apparel maker earns nearly $32 billion per year. Not many companies of this size and scale can boast that kind of growth. But, the problem is Nike said in October 2015 that the company wants to reach $50 billion in revenues by the end of 2020.
“During an investor meeting at its world headquarters near Beaverton, Oregon, the Company announced a revenue target of $50 billion by the end of fiscal year 2020. Additionally the Company shared its long-term financial model of high single-digit to low double-digit revenue growth, mid-teens earnings per share growth and expanding returns on invested capital.”
- NIKE
Could that be the real problem?
Nike’s total sales in 2015 was $30.601 billion, to get to $50 billion by 2020, the company needs to grow at a tad better than 10% year over year. Every year that the company grows slower than that, it makes the target that much harder to achieve. With fiscal year 2016 sales coming in at $32.376 billion, they now need to consistently hit more than 11% revenue growth from here to get to that target. The current slowdown towards their target is that the company failed to excite the market.
The Real Culprit
From an absolute revenue growth standpoint, total Nike revenues grew by 6% during fiscal year 2016, but a lot of damage was done due to currency headwinds. Excluding currency changes, Nike’s revenues actually grew by 12% this year and 14% last year, a bit more than their target growth rate to get to $50 billion by 2020.
Andy Campion, CFO, at the Nike Q4 Earnings Call:
“For fiscal year 2017 we expect reported revenue to grow at a high single digit rate reflecting high single digit to low double digit growth on a currency neutral basis. Our rate of reported revenue growth will be more heavily impacted by FX headwinds in the first half of fiscal year 2017 primarily due to developing market currencies. For Q1, we expect mid single digit reported revenue growth, roughly three points below our reported rate of futures growth.“
With Nike’s earnings spread out fairly evenly all over the globe, the footwear leader of the world lies extremely exposed to currency headwinds in Europe, China and emerging markets. With some parts of the world economy pulling ahead and some parts slowing down, the overall health of currency markets in the next four years is anybody’s guess, but it is safe to bet that the dollar will stay strong during that period.
My Take
When you look at Nike’s absolute growth numbers, the company might seem to be a on a declining path with revenue growth slowing down. But the reality is that the company is actually doing a little better than what it wanted to achieve. Unfortunately, the $50 billion in annual sales by 2020 may not happen if currency markets remain this volatile, but for a long-term investor that should not be an issue as long as Nike continues to keep expanding its reach.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
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