Nike (NKE, Financial) has been trading sideways for quite some time now. In fact, over the last ten months, Nike has lost about 15% value and has failed to test its all-time highs. Investors should use the pullback to add to their positions, as Nike’s future prospects look good.
Ditching Golf Segment a Good Decision
In the case of Nike, the Golf segment is the only segment that is performing poorly, as the company’s sales dropped 8% to $706 million, which trailed a 2% decline the year before. Moreover, golf was also the only segment to lose sales on a constant currency basis the previous year and has turned into the company’s lowest revenue contributor.
Throughout the past two decades, participation in golf has been on a sluggish and firm decline. Participation amid millennials has been mostly weak, as many have congregated to cities where golf is less handy. Furthermore, golf takes too much time and involves lot of money.
On the other hand, the company’s foremost rival, Adidas (ADS, Financial), detailed that it would sell its golf brand, TaylorMade, which comprises the Ashworth as well as Adams brands. Adidas believes that it is the time to emphasize on its core strength in the athletic footwear and apparel market.
Apart from this, Nike’s other significant rival, Under Armour’s (UA, Financial) golf footwear and apparel have acquired a strong boost from Jordan Spieth, but the company also detailed that it has no curiosity in manufacturing golf equipment at this time.
Given that the market is not lucrative, doing away with it will benefit Nike in the short as well as long run.
Tax Rate
One significant reason for Nike’s uniform fourth quarter earnings, but impressive full year growth, was the company’s inconsistent tax rate. The company’s tax rate is exaggerated by the percentage of sales from foreign markets, which usually have a lower tax bill and other cash handling actions, like deporting foreign sales.
In the most recent quarter, the company’s effective tax rate was more than 21%, equated to 17.8% in the fourth quarter of the previous year. This was mainly due to adjustments made in 2015 to decrease tax expenses acknowledged during those quarters of previous year intercompany transactions.
However, the company’s tax rate could be one of the most significant things to keep an eye next year.
Conclusion
Nike has been stagnant over the last few months. However, investors should use this weakness to accumulate the stock. Due to the reasons mentioned above, Nike should perform better in the short as well as the long term.
Disclosure: I don't hold a position in any of the stocks mentioned in the article.
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