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Naman Shukla
Naman Shukla
Articles (220) 

Is Nike Out of the Woods?

The company refocuses with Amazon deal and new alignment

July 03, 2017 | About:

Shares of Nike Inc. (NYSE:NKE) surged nearly 11% after reporting robust fiscal fourth-quarter 2017 results on June 30. The stock currently trades at roughly 24 times its forward earnings estimate, suggesting it is not an inexpensive purchase. Although the company’s revenue growth has slowed from escalating competition, its long-term growth prospects still look healthy.

For the fourth quarter, the sports apparel giant logged earnings per share of 60 cents, beating the estimate by 10 cents. At 60 cents per diluted share, these earnings signify a 22% surge from the year-ago period. On the other hand, its revenue came in at $8.68 billion, again surpassing the consensus by $40 million. That figure also represents a surge of 5.3% year over year.

With rising sales, the expense to generate those sales increases as well. Regardless, the company’s fourth-quarter results reveal an entirely different story as the selling and administrative expenses fell 4% to $2.7 billion. Also, the operating overhead expense declined 1% to $1.9 billion.

Despite higher prices, the company’s gross margins declined 180 basis points due to currency fluctuations. Net income was $1 billion, representing a 19% year-over-year increase.

Nike also reported solid full-year results. The company’s earnings per share escalated 16% to $2.51 while its revenue grew 6% to $34.4 billion. Although its gross margin declined 160 basis points to 44.6%, it will soon start improving with increasing direct-to-consumer sales.

Most significantly, the company signed a deal with Amazon.com Inc. (NASDAQ:AMZN) to sell certain products on its platform. Since brick-and-mortar retailers' sales have taken a hard hit due to continuously growing online sales, the deal will help Nike reach more consumers.

Before the deal, Nike products were sold on Amazon via third-party and unlicensed dealers, but this deal could help the company generate an additional $300 million to $500 million of revenue in the U.S.

Apart from this, the apparel giant also recently publicized its Consumer Direct Offense, a new alignment that enables it to better serve customers on a personal level. The company plans to revamp its business structure, which involves cutting 2% of its global workforce considering its progressively growing digital sales.

The new alignment aims to accelerate innovation as well as product creation by moving even closer to the customer via key cities like London, Beijing, Shanghai, New York, Tokyo, Mexico City, Los Angeles, Berlin, Paris, Seoul, Barcelona and Milan. Nike said these 12 key cities are anticipated to represent more than 80% of the company’s expected growth through 2020.

Nike is dividing its business into four geographical areas – North America; Europe, Middle East and Africa; Greater China; and Asia Pacific and Latin America – down from the previous six regions. The company's new alignment will be driven by its "Triple Double" strategy, which means two times innovation, two times speed as well as two times direct connections with customers.

Conclusion

Nike has faced multiple challenges over the past several years. The continuous rise of online shopping has resulted in the fall of many of its brick-and-mortar stores, which are a significant sales channel for the company.

On the other hand, the company is feeling the heat from other competitors in the sports apparel space. The effects are reflected in the recent slowdown in the company’s future orders.

Nike’s direct-to-consumer sales continue growing at a healthy rate. Moreover, the company’s new alignment and deal with Amazon will help it to grow its online sales at an even higher rate.  The company, however, should be very careful about making any radical shift to selling directly on Amazon as it generates approximately two-third of its revenue from its wholesale channel.

All in all, the company’s aggressive focus on digital sales and key markets appears to be a smart move, which could help it regain its lost momentum. Therefore, investors should continue to hold the stock as its future looks healthy.

Disclosure: I do not hold a position in the stocks mentioned in this article.


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