Shares of Nike Inc. (NKE, Financial), the world’s largest sportswear maker, fell 4% after the company posted first-quarter results on Wednesday, beating earnings and revenue estimates.
The stock suffered as a result of the company not increasing its revenue guidance, despite getting a boost from a recent advertising campaign.
The controversial ad campaign featuring Colin Kaepernick led to multiple people burning Nike products in protest, as the NFL player was among those who kneeled during the national anthem to protest police brutality. In addition, shares plunged after the ad was released. Despite the backlash, Nike said it benefited from an uptick in traffic and customer engagement.
Nike’s revenues jumped 10% to $9.95 billion in the fiscal first quarter, beating the Street’s consensus of $9.85 billion. Moreover, the company posted earnings of 67 cents a share, beating estimates of 63 cents. While the earnings seem to be more than satisfactory, the markets gave Nike a tough time, which some market pundits believe is overblown.
"We're off to an even stronger start to the fiscal year than we initially expected," Chief Financial Officer Andrew Campion told analysts on a conference call. "Our currency-neutral growth and profitability is exceeding our expectations.”
While the gross margin of 44% was at the lower end of what analysts were expecting, the ad campaign seems to have had a positive impact on the company’s image among younger consumers. Hence, an increase in sales in September might continue.
"The success we're seeing today starts with great products,"Ă‚ CEO Mark Parker said.Ă‚ "It's ultimately where the consumer cast their vote. Our innovation platforms are building a foundation for growth over many years."Ă‚
Considering the current brand positioning and attention Nike has received following the ad campaign, the stock is expected to recover greatly and move north. As a result, the company’s association with the athlete and support of the greater good is expected to play in its favor.
From a valuation perspective, Nike currently floats a price-earnings ratio of 72.77 as compared to the industry median of 18.38. In order to sustain this stretched valuation, Nike will have to do justice to its top-line numbers. Moreover, it has an operating margin of 12.21%, compared to the industry median of 6.02%, leading GuruFocus to rank the company's profitablity and growth 8 out of 10.
All told, while near-term headwinds are possible, Nike’s stance on social issues is expected to resonate well with its target market, the urban young, who are more likely to align with social awareness and stand by corporations fulfilling their social responsibilities.
Disclosure: I do not own any of the stocks mentioned.
