Let Mr. Attention Deficit Sell His Nike Shares – the Long-Distance Runner’s View

Nike (NKE) stumbled badly in its 4th quarter (through May 31). Earnings fell 6% from the prior year and gross margins got squeezed by 1.5 percentage points. A 12% pickup in revenue wasn’t enough to offset higher operating costs.

No surprise, the stock got pummeled on the bad Q4 news -- and the fact that management warned it expects to continue to run into stiff headwinds in the near term thanks to higher operating costs and slow demand in mature matures such as western Europe.

NKE Chart

NKE data by YCharts

Whether you see all that as ugly or opportunity depends on whether your investing time frame runs more toward sprints than long-distance. The sprinters are the ones who bailed in late June on the earnings miss.

That’s potentially creating opportunity for the long-distance crowd.

Nike is far and away the dominant global sports footwear, clothing and equipment manufacturer. Adidas has a market cap of $14.2 billion (in $USD), barely one-third the size of Nike.

NKE Market Cap Chart

NKE Market Cap data by YCharts

Under Armour (UA) takes a very distant bronze with a $4.94 billion market cap.

And it’s not as if demand for Nike merch has disappeared. Revenue grew 12% in the fourth quarter, and 16% for the fiscal year. Both figures are adjusted for currency changes. Considering that the past three years were a period where consumers were in serious belt tightening mode, Nike has still managed to keep up revenue growth.

NKE Revenues Chart

NKE Revenues data by YCharts

The problem is that so too did input costs, compressing margins.

NKE Gross Profit Margin Chart

NKE Gross Profit Margin data by YCharts

Nike management pretty much conceded that the next few quarters could remain tough given slowing consumer spending in key markets and a strong dollar. That’s why investors killed the stock after the earnings release on June 28th.

And that’s potentially creating an intriguing entry point for patient investors. The price drop was a lot steeper than the earnings slowdown, improving Nike’s valuation.

NKE PE Ratio Chart

NKE PE Ratio data by YCharts

And there are a few catalysts on the near-term horizon that could significantly boost demand. Perhaps you’ve heard the London Summer Olympics start at the end of the month. It’s going to be a few weeks of wall-to-wall Swoosh. Nike also was a major presence at the European Football Championship. Those two massive events and the launch of new products are actually to blame for part of Nike’s Q4 miss. The firm said it spent $760 million in “demand creation expenses” That’s MBA-speak for marketing costs.

That begs the question, will Nike get a return on its upfront marketing costs? Well, it sure seems to know how to leverage a two-week global stage into future revenue. In 2008 Nike used the Beijing Summer Olympics to launch its Lunar line of sneakers; the line now generates $2 billion in annual revenue for Nike.

While the 12 months after the Beijing games weren’t exactly a happy time in global equity markets, Nike certainly held on a helluva lot better than the broad market.

NKE Chart

NKE data by YCharts

Nike has also managed to outrace the S&P 500 over the past three years as well.

NKE Chart

NKE data by YCharts

Another longer-term catalyst is the appetite for consumer brands among the fast growing middle classes in emerging markets. Will Danoff, manager of the $79.5 billion Fidelity Contrafund recently singled out Nike at the Morningstar Investment conference as just the sort of company that’s well-suited to capitalize on the growth in disposable incomes in emerging markets.

In the latest fiscal year Nike reported that while North American revenues grew 17%, China delivered 23% revenue growth, and a catchall category of other emerging markets posted 25% revenue growth. The growth for China and emerging markets was actually higher than the prior fiscal year.

Sure, consumer spending may stay under pressure, as key economies (read: China) aren’t exactly in strong growth modes. But putting a pair of Swooshes on your feet is a lot smaller an outlay than say buying that first washing machine or car. In terms of global status symbols, a pair of Nike’s is one of the cheaper ways for burgeoning consumer classes to make their statements.

Long-term investors might also take a look at Nike’s dividend yield. The 1.65% yield might not strike you as gold-medal. But Nike’s dividend growth should catch your eye, as well as the fact that the company is certainly spinning out ample earnings to keep its payout ratio nice and low. According to Ned Davis Research, companies within the S&P 500 that have a history of consistent dividend growth have-on average-generated higher total returns than companies that fail to boost their dividends.

NKE Dividend Chart

NKE Dividend data by YCharts

That suggests Nike will not have any trouble continuing to keep the dividend flowing and growing.

Carla Fried is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.



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