Nike Remains A Good Investment Despite The Slight Miss On The Top Line

  • Nike’s EPS exceeded Wall Street expectations, but its revenue fell short.
  • Nike’s “complete offense” philosophy indicates a vibrant and dynamic culture.
  • Nike’s year-to-date fundamentals and balance sheet remain rock solid.

On March 22, global footwear and apparel company Nike (NYSE:NKE) released its Q3 FY 2016 earnings. In the most recent quarter, Nike saw its revenue and net income expand an incredible 8% and 20%, respectively, YoY. Nike’s Q3 EPS came in at $0.55 versus estimates of $0.49. However, its revenue fell short of expectations, coming in at $8.03 million versus the $8.2 million expected by Wall Street.

Nike's stock fell roughly 6% in after-hours trading on the day of the release and 4% on the following day. Nike’s lower stock price combined with its extraordinary business qualities warrant a close look by long-term investors.

The “Complete Offense”

While reading Nike’s earnings call, management’s use of the words “Complete Offense” stood out. Some people may think of sports competitiveness. The related phrase, “the best defense is a good offense” comes to mind. Military leaders often prefer offensive strategies that take the enemy by surprise and head them off at the proverbial pass. Management’s repeated use of this phrase is indicative of Nike’s dynamic corporate culture. Operating in the sports industry over the decades taught Nike that winning is paramount in building wealth for its shareholders.

The customer

Nike’s strategies center on making the life of its customers easier. Nike believes that taking care of the consumer creates a “virtuous cycle”. Keeping customers happy creates growth and growth creates the ability to invest, which in turns creates more products that will keep them coming back. Nike’s product designs exude a combination of functionality, technology, comfort and aesthetic design. Nike gave examples of products exhibiting these qualities such as the “Mercurial Superfly” touted as the “boot for the fastest player” and the “new lightweight plate for better power transfer and texture mapping across the forefoot for enhanced ball control.”

Nike maintains relationships with superstar athletic leaders, who sort of serve as representatives of the overall athletic community. These athletes provide insights on what works and what doesn’t in product designs. Moreover, Nike’s success in its direct to consumer business (DTC) gives an indication that it can serve consumers’ increasing preference for shopping online. Nike’s online sales expanded 56%.

Other fundamentals

Nike’s financial discipline represents a strong appeal for the long-term investor. Nike exuded this quality in the liquidation of slow North American inventory in the most recent quarter. Nike focused heavily on factory stores in this process, which garnered higher margins than other avenues. Other companies would probably focus on just getting rid of the inventory at losses.

Nike’s FY 2016 performance resides in the excellent range. Nike’s revenue and net income increased 6% and 21%, respectively, YoY. Nike’s balance sheet showed $5.1 billion in cash and short-term investments, representing an impressive 42% of stockholder’s equity in the most recent quarter. However, this balance represents a 5% YoY decline. Nike’s long-term debt balance of $2 billion represents a mere 17% of stockholder’s equity. It’s preferable for investors to see a long-term debt to equity balance of 50% or less.

Concluding thoughts

Nike’s focus on the consumer combined with its scale, leadership, product depth and diversity serve as a recipe for long-term success. Nike’s recent correction will likely serve as a minor negative blip over the long-term. Keep in mind though that the company’s P/E ratio of 28.3 resides a little in the high range. Investors may want to take a small position while adding more during any corrections.

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