Our long term recommendation on leading sports gear retailer, Nike Inc. (NKE), has been raised to Neutral on the back of better-than-expected first-quarter 2013 results. However, poor margins, sluggish discretionary spending and intense competition remain causes of concern, keeping us on the sidelines.
Engaged in designing, developing and marketing of footwear, apparel, and equipment and accessories for men, women and children worldwide, Nike is the industry leader in the U.S. footwear and athletic apparel industry. The company’s strong portfolio of globally recognized brands, Nike, Converse, Chuck Taylor, Hurley, All Star, One Star, Star Chevron, and Jack Purcell along with an incessant focus on innovation has helped further strengthen its leadership position. These attributes also provide Nike a competitive edge over its peers like Adidas AG-ADR (ADDYY) and Brown Shoe Co. Inc. (BWS).
First-quarter 2013 proved to be an encouraging one for Nike as it posted stronger-than-expected earnings backed by a solid top-line growth. The company’s earnings of $1.27 per share outdid the Zacks Consensus Estimate of $1.12. Total revenue grew 10% driven by superior demand for Nike brand. The company witnessed strength across all key categories and geographies, except Japan.
Moreover, the company’s future orders, due for delivery from September 2012 through January 2013, improved 6% from the year-ago comparable period, indicating potential for further growth in the company’s top line.
Further, we remain impressed by the company’s relentless emphasis on expanding its global footprint and global market share. In one such effort, the company remains rigorously focused on capitalizing on the growth opportunities presented by the emerging markets, especially China.
Another major tool used by Nike to broaden its boundaries is the development of direct-to-consumer business model. Put together, these strategies not only facilitate growth of its market share but also strongly position the company among competitors. Further, the company is in the process of doing away with its underperforming brands, Cole Haan and Umbro, to help haul up its bottom lines.
Nike also boasts of a strong balance sheet that offers it the financial flexibility to drive future growth. The company ended first-quarter 2013 with cash and cash equivalents of $2,165 million and a total debt of $235 million, reflecting debt-to-capitalization ratio of 2.3%. Further, the company remains committed towards enhancing shareholders return as evident from its new 4-year, $8 billion share repurchase program. The company recently completed its 4-year $5.0 billion share repurchase program approved in September 2008.
On the flip side, the dark shadow of the challenging macroeconomic conditions continues to impact consumers by curtailing their purchasing power. This may ultimately weigh on Nike’s growth and profitability as the general input costs, fuel and energy costs, unemployment levels, and high household debt levels continue to surge.
Further, the company remains exposed to political, social and economic risks associated with its operations in other countries. The company’s footwear products are entirely manufactured outside the U.S., in developing countries such as China, Vietnam, Indonesia and Thailand. The company’s operations across international borders also attract the risk of currency fluctuations.
Despite a little elevation in our long-term view on the stock, the company’s prospects remain solid in the short term given its robust quarterly performance and a ramp up in future orders. Thus, the company maintains a Zacks #2 Rank, indicating a short term ‘Buy’ rating.
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