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NIKE Outpaces S&P 500 in a Year: Will the Momentum Continue?

Zacks Equity Research

NIKE, Inc. NKE has always been investors’ favorite, thanks to its concerted efforts to resonate well with evolving consumer preferences. The company is progressing well with the solid execution of Consumer Direct Offense through the focus on direct-to-customer and innovation. In addition, continued strength in NIKE Digital and NIKE Direct business are significantly contributing to the company’s performance.

Driven by its efforts, shares of the company have cruised ahead of the industry and broader market in a year. While the stock advanced 18.6%, the industry rallied 9.9%. However, the S&P 500 index witnessed a decline of 5.8% in the past year.

 

 

Momentum in the stock can also be attributed to the company’s superb earnings surprise history. NIKE has outpaced earnings estimates for the 26th straight time, when it reported second-quarter fiscal 2019. Further, this Zacks Rank #3 (Hold) company delivered the seventh consecutive positive sales surprise. We believe that the owner of Swoosh brand will continue to display strong earnings growth, as evident from its long-term earnings growth rate of 12.3% and Growth Score of A.

Let’s Delve Deeper

NIKE remains on track with its Consumer Direct Offense and Triple Double strategies, which position it to capture the strong global demand for athletic footwear and apparel. The company is building momentum across its operating regions by making the right product available at the right time and establishing a direct connection with consumers. Management remains focused on the key aspects of its triple-double strategy — 2x innovation, 2x direct and 2x speed.

Driven by this strategy, the company is progressing with its Consumer Direct Offense by latest innovation as it creates and scales new product platforms. Apparently, the company’s Consumer Direct Offense is significantly driving the top line, which is likely to continue in the quarters ahead.

Apart from acquiring new brands, the company has been focusing on broadening its foothold through the expansion of e-commerce and NIKE Direct businesses. Over the past two years, the enhancement of its digital platform has nearly doubled its revenue contributions from NIKE.com and its apps, crossing the $2-billion contribution mark. In second-quarter fiscal 2019, NIKE Digital grew 41% beside continued growth in NIKE Direct and all geographic regions.

Notably, NIKE’s North America business also returned to healthy, sustainable growth, which otherwise hurt results in the past. The business performed well in the last three quarters, courtesy of robust growth across footwear and apparel. This was backed by innovative platforms, strong owned and partnered Digital growth. In fact, the company’s Jordan Brand is witnessing momentum, with double-digit growth in the fiscal second quarter.

Looking ahead, management expects the momentum in North America to continue throughout fiscal 2019 and beyond. The company continues to target mid-single-digit revenue growth in North America in the next five years.

Meanwhile, the company’s international business continued to remain robust. It registered revenue growth of 20% at international locations, with the Greater China region delivering 18 straight quarters of double-digit growth. Apart from the sturdy flagship brand, the company is witnessing growth at its Converse Brand, primarily owing to digital growth as well as gains in Asia.

Though NIKE has been battling higher SG&A expenses due to elevated operating overheads and demand creation expenses now, we expect it to curtail expenses driven by its initiatives.

Three Better-Ranked Consumer Discretionary Stocks

Some of the better-ranked stocks from the same space are Cherokee Inc. CHKE, G-III Apparel Group, Ltd. GIII and Crocs, Inc. CROX, each currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Cherokee has an impressive long-term expected earnings growth rate of 15%.

G-III Apparel has outpaced earnings estimates in each of the trailing four quarters, the average surprise being 429%.

Crocs delivered average positive earnings surprise of 126.3% in the last four quarters.

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