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Nike's Long-Term Growth Is Still Intact

- By Harsh Jain

Although Nike Inc. (NKE) disappointed shareholders in 2016, the stock is off to a great start this year, surging approximately 11% year to date. Despite facing strong competition from Under Armour (UAA) (UA) and Adidas (ADS), Nike still remains a great long-term pick. In spite of its massive size and brutal competition, the company has successfully managed to endure growing at a healthy rate in the United States.

Over the past 10 years, the company's revenue has more than doubled and its net income has nearly tripled, highlighting its consistent long-term performance and growth. Keeping in mind Nike's reputation as a prominent innovator and strong worldwide brand presence, it looks like the company will continue enjoying growth and high profitability in the long run.

Nike reported decent third-quarter 2017 results in March. For the quarter, the company recorded earnings per share of 68 cents, beating the estimates by 15 cents. The company's revenue came in at $8.43 billion, in line with estimates. That figure, however, represents a 5% year-over-year surge.

The primary reason for the company's top-line growth was strong footwear sales in China and emerging markets and a robust performance in the United States. Despite the rise in revenue, the company's gross margin plunged to 44.5%, down 140 basis points from a year ago, due to higher product input costs.

Consumers are moving away from brick-and-mortar stores in favor of purchasing products online. Therefore, the company is aggressively focusing on its direct-to-customer (DTC) channel. Throughout the past few quarters, the revenue generated from the company's DTC channel has been growing at a rapid rate.

According to a forecast report from marketrealist.com, the revenue generated from the company's DTC channel is projected to grow to $16 billion by fiscal 2020, up significantly from $6.6 billion in fiscal 2015. As a matter of fact, the sales generated from the DTC channel are directly proportional to the company's gross margin. Hence, increasing DTC sales will likely enhance the gross margin in the future.

Over the past few quarters, the company has been facing tough competition domestically as well as internationally. Its domestic problems, however, now appear to be less threatening because Under Armour, its foremost rival in the United States, has seen its own growth rate slow significantly.

On the other side, Adidas is attempting to reinstate itself as a worldwide powerhouse in apparel and footwear. Nevertheless, Nike has been able to grow well in similar phases in the past and is effectively competing against its rivals by launching innovative footwear.

Summing up

Nike ended 2016 in the red, but the stock appears to be in a great position to reward shareholders with massive returns in the long run. The company is aggressively focusing on improving its DTC sales, which will positively impact its gross margin going forward.

Currently, the stock offers a dividend yield of 1.28%. Although its dividend yield is not impressive, it is worth noting that Under Armour does not even pay a dividend. Moreover, Nike currently trades at a price-earnings (P/E) ratio of 23.50, considerably lower than its competitors.

As a result, shareholders should continue holding the stock for long-term gains as its future prospects look bright.

Disclosure: No position in the stocks mentioned in this article.

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This article first appeared on GuruFocus.