Streetwise for Sunday, July 7, 2019

While I am the antithesis of your normal sports enthusiast, that is not a hindrance to recognizing successful companies in the athletic arena such as Nike (NKE). 

Moreover, Nike would be my first suggestion for a possible research candidate in the competitive world of sports apparel. (Note: I am aware of the controversy surrounding Nike but that is not an issue for this column.)

When I wrote about Nike a year ago, my earnings estimate for fiscal 2019, (Nike’s fiscal year ends on May 31) was $2.70 per share with a 12-month projected share price of $85.

So how did the company do? Earnings for fiscal 2019 came in at $2.49 and the shares recently closed at 86.20. Although Nike’s earnings were a bit less than my forecast, its shares have delivered solid returns with a gain of 16.78 percent since the beginning of the year.

One key to its success is that despite the earnings miss in Q4 of 2019, the company has built a strong buffer against the trade war between the U.S. and China.

While it is unlikely that Nike will meet its $50 billion by 2020 goal and Q4 earnings missed expectations by 4 cents, 62 cents versus a consensus of 66 cents, the company has been outperforming its peers on multiple fronts.

Nike chalked up fiscal 2019 fourth-quarter sales of $10.18 billion with sales in North America up 7.5%, due in no small part to rising sales of basketball shoes and innovative products like VaporMax. 

The company also reported double-digit growth with important U.S. partners despite recent weak overall sales from several domestic apparel retailers. 

In greater China, Nike’s sales growth of 15.6% indicates that the company is on track to achieve long-term annual growth in that region. 

The ongoing trade dispute between the United States and China does not appear to be a major stumbling block to Nike. While expanded tariffs does make imports from China more expensive, only about one fourth of Nike’s merchandise is manufactured in China. Of that, only a small portion is imported to the U.S.

Most of Nike’s Chinese-made merchandise is now sold in China. Its sales in greater China increased by more than $1 billion in fiscal 2019 (to $6.2 billion from $5.1 billion) and constituted 21% of its total sales. 

To avoid the tariff issue Nike will need to import merchandise to the U.S. from countries such as Vietnam and Thailand. To that end the company has been shifting production out of China in recent years, both for cost and efficiency reasons.

Keep in mind that Nike is the largest athletic footwear brand in all major categories and all major markets, dominating categories like running ($5 billion in annual sales) and basketball ($4 billion in annual sales) with well-known brands like Jordan, Air, and Pegasus. 

Moreover, the Nike brand, while an intangible asset, discourages competition, while supporting the company’s strategies, such as direct-to-consumer sales, product innovation, and supply chain improvements. 

The company’s digital business chalked up a 35% growth rate in fiscal 2019 is critical as it allows the company to control marketing and improve pricing while reducing dependence on physical retailers.

Key to Nike’s marketing plan is reducing its exposure to mediocre, undifferentiated retailers, while emphasizing retailers such as Nordstrom. At Nordstrom, for example, Nike operates its own shops with its own salespeople, allowing it to control the brand message. 

Nike’s consumer plan is led by its Triple Double strategy to double innovation, speed, and direct connections to consumers. Triple Double includes cutting product creation times in half, increasing membership in Nike’s mobile apps, and improving the selection of key franchises while reducing the number of styles by 25%.

The intrinsic value of the company using a free cash flow to the firm is $110 per share. My earnings estimate for the 2020 fiscal year is $2.90 per share with a 12-month projected share price of $92, for about a seven percent capital gain. There is also an indicated dividend yield of 1.04 percent. Nike has been raising its dividend for 17 consecutive years.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddInternational.com.