Nike Has More Room to Run
Nike (NKE) will oblige with the introduction of Flyknit footwear, which will go on sale to the public in July and be worn by athletes from several countries at the August Olympic Games. Flyknits feature woven mesh uppers made from a single piece of fabric, and in most sizes weigh less than six ounces, half as much as the average running shoe.
Barron's long has lauded Nike's product innovation and marketing smarts, and the Beaverton, Ore.-based company's ability to transform both into rising earnings. Last April, when the shares dipped to $80 from the low-$90s amid concerns about rising input costs and pinched profit margins, we seized the moment to reiterate our praise and explain why Nike soon would be back on track ("Built for the Long Run," April 25, 2011).
RECENTLY NIKE HAD ANOTHER margin scare: Management said last month that gross margins had dropped to 43.8% in the fiscal third quarter (ended Feb. 29) from 45.8% in the year-earlier period, while also issuing a subdued sales forecast for fiscal 2012's final quarter. Even so, third-quarter earnings rose 7% from a year ago, to $1.20 a share, beating analysts' consensus estimates by three cents.
More important, global "futures," or future orders, rose 15% in the quarter, to $9.4 billion, the biggest leap in 14 years.
Nike is expected to earn $2.3 billion or $4.93 a share in the current fiscal year, on sales of $24 billion. Analysts see per-share earnings jumping 17% in fiscal 2013, to $5.77 a share, and revenue rising 9.5%, to $26 billion. Shares trade for 19 times fiscal '13 forecasts, toward the upper bound of their historic valuation range.
Nike tends to beat earnings estimates in years with Summer Olympics, and its shares outperformed the Standard & Poor's 500 by an average of 24.5% in the past five Olympic years. In the quarter that followed the 2008 Summer Games, the company credited Olympics coverage with helping to spur revenue and futures gains of more than 50% in China, one of its most important markets.
As for Flyknits, Omar Saad, an analyst at ISI Group, expects the new brand and new technologies, such as sensors on shoes that track wearers' movements, to add $4 billion of incremental sales and $2 a share in earnings in the longer term. "Flyknits have the potential to become one of Nike's largest, most long-lived and most profitable platforms," Saad wrote in a recent report. He has a $130 share-price target.
Nike is a promising play on higher consumer spending around the world, and the best way to capitalize on a strong athletic-footwear cycle.