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Well, it finally happened. After several quarters of encouraging results -- and a mostly rising stock price -- Nike (NYSE: NKE ) disappointed investors. Compared with Wednesday's closing price, shares are down roughly 4%.
It's not that the athletic shoe and apparel maker's fiscal fourth-quarter and full-year results were terrible. Rather, it appeared to be management's outlook that sent shares tumbling.
But let's review the recent past before we move on to the future. Fourth-quarter revenue of $5.1 billion represents an 8% year-over-year gain, which, on a currency-neutral basis, drops to a lesser but still respectable 4%.
Quarterly earnings per share, meanwhile, jumped 51%, to $1.06. However, excluding a restructuring charge in the year-ago quarter, EPS growth didn't even break the single digits, rising a mere 7%. And while Nike deserves credit for boosting profitability by cutting costs and running lean inventories, investors should note that the recent quarter's tax rate was more than six percentage points lower than 2009's Q4. Operationally, that makes that 7% EPS gain appear even less impressive.
For the year, Nike's sales slipped 1%, to $19 billion. At $3.86, earnings per share increased 27%, but again, there are a number of fiscal 2009 impairment and restructuring charges to consider. All told, comparable EPS grew only 1% -- more than a tad shy of the midteens profit growth management has forecast for the next five years.
Notably, that long-term target is now looking overly ambitious, at least in the context of fiscal 2011. Speaking on the conference call, management cited a number of macroeconomic headwinds, including a stronger dollar and higher costs for oil, labor, and freight, all of which could pressure 2011 gross margins by as much as one percentage point versus 2010.
Top-line growth, as well, could sputter. The U.S. economy is showing signs of distress, and consumer spending in particular may be breaking down. Meanwhile, Europe's a deflationary wreck waiting to happen, and it's almost guaranteed that a slowdown in developed economies will eventually exact a toll on the emerging-markets consumer, which has been an outsized growth driver for Nike's recent performance.
Don't get me wrong, I believe that Nike's an excellently managed company with a resilient brand. Its opportunity -- and proven ability -- to innovate on both functional and style platforms arguably puts it ahead of a likewise strong company such as Coach (NYSE: COH ) . Furthermore, Nike touches a broader demographic than youth-oriented retailers such as Abercrombie & Fitch (NYSE: ANF ) and American Eagle Outfitters (NYSE: AEO ) , lending an element of diversification and stability to its business. Finally, annual free cash flow is at a record high of $2.8 billion, and the balance sheet's in great shape.
But none of that changes the valuation. With shares trading at a trailing price-to-earnings ratio of nearly 20 and a forward multiple of about 16, there's little margin of safety. Last fall, I suggested that investors wait for shares to come down into the low $50s. For diehard deep-value folks, that likely remains a good target. Less cautious souls might wait for the low-to-mid $60s, where macro risks will be more fully priced in.