Investors in Nike (NYSE:NKE) have watched their stock more than "just do it" in 2013, as the stock has risen nearly 50% as I write. Moreover, retailers like Foot Locker (NYSE:FL) and Dick's Sporting Goods (NYSE:DKS) have recently confirmed many of the strong trends that Nike is seeing in North America. Looking into 2014, the soccer World Cup will provide an obvious upside kicker to Nike's prospects, but is all the good news already priced in?  

Nike reports a strong second quarter
The sporting giant is unusual in the consumer goods sector because its growth in recent years has been coming from developed markets (principally the US), while its emerging market performance has been disappointing.

Don't be alarmed by the sequential drop in earnings before interest and taxes, or EBIT, for North America and Western Europe. In actuality, EBIT rose 14.9% and 11.8%, respectively, for these regions in the second quarter.

Source: company presentations.

As such, the rise in Western Europe (revenue grew 18% and futures orders were up 26%) demonstrates Nike's ability to turn around performance with a strategic reset. This is precisely what the company intends to do in China as well.

North America (and to a lesser extent footwear) remains the powerhouse of Nike's operations. While investors have a right to be skeptical as to how long Nike can continue to rely on North America for growth, signs from the industry continue to indicate strength. For example, Dick's Sporting Goods reported same-store sales growth of 3.3% in its last quarter, significantly above its expectation of flat to minus 1%. Furthermore, on the conference call management outlined that "third quarter comparable store sales growth" was "led by strength in athletic footwear and apparel and team sports." 

Foot Locker also saw strength in the US, with its Foot Locker division up by mid-single digits. Interestingly, Foot Locker argued that its sales increase was "driven by average selling prices, which were up low- to mid-single digits depending on category."  Meanwhile, Foot Locker's footwear units were up, but its apparel and accessories were down as the company made a conscious decision to shift to more "premium assortments, away from more basic product." 

Nike's results nicely mirrored what Foot Locker and Dick's Sporting Goods said, in that average selling prices are going up amid ongoing strength in footwear.

However, the good news doesn't stop there because Nike is set for a strong year in 2014.

Nike's growth catalysts
The coming year promises to be a strong one for a variety of reasons:

  • The World Cup in Brazil will generate strong interest in Nike's football products, especially with Nike's sponsorship of the host nation
  • The consistent pattern of average selling prices rising due to a shift in product mix looks set to continue
  • E-commerce revenue grew 35% in the third quarter, and Nike is in the process of launching new country sites and expanding merchandising in others
  • Nike brand futures orders rose 13% (10% units and 3% average selling prices), indicating growth remains strong going into the new year

However, the most important long-term consideration is likely to be Nike's strategic reset in China. The early indications are positive, with revenue from China rising 5% in the quarter. On the other hand, anyone who thinks the battle is won should note the guidance provided on the recent conference call:

...our futures and revenue growth for China won't necessarily show sequential improvement every quarter as we move through this transition.

...we continue to expect overall FY14 revenue to be roughly in line with the prior year with single digit revenue growth in Q3 and flat to down revenue in Q4.

Where to next for Nike?
As ever, the key thing for investors is to try and take a snapshot of what Nike will look like in the future. Its 2014 fiscal year (ending in May) looks to be ending on a strong note, and positive sentiment is likely to remain for the World Cup in the summer. Furthermore, analysts expect Nike to grow revenue and earnings per share by 8.8% and 17%, respectively, for the year to May 2015.

While it all looks rosy, Foolish investors should note that this implies that the stock is trading for more than 22 times its expected earnings to 2015. A lot of good news is baked into the stock price, and any slowdown in Nike's performance in North America or a failure to execute the strategic reset in China could leave the stock exposed. After the World Cup, the market will start asking "where next?" and the focus will shift onto Nike's emerging market performance.

Lee Samaha owns shares of Nike. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.