What to Make of Nike’s Third Quarter

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As you might already know, the Street wasn't impressed by Nike's (NYSE: NKE  ) third quarter. The primary reason for this was China, where Nike's future orders declined by 3%. However, the Street focused on the wrong number. Yes, China is important thanks to its growing middle class and increased disposable incomes for those consumers, but Nike is more than capable of figuring out what Chinese consumers want. Most importantly, Nike is still growing in areas that matter most.

The big picture
To get an overview of the Nike situation prior to dissecting it, the following are some key numbers you should know. In the third quarter, revenue increased 13% year over year to $7 billion, and net income improved 3% to $685 million. Diluted earnings per share grew at a 4% clip to $0.76. Furthermore, future orders increased 12%; and if you exclude the currency impact, future orders jumped 14%. Despite being a much smaller brand, Converse also enjoyed a 16% revenue spike to $420 million.

Gross margin expanded by 0.3 percentage points to 44.5%, mostly thanks to higher average prices and continued improvements in the direct-to-consumer business. As if that's not enough positive news, Nike has seen its online sales skyrocket 57%. Therefore, not only is Nike finding ways to improve margins thanks to pricing power, but it's seeing significant improvement in its high-margin, direct-to-consumer business. Furthermore, more people order online now than at any point in the past. If this trend continues, and based on recent results, Nike stands to benefit. 

On the negative side, selling, general, and administrative expenses did increase 16% to $2.2 billion. But there were justifiable and short-term reasons for this spike, which include new product launches, marketing for the World Cup in Brazil, digital innovations, and increased costs related to existing and new store growth.

If you eliminate the Wall Street noise, including expectations and opinions, and you only look at the numbers above, then you're looking at a strong and still-growing company. That said, while Nike should remain a high-quality long-term investment (including a 1.3% dividend yield,) it's not where you will find the most potential in branded sportswear apparel. That title would belong to Under Armour (NYSE: UA). 

Potential and fear
Under Armour is a much smaller company than Nike, but it's growing much faster. In its fourth quarter, Under Armour delivered a net revenue gain of 35%. Since this was just one quarter, you might expect that this could be an aberration, but that's not the case. For example, Under Armour's fiscal-year 2013 revenue increased 27%. These types of numbers are difficult to find, especially in today's consumer environment. 

The best part is that Under Armour doesn't seem to be likely to slow down much in the near future. The company expects fiscal-year 2014 new revenue to grow between 22% and 23%, and for operating income to increase between 23% and 24%.

It's possible that Under Armour falters, but it's never wise to bet against a company that has delivered 15 consecutive quarters of at least 20% net revenue growth. 

On the other end of the spectrum is Adidas (NASDAQOTH: ADDYY  ) . Adidas has been performing well, delivering top-line growth of 31.7% over the past five years. It's also trading at just 22 times earnings. Therefore, you might be wondering where the problem lies.

The problem is that Adidas recently announced that political uncertainty in the Ukraine creates considerable risk for the company, partially related to the fall of the Russian ruble. For instance, Chief Executive Herbert Hainer recently stated: "We cannot ignore the significant weakness of the Russian ruble since the beginning of the year as well as the current uncertainty in the region, both of which have added considerable risk to our results in euros."

Translation: while Adidas is a quality company, this might not be the bet entry point for investors. Recent tensions have tamed, but this turmoil in the region seems to be far from over.

The Foolish takeaway
If you're looking to invest in a company that continues to offer steady growth on the top and bottom lines, then you might want to consider Nike. The company is trading at 25 times earnings, but that's still cheap compared to Under Armour. 

As far as Under Armour goes, it's trading at a much riskier 76 times earnings. On the other hand, it continues to deliver on the top line in a massive way, which investors love. Additionally, the company doesn't see any signs of a slowdown up ahead. In regards to Adidas, geopolitical events make this a high-risk investment at this time. Please do your own research prior to making any investment decisions.

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