Nike’s Pullback Is a Buying Opportunity

Improving margins and innovative products are some of the reasons why you should buy Nike on the pullback.

Apr 12, 2014 at 7:00AM

Sports apparel and footwear giant Nike's (NYSE:NKE) performance this year hasn't been up to the mark. Its share price dropped almost 8% after the company released its third-quarter results last month. Moreover, with competition from the likes of Under Armour (NYSE:UA) and Adidas (NASDAQOTH:ADDYY) heating up, investors might think that Nike is in for tough times, but that's not the case. 

Nike's results were not bad and the company posted decent growth numbers, but even then the stock dropped. So it looks like an opportunity has opened up for investors to add to their Nike positions.

A solid performance
Nike's third-quarter results were better than consensus estimates  . Global demand for Nike's athletic goods drove the company's results, while the approaching FIFA World Cup in June also boosted Nike's orders. Nike's revenue for the third quarter increased 13% to $7 billion while its net income rose 3% to $685 million. Its gross margin also improved by 30 basis points due to higher average prices and growth in the higher-margin direct-to-consumer business.

Innovative products drive growth
In the third quarter, Nike focused on footwear and apparel, launching an array of innovative footwear while keeping the Super Bowl in New York in mind. Also, the World Cup fever is gaining momentum, so Nike launched its Vapor Carbon Elite Cleat which it specifically designed for speed. Nike has  leveraged its 3-D printing technology to bring out this revolutionary new cleat and it plans to expand this state-of-the-art technology to its other segments as well. 

In March,  Nike introduced the Magista, and it anticipates that this will set a new standard in soccer boots. Nike designed the boot to enhance player fit, touch, and traction for a game that has become faster and more intense.

Nike's Flyknit platform has also continued to deliver good results. The new Flyknit Air Max combines Flyknit with an improved Max Air to create a lightweight, well-conditioned, and well-cushioned running shoe. While it will continue with the existing designs, Nike will launch more products before the World Cup. In the apparel segment, Nike has introduced the Silver Speed collection of on-field, sideline, training, and sportswear products, which includes the Aeroloft Summit Jacket. Nike constructed this apparel to be lightweight and breathable to keep athletes in comfort.

The company is doing well in basketball. The Nike and Jordan brands turned in good performances in the previous quarter which led to the tenth consecutive quarter of double-digit growth in the basketball segment. Nike expects that as the game becomes more and more popular globally, the numbers will improve further.

Nike's partnership with star basketball players has helped the company launch innovative and popular products such as the LeBron 11, KD 6, and Kobe 9 Elite. Since launch, these have sold out at nearly every location as soon as they have arrived.

China remains a concern
However, China still remains a major concern for the company. Future orders from China fell 1% in the previous quarter, and Nike expects this trend to continue for some time due to the strong dollar. To add to its problems, Nike has to deal with higher raw material costs for leather, chemicals and labor. 

Moreover, the competition in China will get stronger. Nike's American rival, Under Armour, plans on international expansion and China is one of its main targets. Last year, Under Armour opened eight new stores in China which included a new Under Armour Experience Store in Shanghai. In addition, Under Armour already has an e-commerce site for the country and this enhances its chances of getting a larger share of the Chinese market. 

Adidas is also bolstering its retail strategy to get ahead of Nike in the Chinese market. Adidas has introduced a new retail concept known as HomeCourt that offers an enhanced consumer experience. HomeCourt is the largest Adidas store concept and Adidas will open stores in 24 locations, focusing on the emerging markets. Adidas has kicked off this new concept by placing its first store in Beijing in a bid to compound Nike's problems in China further through stiff competition. 

Final words
Nike is a  diversified player and it enjoys solid brand equity. Although it faces some tricky times in China, it is changing its strategy to turn around its business in the region. Its Greater China revenue was up 9% in the previous quarter, and looking forward, management is positive about Nike's performance in this particular country.

Moreover, on the whole, Nike is doing well and the FIFA World Cup should provide a good boost to the business. Hence, investors should consider buying Nike on the dip as the company's innovative products and global presence are key long-term growth drivers.

Shirish Mudholkar has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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