What Makes Nike a Good Long-term Buy?

Nike is still a top seed in the sportswear industry.

Apr 20, 2014 at 7:00AM

Sportswear company Nike (NYSE:NKE) posted third-quarter results that were nothing short of impressive. Unlike its industry peers, the company maintained its high-growth momentum, which was buoyed by strong performances in North America and its operations abroad. Let us take a detailed look at the company and see how this sports giant stacks up with its rivals Under Armour (NYSE:UA) and Lululemon Athletica (NASDAQ:LULU).

Third-quarter results
In its most recent quarter, Nike's earnings increased on the back of strong sales growth. The company earned $0.76 per share versus $0.73 a share in the year-ago period. Its revenue rose nearly 13% to $6.97 billion, which beat the consensus of $6.69 billion.

All of Nike's geographic regions delivered solid results during the quarter. On top of that, the company generated 7% of its sales from the highly competitive Chinese market. The gross margin during the quarter increased 0.3 percentage points to 44.5%. 

Nike's net sales in North America rose 12%, with comparable sales growth of 8%. Direct-to-consumer revenue increased 19% during the quarter, and this was driven by higher online sales. The company saw double-digit growth in all of its major categories, including basketball, sportswear, global football, and training.

Nike reported strong performance in Europe throughout the quarter with revenue growth of 19% in Western Europe and 22% in Central and Eastern Europe. Except for Italy, all of the regions in Western Europe showed double-digit growth. In Central and Eastern Europe, Nike saw strong growth in Russia, Turkey, Poland and Greece.

In Greater China its revenue grew about 7%, although its margins were pressured by higher SG&A expenses. Emerging markets' revenue rose 19%, while Japan's sales increased by 10%.

What is Nike up to?
Nike has always believed in making innovative products, and this has been the primary reason for its success over the years. In footwear, the company launched the Vapor Carbon Elite Cleat for the most recent Super Bowl, which enhances speed and allows quick cuts. In apparel, the company introduced the lightweight and breathable Aeroloft Summit Jacket. Nike uses state-of-the-art 3-D printing to manufacture its products, including its new football cleat. Furthermore, it plans to use 3-D printing across more of its business areas to create more innovative products.

For the upcoming FIFA World Cup, Nike has recently launched the Hypervenom boot with the NIKESKIN mesh upper, which gives an amazing level of ball feel. Earlier, the company introduced its latest standard in football boots, Magista, at Barcelona. With the new silhouette, the boot increases player fit, touch, and traction. According to Nike, it took four years of sports research before the company was finally able to launch Magista. This is also the first football boot which utilizes the Nike Flyknit technology.

Since China is no longer a low-cost region for many multinationals, Nike is moving some of its manufacturing plants out of the country. High labor costs and an appreciating currency have contributed to the higher manufacturing costs. Since 2005, the Chinese Yuan has appreciated more than 35% against the US dollar. Wages in the country have also tripled in the last decade. As a result, Nike is shifting its production plants to countries like Bangladesh and Vietnam.

Industry peers
The yoga-apparel retailer Lululemon Athletica, which has been plagued by quality-control issues, registered a flat year-over-year profit for its fourth quarter. The retailer had to recall its top-selling yoga pants as a result of the see-through issue, and this negatively affected the company's otherwise strong earnings momentum. Its earnings still came in at $0.75 per share, whereas analysts on average had expected it to post earnings of $0.72 per share. Its net revenue rose to $521 million, which was up 7.3% from the year-ago period. In an effort to turn things around, Lululemon recently replaced its CEO and CMO. Although the recall resulted in slightly lower sales, it also resulted in an improved supply chain and better control of expenses for the company.

In its latest quarter, Under Armour reported EPS of $0.59 per share, which rose from $0.47 per share in the year-ago quarter. Revenue also surged 35% year-over-year to $682.76 million. Analysts had looked for EPS of $0.53 per share on sales of $620 million. Among the company's various brand categories, its accessories segment witnessed the highest revenue growth at 51.7%.

Under Armour's acquisition of the innovative MapMyFitness technology is expected to help the company expand its online business and increase its revenue. Moreover, the retailer is actively eyeing the coming World Cup as it will bring on huge demand for sports goods.

Final thoughts
Nike had an admirable third quarter. The company continued to perform well across almost all of its regions, a great sign. Nike's innovations in footwear and apparel will keep it ahead of its peers in the coming years. With the World Cup just around the corner, the company has a huge opportunity to reap sizable profits through its latest products. The company's decision to shift some of its plants from China will prove to be a wise one, as Bangladesh and Vietnam will reduce its manufacturing costs. Weaker currencies and lower wages in these countries mean that Nike will be able to post better profits in the future.

Considering all of the aspects discussed above, I believe Nike presents a good investment opportunity at this point in time.

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Zahid Waheed has no position in any stocks mentioned. The Motley Fool recommends Lululemon Athletica, 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.

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