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3 Reasons Why Nike Inc. Shareholders Have Nothing to Worry About

By Demitri Kalogeropoulos - Jul 19, 2017 at 1:08PM

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See the factors that point to improving operating trends ahead.

After finishing 2016 as the single worst performer on the Dow, Nike's (NKE 1.73%) stock isn't exactly surging back this year. Shares ran just modestly ahead of the broader market through the first half of 2017 as many investors worry about a short-term dip in profitability and slowing sales growth in the core U.S. market.

Yet the company managed key operating wins recently that put the footwear and sports apparel titan in position to expand revenue and profit in the fiscal year it just started. Let's look at a few of the biggest bright spots from Nike's latest report.

Improving U.S. trends

Like most industry participants, Nike was hit with surprisingly weak sales growth in the U.S. market around the 2016 holiday shopping season. Slumping customer traffic trends forced its network of retailers to discount their merchandise, which sent both revenue and gross profit margin lower. As a result, Nike's expansion pace in the U.S. geography slowed to 3% from an 8% spike in fiscal 2016.

A pickup game of basketball.

Image source: Getty Images.

The inventory picture looks much better heading into the next holiday shopping crush, though, now that retailers have cleared out the slow-moving products and synced up their holdings with the new, weaker pace of customer traffic. Nike even managed an uptick in gross profit margin in the division last quarter as adjusted earnings improved by 5% to outpace the 1% revenue gain. To be sure, executives aren't forecasting exciting growth in the U.S. market any time soon. However, the business has stabilized and is finally positioned to stop weighing down overall results.

Betting big on China

Nike gets more than half of its revenue from geographies outside of the United States, which is a major advantage it holds over Under Armour (UA 1.80%) (UAA 1.83%) and its 85% reliance on the domestic market. That diversity is a key reason why Nike's overall sales growth fell from 12% to 8% this past year whereas Under Armour endured a more dramatic slump.

UA Revenue (Quarterly YoY Growth) Chart

UA Revenue (Quarterly YoY Growth) data by YCharts.

Nike posted 11% growth in its Western European business last year and a 17% spike in China. CEO Kevin Parker and his executive team see plenty of room for more gains ahead there, too. The expansion in China should speed up as the company implements its quicker product release schedule this year. Meanwhile, the geography promises to be a huge growth market over the long term. Nike estimates that per capita sports apparel spending there is still 10% less than comparable figures from more developed economies.

Doubling down on e-commerce

Even though it has hurt the wholesale business lately, e-commerce represents a huge growth opportunity for Nike over the long term. And the good news for investors is they don't have to try to imagine how the finances might be impacted by a broad shift into this sales channel. It's already happening, and its helping improve both sales and profit growth.

Nike posted 30% spike in its direct e-commerce channel last year and an 18% gain in the broader category that management calls its direct-to-consumer segment. Rather than pinch profits, these sales were far more profitable than equivalent sales on the wholesale side of the business. In fact, management estimates that it earns roughly twice the revenue and a higher profit margin on each of its direct sales when compared against a wholesale purchase. The direct-to-consumer segment only represented 35% of the business last year, but was responsible for 70% of Nike's growth.

That's a good reason for management to rely on that channel to drive results higher over the coming fiscal year. Nike's overall forecast calls for a steady expansion pace that's led by international markets. Investors can expect profitability to rebound, too, thanks to a mix of cost cuts and increasing e-commerce sales.

Innovative product launches will be a critical factor in Nike's performance. But if the latest operating trends are any indication, the retailer's fiscal 2018 should include rising market share and improved profits.

Demitrios Kalogeropoulos owns shares of Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$116.07 (1.73%) $1.97
Under Armour, Inc. Stock Quote
Under Armour, Inc.
UAA
$10.03 (1.83%) $0.18
Under Armour, Inc. Stock Quote
Under Armour, Inc.
UA
$9.05 (1.80%) $0.16

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