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Is Nike a Buy After Crushing Earnings Estimates?

By John Ballard - Jun 26, 2021 at 8:30AM

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The digital business is gaining momentum, causing management to raise its long-term growth outlook.

Nike (NKE -0.53%) reported surging demand across its business in its fiscal fourth-quarter earnings report. Everything was clicking -- footwear, apparel, sports equipment -- and the momentum was spread across all geographies. Earnings per share of $0.93 blew past the consensus analyst estimate of $0.51. 

The stock price spiked to a new high above $150 on Friday, following the earnings news. Should investors follow the crowd and buy at these highs? 

A soccer field at a Nike corporate campus.

A soccer field at Nike's corporate campus. Image source: Nike.

Digital is Nike's advantage

Revenue increased by 96% over the year-ago quarter, but that was on top of an easy comparison, when revenue fell 41% last year due to store closures. 

Still, the comparison to the same quarter in 2019 shows how well Nike is really performing right now. On a two-year comparable basis, revenue grew 21%, with EPS up 50%. Most impressive was that the North America region, which is Nike's most mature market, topped $5 billion in revenue for the first time in the most recent quarter. 

Once again, as we saw all through the pandemic, growth was led by its digital business. Digital now represents 21% of total brand revenue, and management believes it's going to get even better from here. "Today, we are better positioned to drive sustainable long-term growth than we were before the pandemic," CEO John Donahoe said during the fiscal fourth-quarter earnings call

Nike's advantage in digital is membership, where demand from members continues to outpace growth in digital sales overall. The digital business has more than doubled over the last few years to $9 billion, with $3 billion of that coming from its 300 million members. 

The company has invested heavily in e-commerce going back to before the pandemic. Between fiscal 2018 and 2020, it acquired multiple businesses to accelerate its Consumer Direct Offense strategy. Specifically, the Celect acquisition in 2019 improved Nike's retail predictive analytics and demand sensing, which is clearly paying off. 

Growth catalysts

In the near term, Nike has big catalysts with the return of sports and the Summer Olympics in Tokyo. Marketing is one of the company's strengths, where the Swoosh relies on superstar endorsers, like LeBron James and Cristiano Ronaldo, to showcase the brand in front of a large audience. 

Nike is cranking up its digital marketing efforts behind the reopening to encourage people to get active. It said its Play New campaign on TikTok and Snapchat led to more than 600 million Gen Z impressions in two weeks. With these initiatives, Donahoe said the company's goal is not just to take market share, but "also to grow the entire market." 

On that note, Nike raised its long-term growth guidance for EPS to the mid to high teens through fiscal 2025. This is a small upward revision from the mid-teens growth outlook issued before the pandemic. Nike expects earnings to be fueled by high-single-digit to low-double-digit revenue growth, with operating margin improving to the high teens by fiscal 2025.

The only obstacles in the near term are continued supply chain delays and higher logistics costs that management expects to remain through much of fiscal 2022. But this is actually weighing in Nike's favor by driving faster inventory turns and higher full-price sales. Management expects gross margin to improve by up to 1.5 percentage points in fiscal 2022, partly reflecting strong full-price sell-through.

The cream of the crop

At the current share price of $152, Nike trades at a forward price-to-earnings ratio of 39.6, which is no value, but there are not many retailers with its brand power, growth prospects, and high returns on invested capital, either. 

The stock is appropriately cheaper than the faster-growing lululemon athletica, and more expensive than the average company in the S&P 500 index. 

All in all, this high-quality sportswear giant might be priced about right, which explains why the stock is soaring after earnings. With the digital business gaining steam, Nike remains a top retail stock to buy.

John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy.

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