Onward and upward! Or so it goes for shares of athletic-shoe and apparel maker Nike
There's no doubt that the shoemaker's fiscal 2010 third-quarter results impressed. Following four consecutive quarters of declining sales, Nike posted revenue of $4.7 billion, good enough for a respectable 7% gain. That's better than the most recent sales performance of VF
Emerging-market sales stole the show; revenue there vaulted to $509 million, scoring 43% year-over-year growth. The "Other Businesses" segment, which includes the Converse and Hurley International brands, posted a 13% sales gain.
Perhaps more importantly, wholesale orders for future delivery chalked up 9% year-over-year growth. This key expression of retailer confidence initially regained traction in the prior quarter. Coupled with recent results, it appears that retailers now firmly expect loyal Nike consumers to come off the bench and hit the mall.
Judging profit performance is a trickier game. On a reported basis, earnings per share of $1.01 soared more than 100%. But when we exclude a hefty non-cash impairment charge in the year-ago period (related to Nike's 2008 acquisition of Umbro), EPS growth dwindles to a meager 2%.
That may not seem right, given that gross margin widened by three percentage points (on higher revenue nonetheless), driven by such notables as improved product mix, lower material costs, and tighter inventory management. The problem is that additional factors intervened to the downside, including unfavorable shifts in overhead and marketing expense, a higher effective tax rate, and a larger share count.
That last fact is particularly notable, since Nike has been enthusiastically buying back shares -- 5.1 million of them in Q3, in fact. Dilutive stock options are presumably the culprit. I'm not trying to give Nike a hard time here -- management's worth it, in my view, and the share count remains below 2007 levels -- but it's a lesson for investors to read beyond the happy headlines.
As an alternative to high-flying and risky consumer-discretionary stocks, I first suggested that investors take a look at Nike back in September 2009. Since that time, the swoosh has well outperformed its consumer-discretionary peer group, including Polo Ralph Lauren
While stock performance doesn't always correlate with business results, I found Nike's following description of Q3 results particularly revealing:
It all points to one word -- Momentum. While others froze or retrenched over the past two years, we never stopped moving. We never stop designing better products …. And because we never stopped, it’s easier for us to gain speed and momentum.
Among the 30 or so stocks that I regularly cover, I have to say that Nike, along with Church & Dwight
And given this quarter's showing, I'm less cautious on valuation than in the recent past. Management's not offering a fiscal 2011 forecast until May. But based on analyst expectations, the stock is currently trading at a forward price-to-earnings ratio of 17, below its five-year average of 18.
Investors who buy at today's prices might not win gold, but in the marathon, if not the sprint, I suspect they'll keep pace just fine.
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