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Nike Inc. Highlights 1 Challenge With Being a Global Giant

By Steve Symington – Mar 25, 2014 at 11:30AM

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Nike's most recent earnings report showcased one challenge it faces that its U.S.-centric competitors don't.

Nike (NKE 0.05%) may be one of the business world's most recognizable names by a long shot, but it's not always easy being a global industry stalwart.

Although shares of Nike initially rose nearly 3% after the bell Thursday following its better-than-expected quarterly results, Nike stock has promptly reversed course to fall more than 5% since then.

So, what happened?

First, investors are rightly concerned by Nike's 3% decline for reported futures orders in China, where the company currently derives nearly a quarter of its operating income.  

However, I'm willing to give Nike a pass here, as it undertakes a market reset in the region. Notably, this involves placing greater focus on Nike's higher-margin direct-to-consumer sales in China, which grew 11% during the quarter.

One big "problem" with global exposure
On a broader scale, however, much of investors' negative sentiment came in response to one key challenge going forward. Specifically, during the subsequent earnings conference call, Nike CFO Don Blair stated "this year's devaluation of developing market currencies will be a significant drag on next year's reported revenue, gross margin and profit growth."

So there you have it: While Nike's overall business is still chugging along nicely, those pesky foreign exchange headwinds are expected to continue putting pressure on the growth of Nike's top and bottom lines.

Of course, that doesn't mean Nike is a broken stock. Instead, it's merely one of the pitfalls of operating a multibillion-dollar business on a global scale.

What's more, this is something Nike's primarily domestic competitor Under Armour (UAA 0.45%) simply doesn't have to deal with. Though Under Armour is working hard to expand its global presence now -- earlier this month, it held a press event to launch the Under Armour brand in Brazil -- Under Armour still derived more than 93% of its total revenue from North America last quarter. By contrast, Nike brand footwear, apparel, and equipment most recently relied on North America for less than 47% of its $6.55 billion in total sales. 

What's more, this shouldn't have come as a huge surprise considering emerging markets' instability has threatened to derail our wider bull market for months now. That doesn't mean it will happen, but the risk is finally becoming more apparent as companies like Nike increasingly bring it to the forefront of their financial planning.

Nike is still being proactive
Luckily for investors, Nike isn't sitting on its heels waiting for the forex situation to turn in its favor.

When asked by analysts whether currency devaluation affects the company's capital allocation strategy, Blair insisted Nike's "financial management absolutely is driven by where we see the currency going." Furthermore, they can reduce the negative effects to some extent by temporarily minimizing the level of receivables in those respective markets.

However, Blair also reminded investors to maintain a long-term outlook, saying that if they believe any given market will stay healthy down the road, Nike can gain share by remaining committed and building out its business as their respective middle classes expand.

And that, my fellow Fools, is exactly the kind of view truly Foolish investors should love to hear. All things considered, that's why I think Nike's pullback represents a fantastic opportunity for patient shareholders to build their long positions.

Steve Symington owns shares of Under Armour. The Motley Fool recommends and owns shares of Nike and Under Armour. 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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