Nike’s Pullback Is a Buying Opportunity

Improving margins and innovative products are some of the reasons why you should buy Nike on the pullback.

Shirish Mudholkar
Shirish Mudholkar
Apr 12, 2014 at 7:00AM
Consumer Goods

Sports apparel and footwear giant Nike's (NYSE:NKE) performance this year hasn't been up to the mark. Its share price dropped almost 8% after the company released its third-quarter results last month. Moreover, with competition from the likes of Under Armour (NYSE:UAA) and Adidas (NASDAQOTH:ADDYY) heating up, investors might think that Nike is in for tough times, but that's not the case. 

Nike's results were not bad and the company posted decent growth numbers, but even then the stock dropped. So it looks like an opportunity has opened up for investors to add to their Nike positions.

A solid performance
Nike's third-quarter results were better than consensus estimates  . Global demand for Nike's athletic goods drove the company's results, while the approaching FIFA World Cup in June also boosted Nike's orders. Nike's revenue for the third quarter increased 13% to $7 billion while its net income rose 3% to $685 million. Its gross margin also improved by 30 basis points due to higher average prices and growth in the higher-margin direct-to-consumer business.

Innovative products drive growth
In the third quarter, Nike focused on footwear and apparel, launching an array of innovative footwear while keeping the Super Bowl in New York in mind. Also, the World Cup fever is gaining momentum, so Nike launched its Vapor Carbon Elite Cleat which it specifically designed for speed. Nike has  leveraged its 3-D printing technology to bring out this revolutionary new cleat and it plans to expand this state-of-the-art technology to its other segments as well. 

In March,  Nike introduced the Magista, and it anticipates that this will set a new standard in soccer boots. Nike designed the boot to enhance player fit, touch, and traction for a game that has become faster and more intense.

Nike's Flyknit platform has also continued to deliver good results. The new Flyknit Air Max combines Flyknit with an improved Max Air to create a lightweight, well-conditioned, and well-cushioned running shoe. While it will continue with the existing designs, Nike will launch more products before the World Cup. In the apparel segment, Nike has introduced the Silver Speed collection of on-field, sideline, training, and sportswear products, which includes the Aeroloft Summit Jacket. Nike constructed this apparel to be lightweight and breathable to keep athletes in comfort.

The company is doing well in basketball. The Nike and Jordan brands turned in good performances in the previous quarter which led to the tenth consecutive quarter of double-digit growth in the basketball segment. Nike expects that as the game becomes more and more popular globally, the numbers will improve further.

Nike's partnership with star basketball players has helped the company launch innovative and popular products such as the LeBron 11, KD 6, and Kobe 9 Elite. Since launch, these have sold out at nearly every location as soon as they have arrived.

China remains a concern
However, China still remains a major concern for the company. Future orders from China fell 1% in the previous quarter, and Nike expects this trend to continue for some time due to the strong dollar. To add to its problems, Nike has to deal with higher raw material costs for leather, chemicals and labor. 

Moreover, the competition in China will get stronger. Nike's American rival, Under Armour, plans on international expansion and China is one of its main targets. Last year, Under Armour opened eight new stores in China which included a new Under Armour Experience Store in Shanghai. In addition, Under Armour already has an e-commerce site for the country and this enhances its chances of getting a larger share of the Chinese market. 

Adidas is also bolstering its retail strategy to get ahead of Nike in the Chinese market. Adidas has introduced a new retail concept known as HomeCourt that offers an enhanced consumer experience. HomeCourt is the largest Adidas store concept and Adidas will open stores in 24 locations, focusing on the emerging markets. Adidas has kicked off this new concept by placing its first store in Beijing in a bid to compound Nike's problems in China further through stiff competition. 

Final words
Nike is a  diversified player and it enjoys solid brand equity. Although it faces some tricky times in China, it is changing its strategy to turn around its business in the region. Its Greater China revenue was up 9% in the previous quarter, and looking forward, management is positive about Nike's performance in this particular country.

Moreover, on the whole, Nike is doing well and the FIFA World Cup should provide a good boost to the business. Hence, investors should consider buying Nike on the dip as the company's innovative products and global presence are key long-term growth drivers.