On Sept. 21, Nike (NYSE:NKE) reported strong sales but tepid bottom-line results for its fiscal first quarter. Doesn't sound so great, so why did the stock go up more than 4% on the day of the release with further gains since then?

Perhaps the gains are due to the overall cheery mood on Wall Street as oil prices drop and inflation remains in check, both of which benefit the consumer. Other reasons include the fact that analysts applauded Nike's strong top-line results during the quarter and a good start to the fiscal year. Plus, investors may have unduly punished Nike's stock over the past year because of shorter-term worries that consumers were becoming short of cash and shying away from its higher-priced shoes.

For the first quarter, sales grew 9% to $4.2 billion and foreign currency exchange rate benefits accounted for about 2% of that growth. Net income fell 13% and diluted earnings fell 9% to $1.47, as stock option expenses shaved $0.16 off the diluted earnings figure. Excluding stock option expenses, Nike detailed that net income only fell 3%, while diluted earnings grew 1%.

Below is a breakdown of the three key sales categories of shoes, apparel, and equipment, by major region:

Total

($M)

%Growth

U.S.

$1,601.9

6%

Europe

$1,270.9

4%

Asia/Pacific

$518.4

13%

Americas

$242.5

13%

Footwear

($M)

% Growth

U.S.

$1,079.1

6%

Europe

$679.5

(1%)

Asia/Pacific

$266.0

12%

Americas

$172.3

10%


Apparel

($M)

% Growth

U.S.

$431.5

9%

Europe

$487.0

12%

Asia/Pacific

$200.9

14%

Americas

$51.2

26%


Equipment

($M)

% Growth

U.S.

$91.3

(1%)

Europe

$104.4

7%

Asia/Pacific

$51.5

13%

Americas

$19.0

18%


As you can see, the U.S. and Europe continue to account for the bulk of sales, but Asia/Pacific and the Americas continue to account for a good portion of the top-line growth. Overall sales results were solid, with particular strength in the apparel category.

Nike also has an "Other" category that includes Converse; Nike's golf and Bauer hockey businesses; and dressier shoe division Cole Haan. These businesses collectively grew sales 21% to $560.4 million. "Futures orders," which allow customers the ability order five to six months in advance in order to lock in 90% of their orders at a fixed price, were rosy and up in most key regions. These orders provide a decent way for investors to see a couple of quarters into the future. Additionally, gross margins of 44.1% allayed certain analyst concerns regarding margin weakness last quarter.

Again, I'm not quite sure whether the first-quarter results were impressive enough to warrant such a strong share price reaction, but the shares have advanced almost 7% in a week and nearly 14% since August. With the recent run-up, the shares are trading at 15.4 times forward earnings for the year ended May 2007.

Based on Nike's growth track record and cash flow generation capabilities, I'm not so sure that still isn't a reasonable multiple, especially considering it's still a five-year low. Free cash flow has come in close to reported net income over the past couple of years, as operating cash flow has exceeded net income. And capital expenditure needs are minimal, as Nike is primarily a marketer and designer of brands; it outsources capital-intensive functions such as the manufacturing of its merchandise. This structure is similar to rival K-Swiss (NASDAQ:KSWS), but Nike has far more product diversification and is about 22 times larger from a market capitalization perspective.

Additionally, Nike's returns on invested capital have risen steadily over the past five years, while sales have grown 10.1% and net income has advanced 18.2% each year over this timeframe. I also recently highlighted the fact that Nike possesses a number of those coveted Foolish investment principles, including a leading global brand and solid financial position with a clear direction.

One of the only potential drawbacks I see is that retailer Foot Locker (NYSE:FL) accounts for a high 10% of total Nike sales, implying that any difficulties at Foot Locker are out of Nike's control and could adversely affect results should any problems arise. Plus, the relationship has been rocky in the past -- at one point, Foot Locker was looking to sell less pricey goods.

In any case, Nike should be on any Fool's stock watch list. The stock may take a breather after such a rapid advance, but the long-term prognosis continues to be positive for this leading footwear and apparel firm.

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Fool contributor Ryan Fuhrmann is long shares of Nike but has no financial interest in any other company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.