Is Nike a Buy After Crushing Earnings Estimates?


Nike (NYSE: NKE) reported an increase in demand at his business in its fiscal fourth quarter earnings report. Everything clicked – shoes, clothing, athletic gear – and the momentum spread to all geographies. Earnings per share of $ 0.93 exceeded analysts’ consensus estimate of $ 0.51.

The stock price hit a new high above $ 150 on Friday, following the announcement of the results. Should investors follow the crowd and buy at these highs?

A football field on the Nike corporate campus. Image source: Nike.

Digital is Nike’s asset

Revenue was up 96% from the quarter last year, but that added to an easy comparison, when revenue fell 41% last year due to store closings.

Still, comparison with the same quarter in 2019 shows how well Nike is really performing right now. On a comparable two-year basis, sales increased by 21%, with EPS up 50%. Most impressively, the region of North America, which is Nike’s most mature market, surpassed $ 5 billion in revenue for the first time in the last quarter.

Once again, as we’ve seen throughout the pandemic, growth has been driven by its digital business. Digital now accounts for 21% of the brand’s total revenue, and management believes it will get even better from there. “Today, we are better positioned to generate long-term sustainable growth than before the pandemic,” CEO John Donahoe said during the fiscal fourth quarter earnings call.

Nike’s digital advantage is membership, where demand from members continues to outpace growth in digital sales overall. Digital activity has more than doubled in recent years to reach $ 9 billion, including $ 3 billion from its 300 million members.

The company invested heavily in e-commerce before the pandemic. Between fiscal years 2018 and 2020, it acquired several companies to accelerate its direct-to-consumer infringement strategy. Specifically, the acquisition of Celect in 2019 improved Nike’s retail predictive analytics and demand sensing, which is clearly paying off.

Growth catalysts

In the short term, Nike has big catalysts with the return of sport and the Tokyo Summer Olympics. Marketing is one of the strengths of the company, where the Swoosh relies on superstar endorsers, like LeBron James and Cristiano Ronaldo, to present the brand to a large audience.

Nike is stepping up its digital marketing efforts behind the reopening to encourage people to get active. He said his Play New campaign on TikTok and Snapchat generated more than 600 million Gen Z impressions in two weeks. With these initiatives, Donahoe said the company’s goal is not only to gain market share, but “also to develop the whole market”.

On that note, Nike has raised its long-term growth forecast for BPA through mid-teens through FY2025. This is a small upward revision from the growth outlook for mid-teens published before the pandemic. Nike expects profits to be fueled by single-digit to double-digit revenue growth, with operating margin improving to a high level by fiscal 2025 .

The only short-term hurdles are continued supply chain delays and higher logistics costs that management expects to maintain for much of fiscal 2022. But this actually weighs in Nike’s favor in accelerating inventory turnover and increasing sales at full price. Management expects gross margin to improve by up to 1.5 percentage points in fiscal 2022, in part reflecting a strong full-price sale.

The best

At the current stock price of $ 152, Nike is trading at a futures price / earnings ratio of 39.6, which isn’t a value, but there aren’t many retailers with its share either. brand power, growth prospects and high returns on invested capital.

The stock is suitably cheaper than the faster growing stock lululemon athletics, and more expensive than the average for companies in S&P 500 index.

All in all, the price of this high-quality sportswear giant could be about right, which is why the stock is soaring after profits. With the rise of digital business, Nike remains one of the main retail stocks to buy.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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