One of the star performers in the Dow Jones Index during 2015 is sportswear company Nike Inc. (symbol: NKE). Its shares hit multiple all-time highs during the year. On the back of strong earnings during fiscal second quarter 2016, shares of the Oregon-based company surged to a new high of well above the $135-mark. With a year-to-date yield of 38%, Nike is a clear outperformer on the Dow which lost a bit more than 2%. Should investors still jump on the Nike-train or are we in the last stage of the bull run?
Nike sales in China impress
A major driver of this year’s stellar performance is driven by Nike ability to impress investors with its margins. But also revenues come in nicely, despite the headwinds due to a strong US Dollar. During the FQ2, the sportswear company was able to increase its revenues with 4.1% on a quarterly basis to $7.7 billion. This was a miss of $120 million, but in constant currency revenue growth reached 12%. What is even more impressive, growth reached at least 10% in each geographical market. Especially Asia performed well, with 28% growth in China as a clear highlight. Direct-to-Consumer revenues shot up with 51% and futures orders came in at a 34% increase, significantly higher than last quarter’s 27%. It seems that Nike’s past investments are paying off well. Also Singles Day provided a real boost, according to Nike President Trevor Edwards. Online sales in China are particularly high and according to Mr. Edwards Nike’s previous decisions are paying off nicely and Nike leads the market as the region’s most coveted brand.
Nike prospects promising
The miss on revenues was also countered by strong futures orders overall that came in 20% higher (in constant currency). A large part of this growth comes on the back of higher sale prices. Nevertheless, robust demand caused unit growth to add 12 points to the higher futures orders growth. The segments Running and Jordan (basketball) grew double-digits. Nike’s efforts in basketball were recently underlined by a marketing deal with former MVP LeBron James. The life-time deal is rumored to amount approximately $500 million. But other star players such as Kevin Durant, Paul George and Anthony Davis are also under contract. But reigning MVP Steph Curry left Nike in 2013 for Under Armour and a deal was extended until 2024 earlier this year.
Margins and profitability solid
Investors are also keen on Nike shares as a result of the company’s profitability. The company beat analysts’ estimates and reported a FQ2 EPS of $0.90, (vs $0.86 expected). This number is 22% higher than last year. To be fair, pre-tax income was only up 10% due to a sharply lower tax rate. But margin growth in Q2 might matter more. Instead of a guided 25bps increase, gross margin increased 50bps. Nike’s management confirmed once more it sees a 50 bps margin improvement for the full year.
Nike also has some negatives
On the other end of Nike’s impressive numbers stand concerns regarding a large inventory. Running down inventory, especially in North America, could push margin lower during the third quarter. Also numbers for the Converse brand were somewhat disappointing. During the recent quarter, sales dropped 5% mainly due to weaker demand in Europe. The brand saw growth in the US and Asia, but in particular the U.K. saw lower volumes.
But what about valuation of Nike shares?
The excellent performance of the company shares could now raise some questions of sustainability. With a price/earnings-ratio of 31 for fiscal year 2016, Nike shares are not cheap. Growth is not strong enough to let the p/e-ratio drop significantly in 2017. EPS is expected to increase to $4.87 in 2017 (consensus), which means a p/e of 26. Compared to main peer Adidas (2016 p/e 22) this is slightly expensive, but its shares are lot cheaper compared to Under Armour’s 2016 p/e of 60. Price/sales for Nike stands at 3.5, compared to 1.2 for Adidas and 4.7 for Under Armour.
Although Nike is expected to continue to benefit from today’s trend of athleisure wear, its share price valuation looks a bit lofty. Nevertheless, the company holds one of the strongest brands and compared to its North American peer Under Armour, it’s the better pick. But chances for another year of outperformance are limited. Slight disappointments in margin growth or misses on growth in China could spoil the party. Don’t enter at current levels.