Nike's Quarterly Results Show It Still Has Room to Run

Nike proved to be one of brightest spot in the markets on Thursday after all the major indexes fell significantly. Nike’s price managed to hang on thanks to its fourth quarter and year end results, which beat estimates on the top and bottom lines.

After it reported its earnings, its stock climbed as high as $57.69 during intraday trading. That’s within a few dollars of its 52-week high of $60.33. The beat, and subsequent rise in stock price, made Nike one of the top 10 news gainers on Thursday.

As investors cheered the earnings report, Nike continues to take step to maintain its lead road in the athletic apparel space. These steps should give investors even more to cheer in the long term.

Let’s take a look at its performance so far.

Another quarter, another beat

Nike’s beat of analysts’ estimates was not much of a surprise. That’s because the retailer has made a habit of posting numbers that beat estimates.

For its fourth quarter 2017 results, Nike reported its revenue were up five percent to $8.7 billion. Earnings per share increased $.22 to $.60.

For the full fiscal 2017, Nike’s revenues were up six percent to roughly $34 billion.

Improving margins and sales

While Nike managed to beat earnings and revenue estimates again, its margins continue to show they are under pressure. For the quarter, its gross margin fell 180 basis points to 44.1%.

The company charged the decline was due to “unfavorable changes in foreign currency exchange rates and higher product costs.”

Given that investors are growing tired of the continued gross margin declines, Nike has taken several steps. It is in the midst of a transformation that can position it well to grow its profits significantly over the next few years.

For example, it is cutting two percent of its workforce, which amounts to about 1,500 people. Nike is also doing some consolidating. It is reducing the number of its divisions to four from six.

Portfolio manager Jim Cramer had this to say about the workforce cuts:

"Nike may have realized that it got bloated and is taking radical action, so that will drive the stock down but will later drive it up.” Furthermore, while Nike CEO Mark Parker may be struggling today, "he won't stay struggling."

In 2016, Nike announced an ambitious plan to reach $50 billion in sales by 2020. Part of that plan entails focusing on about a dozen cities around the world that have the best potential to helping Nike grow its core brands.

Nike has identified a dozen cities around the world that it sees as key in helping it reach its sales goals through 2020.

Nike’s full footlocker

When it comes to ways to boost its profits, Nike benefits from having several strong revenue producers in its footlocker. This includes its basketball line. In fact, its Michael Jordan line continues to do very well.

In 2017, the line brought in about $3 billion in wholesale revenue. That represented an increase of 13% over the 2016. The Jordan brand was Nike’s fastest growing line for 2017.

Also in Nike’s footlocker is a newly-reached agreement with online giant Amazon. This is beneficial for Nike because it allows it to focus on selling directly to consumers, instead via wholesale.

To consider about Nike

As it maps out its future, Nike must also contend with its chief rivals - Adidas (ADDYY) and Under Armour (UAA). For at least the past two years, these competitors have gained more market share, encroaching on Nike’s turf.

Nike’s report comes on the heels of a few analyst actions in June. Telsey Advisory Group reiterated its ‘outperform’ rating on the stock. However, it lowered its price target to $62 from $66. Prior to Telsey’s action, JP Morgan lowered its rating on Nike to ‘neutral’ from ‘overweight.’

Nike offers a dividend, and is showing no signs of slowing its share buyback program. At this point, it’s a long-term play.

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