Nike beats, but outlook clouded

After the market closed in the US last night Nike, one of our favourite aspirational consumer stocks reported first quarter earnings which again disappointed the market. Revenues were up 10% to $6.7bn while earnings per share were down 10% to $1.23 beating estimates of $1.13. Earnings decreased from last year because of a decrease in margins, higher selling costs and an increase in the tax rate. Future orders were up 6% which was less than expected, this is why the stock is down premarket. Inventories increased 10%.


Analysts reckon earnings will be around $5.26 for the full year so trading at $96 the stock is priced for some strong growth. Let's look at the concerns from this announcement and then discuss the positives.


The fact that margins are decreasing is an issue but not unexpected. Materials are getting more expensive while labour in China is not as cheap as it used to be. Ironically increasing wages in China will benefit Nike from a sales point of view. Although this is declining, the margins at 43.5% are still fantastic and as the brand continues to grow their pricing power should strengthen.


Inventories have also been an issue. The company has experienced less demand, especially from China, than expected which means they are sitting on too much stock. This is something which will take time to offload and why the Nike share price has underperformed of late.


So what of this lack of demand from China? To put things into perspective China is responsible for 17.5% of their earnings mix and much of their growth over the last few years. We all know that China have hit a bit of a speed bump but I really don't think Nike should be too worried. The Chinese consumer is going to be the countries next growth spurt.


On the positive side North America who are responsible for a whopping 67% of profits grew earnings by 17%. Remember my article yesterday which spoke about the US consumer who was showing good signs of growth? Nike, with such big exposure to the area will certainly benefit. In the other regions Europe and Japan saw some hefty declines while emerging markets grew 17%.


When you look at these valuations you also need to note cycles amongst big sporting events and spend on R&D. Nike have been at the forefront of innovation in the industry when it comes to products, advertising and sponsorships. This company sits at the forefront of aspirational consumption whether it is their fantastic brands or peoples drive to get more active and healthy. The share price has pulled back and we will use this opportunity to add.


I'll leave you with a statement from CEO Mark Parker concerning Nike's strategy going forward.

"We had a strong first quarter and a great start to the fiscal year. NIKE, Inc. delivered an amazing array of innovation across some of the biggest moments in sport. Innovation is how great companies sustain growth and build competitive separation. We'll continue to make strategic investments across our portfolio of businesses to capture our full potential over the long term and drive shareholder value."