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Stock Analyst Update

Nike's Investments Propel Results; Shares Fairly Valued

We plan to raise our fair value estimate by a mid-single-digit percentage, but investors should wait for a better margin of safety before diving in.

Mentioned:

Wide-moat  Nike's (NKE) third-quarter results were aided by continued investments in the company's product pipeline as well as its direct-to-consumer channel. Consolidated constant-currency sales were up 7%, driven by 16% growth in the international segment (roughly 50% of sales). However, performance on Nike's home turf remained lackluster, with segment sales down 6%. While this is far from a positive, we’re encouraged by the consolidated 18% increase in direct-to-consumer sales, and we forecast this will continue to be a growth engine for the company. Even though results are tracking toward our full-year estimates (mid-single-digit top-line growth and operating margin compression by around 60 basis points to 13.2%), we plan to raise our $66 fair value estimate by a mid-single-digit percentage to incorporate a moderately lower tax rate and the time value of money. However, the shares trade in line with our valuation, and we believe investors should wait for a better margin of safety.

Despite sluggish North American wholesale performance caused by intense competitive pressures, we think Nike’s focus on building out its direct channel is prudent, particularly given consumers’ penchant for purchasing online. This also brings merchandise closer to the end consumer and enables the firm to respond to customer preferences faster (including more personalization), which should lead to higher sales and margins. We see this channel helping North America return to a positive growth trajectory in fiscal 2019 (we estimate a low-single-digit percentage), which qualitatively aligns with management’s newly issued guidance. Although Nike’s investments to support this channel and product design pressured operating margins by 190 basis points to 13%, we view this spending as supporting its competitive edge longer term.

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John Brick, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.