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Stock Analyst Update

Nike: After Solid Quarter, Our Thesis Intact

Based on the current quarter's momentum and the strong engagement reported from the new advertisement featuring Colin Kaepernick, we think management's full-year guidance is conservative.


Wide-moat  Nike (NKE) posted a solid fiscal 2019 first quarter headlined by continued growth in North America (up 6%) and development in direct-to-consumer and digital offerings (up 12% and 36%, respectively). While management stated that results were better than expected, full-year guidance of high-single-digit growth, gross margin expansion of 50 points, and selling, general, and administrative expense growth at the same pace of revenue remained unchanged. We see this as conservative based on the current quarter’s momentum and the strong engagement reported from the new advertisement featuring Colin Kaepernick. As a result, we continue to believe our long-term forecast remains achievable, with sales growing high single digits, gross margin expanding to 46.5% (from 43.8% in 2018), and operating margins of 16% (12.2%) on average over the next 10 years. We do not plan to materially alter our $75 per share fair value estimate.

Nike’s ability to balance lifestyle versus performance goods highlighted our belief that the firm will be able to cater to consumer demands through fashion cycles, justifying our wide moat rating. In the quarter, Nike’s brand intangible assets helped it sustain top-line growth in the historically challenged North American segment, while keeping inventory flat helped the firm achieve 50 basis points of gross margin lift (to 44.2%). We believe the brand assets helped the firm create new digital partnerships with, Flipkart, and WeChat, which will continue to aid performance in the digital channel. Finally, we are encouraged by the firm's continued investment in supply-chain and cost initiatives seen in the invention of the new plant assembly process for its Advanced Product Creation Center that reduces labor needs by 50% and cuts overall product creation cycles in half (rapid prototyping and 3D printing).

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R.J. Hottovy does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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