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Nike's Growth on Track

Unfazed by trade war, company continues to see opportunity in China.

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 Nike’s (NKE) fiscal 2019 fourth-quarter sales of $10.18 billion slightly exceeded our $10.16 billion forecast. North America sales growth of 7.5% beat our 3.5% forecast as sales of basketball shoes and innovative products like VaporMax were strong. The company reported double-digit growth with important U.S. partners despite recent weak overall sales reports by Foot Locker, Nordstrom, and other U.S. apparel retailers. In greater China, Nike’s sales growth of 15.6% (22% currency-neutral) beat our estimate of 13.0%. We believe the company is on track to achieve our midteens long-term annual growth expectation for the region. Fourth-quarter earnings per share of $0.62 came in just below our $0.63 forecast due to a difference in share count and a higher tax rate. We believe that Nike’s intangible brand asset provides a wide economic moat and that the company continues to execute well on its strategies, including direct-to-consumer sales, product innovation, and supply chain improvements. We view Nike’s digital business (35% growth in fiscal 2019) to be key, as it allows the company to control marketing and improve pricing while reducing dependence on physical retailers.

Nike expects sales growth in the high single digits (excluding currency) in fiscal 2020, in line with our forecast. We think currency headwinds may reduce Nike’s fiscal 2020 first-quarter gross margin by 50-70 basis points. Despite this impact and investments in RFID inventory tracking, Nike’s guidance is for nearly 50 basis points in gross margin improvement and slight leverage in sales, general, and administrative expenses in fiscal 2020. We believe these improvements are achievable as digital sales increase and supply chain efficiencies are realized. Nike’s fiscal 2020 guidance matches our forecast of 40- and 60-basis point improvements in gross and operating margins, respectively, so we do not expect to change our $98 fair value estimate. We continue to view the shares as undervalued.

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David Swartz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.