Nike's Long-Term Story Intact

While the market is justifiably focused on

While the softer futures orders can be attributed in part to competition from Adidas/Under Armour, as well as a trend shift toward lifestyle fashion versus performance products, we share management's views that this metric doesn't fully capture demand as Nike continues to evolve its direct-to-consumer capabilities (constant-currency DTC revenue increased 22%--including impressive 49% growth at Nike.com--which also explains the inventory increase). Management attributed gross margin pressures on foreign currency, the exit of the golf business, a higher mix of off-price goods due to retailer consolidation, and manufacturing investments, all of which are consistent with industry commentary and imply gross margin improvement as the year progresses.

Altogether, Nike's first-quarter update will not materially alter our $57 fair value estimate, and we view shares as modestly undervalued. We still find full-year guidance calling for high-single-digit top-line growth achievable.

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