By Joe Musso
With shares swooshing to record highs, Nike is on many stock analysts’ buy lists. But investors expecting an easy lay-up should proceed with caution.
The sportswear giant, with $28 billion in annual revenue, has seen its shares vault 11 percent in just the past month after reporting a blowout start to fiscal 2015.
Over the past year, Nike has risen 23 percent to $96.47 at Tuesday’s close. By comparison, the Standard & Poor’s 500 index is up 14.5 percent in the same period.
“Nike has never been better positioned to realize our tremendous growth potential,” said Nike CEO and President Mark Parker on the quarterly conference call.
The company reported a 15 percent surge in revenue to $8 billion and a 23 percent jump in quarterly profit to $962 million in the quarter ended Sept. 25. Its gross margin rose 1.7 percentage points to 46.6 percent.
Nike reported $1.7 billion in Western European revenues in the first fiscal quarter, nearly a 32 percent increase from the year-ago quarter, and a 62 percent leap from the first fiscal quarter of 2010. Some of this growth was carry-over from increased global exposure during the World Cup.
“I do expect Europe to be a continued area of growth,” said Canaccord Genuity Corp. analyst Camilo Lyon in an interview. “Despite an unfavorable macro climate they [Nike] have continued to outperform the market with a primarily product-based growth.”
Twenty-one of 32 analysts following the company advise investors to buy the shares. But the remaining 11, including Lyon, have a more cautious “hold” rating on Nike.
“We believe that Nike’s strength, driven by innovative marketing, as well as its industry-leading return on invested capital of 26 percent, are priced in,” said Sterne Agee analyst Sam Poser, in a research report Nov. 14.
Analysts like Poser believe that Nike is “priced to perfection,” meaning the stock may inch up, but its share price is unlikely to match the past month’s gains.
Case in point: Nike’s price-to-earnings ratio of 29.56 is far above the 18.13 for the Standard & Poor’s 500 index.
Analysts say these figures are a result of Nike’s commitment to product innovation, balanced national and global distribution and aggressively unique marketing strategies.
“Because of its size, brand image and related competitive advantages, we expect Nike to maintain its market leadership and high returns on capital,” said Morningstar analyst Paul Swinand.
With competitors like Under Armour making aggressive moves in the female active wear segment of the business, Nike is again flexing its market share muscles. The company plans to expand female sales by 40 percent over the next four years to $7 billion from $5 billion currently.
Nike’s market share expansion is not reserved to female active wear or the United States. Global market share is next on Nike’s checklist as the company begins to encroach on Adidas’ home turf of Western Europe, where it is gaining traction in global basketball, running and soccer sales. Western European sales accounted for 21 percent of Nike’s total revenues in the quarter ended Sept. 25, as opposed to 18.6 percent last year.
Nike’s legal department is also staying busy as the company aggressively defends its home court. On Oct. 14, Converse, a subsidiary of Nike, filed suit against 31 companies for trademark infringement of its iconic Chuck Taylor sneaker.
Last quarter Nike reported a 16 percent increase in Chuck Taylor sales, which accounted for 7.2 percent of quarterly revenues.