With pristine fiscal first-quarter results under the belt, Nike (NKE - Get Report) proved that carefully picking winning stocks can be a successful investment strategy when the broad market shows signs of being out of breath. Ignoring the worries over the trade war and global economic deceleration, the Beaverton, Oregon-based consumer goods company delivered a robust, all-around beat after Tuesday's closing bell, and the stock moved to all-time highs in after-hours trading.
The 10% year-over-year increase in currency-adjusted revenues was nothing short of impressive. Nike was faced with tough comps this time, following a fiscal first quarter of 2019 that had seen the second highest sales growth rate of the past five years. Still, the company managed to pull a rabbit out of the hat, with digital sales skyrocketing and Greater China accounting for nearly half the growth in total company's currency-adjusted revenues.
What Global Recession?
In the same week when Europe shared worrisome macroeconomic data, Nike cut against the grain and reported double-digit sales growth in its EMEA region. The management team even reported unexpected pricing strength in the continent, perhaps surprising those who might have anticipated some softness in consumer sentiment and spending driven by Brexit fears and slowing economic growth.
Something similar happened in the Asia Pacific and Latin America segment, where revenues grew at a respectable currency-adjusted pace of 13%. Again, the results were achieved despite sharp currency devaluation, particularly in Latin America, and the growing economic crisis in Argentina.
It is much more likely that Nike's strong performance was a result of the company's successful execution of its Consumer Direct Offense marketing strategy, launched in 2017, rather than a sign of resilience in the global economic landscape. The swoosh company has stepped up its product innovation efforts, which only two years ago had been criticized by retailers like Foot Locker (FL - Get Report) . The Air Max and Jordan lineups have proven to be a hit with footwear consumers across the different geographies, while new products like the Joyride have been well-received by the market.
Nike has also been doing a superb job at developing its digital platforms to grow DTC (direct-to-consumer) sales. Digital sales, in fact, grew a whopping 42% in the first fiscal quarter. Because the digital channel tends to be more profitable than wholesale, gross margins expanded by an eye-catching 150 basis points in the most recent period, helping to push EPS higher by nearly 30% year-over-year.
The Last Shoe To Drop
Ordinarily, consumer discretionary companies are some of the most exposed to a deteriorating global economic environment. But Nike has been taking the right steps to ensure that it continues to thrive despite the external pressures. Even if the global economy fails to recover in the foreseeable future, I find it unlikely that demand for Nike products will wane -- suggesting that an investment in the stock, at what could prove to be the end of an economic expansionary cycle, might still make sense at current levels.
While some investors may be concerned about rich valuations, since shares trade at a forward P/E ratio of more than 25 times, I note that the multiple is likely to dip in the face of first quarter EPS that surpassed expectations by a whopping 15 cents. Should Nike trade at around $92/share during the Wednesday session, I calculate that the stock will be valued at an earnings ratio that is near the lowest levels of the past 12 months.
All accounted for, Nike still looks like a buy following the company's solid earnings report.