Nike Battles Upstart Under Armour, High Expenses

NEW YORK (TheStreet) -- Nike (NKE), the world's leading manufacturer of athletic footwear, apparel and equipment, delivered good quarterly results with strong direct-to-consumer sales growth. In the meantime, its rival Under Armour (UA) has also impressed investors with a blowout performance. And in the coming quarter, Nike will likely continue posting strong numbers for direct-to-consumer sales.

Is Nike a slam dunk, then?

Maybe not.

Investors should remain cautious, as Nike is still struggling to rein in its expenses. Moreover, the business's performance in China and other emerging markets is far from satisfactory. The company has not reported any growth in combined revenues from these two regions in the first six months of the current fiscal year.

Nike's shares have risen by nearly 10% in the last six months, to $72.67. Its price-to-earnings ratio is 24.8, making Nike considerably cheaper than Under Armour by that metric.

Growing the Top and Bottom Line

In its recent quarterly results, Nike posted an 8% year-over-year increase in revenues to $6.43 billion, which was slightly below market expectations of $6.44 billion. The company's net income rose by a massive 40% from last year to $537 million, or 59 cents per share, just above market expectations of 58 cents per share.

However, this enormous increase in profits was largely due to the $137 million in losses related to discontinued operations that were included in the prior year's results. Considering just the income from continuing operations, Nike's profits are up a modest 3%.

The business benefited from an increase in sales of higher-margin products, as Nike's gross margin increased by 140 basis points to 43.9%. The firm's margins also improved due to lower input costs and 20% growth in comparable-store sales in direct-to-consumer stores.

Moreover, Nike's total global future orders are up 12%, which shows a bright outlook. Orders were up 8% in the previous quarter and 6% a year ago. The business's future orders indicate expected growth in sales of athletic footwear and apparel between December 2013 and April 2014.

Meanwhile, Under Armour came forward with even better results, with double digit top and bottom-line growth. Unlike Nike, the business's revenues and profits surged by 35% and 28%, respectively, from last year. Under Armour's 36% growth of direct-to-consumer sales also easily surpassed Nike's. Like Nike, Under Armour also benefited from a favorable sales mix, which is why the business's gross margins expanded by 100 basis points to 51.3%.

While Under Armour's results were clearly better than Nike's, both companies have posted strong direct-to-consumer sales numbers and are more optimistic about the future, which is evident in Under Amour's guidance and Nike's future orders.

In the coming quarter, I think Nike will likely post double-digit growth in direct-to-consumer sales. The company has other problems, though.

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