Nike (NKE) - Get Report shares soared after earnings, but that doesn’t mean not to buy the stock now. The company, large and economically sensitive, is somewhat of a growth play and has been treated by the market as such.
Before we analyze, let’s look at the earnings and the stock.
Nike reported earnings Tuesday after the closing bell and wiped the floor clean on analysts’ estimates. Here were the results:
- Revenue: $10.6B v. $9.13B (actual result: -1% year-over-year)
- North America Revenue: $4.225B vs. $3.43B (-1%)
- China Revenue: $1.78B vs. $1.87B (+8%)
- Operating Margin: 16.1% vs. 9.6% (14% last year)
- Adjusted EPS: 97 cents vs. 47 cents (+11%)
Digital sales rose 82% as consumers largely stayed at home. Management said foot traffic was weak and that the strength came less from generally strong consumer demand and more from e-commerce capabilities and product and brand strength. Costs nearly stayed in check as well, helping drive EPS, which was expected to fall more than 40%.
Management also raised its fiscal year 2021 (ends in May) guidance to slight revenue growth rather than flat.
The stock rose more than 8% to $127 a share Wednesday. The shares have also doubled from their late March lows and are 22% higher than their pre-COVID 2020 highs. That’s more than a V-shaped recovery -- it’s emblematic of a company coming through the pandemic fundamentally stronger than it was prior to it. Analysts are also quick to note as much. E-commerce awareness is on the rise and Nike continues to leverage its various online sales channels to foster brand loyalty and adoption.
One sticking point for some investors who would ideally like to own the stock is that it is now trading at 41 times the next 12 months of EPS. It has averaged 26 times in the past five years. Yes, interest rates are near rock bottom levels and earnings growth looks strong -- but this valuation may seem bit extended to some. Earnings are expected to grow 30% next fiscal year, but moderate to under 20% growth for the several years following, according to FactSet consensus estimates. Nobody would call the stock cheap.
Upside to Earnings?
But there is upside to those forecasts.
“The outlook is likely conservative,” wrote Wedbush Securities analyst Chris Svezia in a note. Morgan Stanley Kimberly Greenberger wrote in her note that she is raising her fiscal year 2021 EPS estimate to 2.53 from $195, “Which we acknowledge still appears conservative.” Svezia says management is likely not including new opportunities to drive digital sales in its current guidance.
Many growth investors are worried that the adoption of e-commerce, like other secular growth trends, is being pulled forward from later years, and that may very well be true. But for Nike -- and maybe other similar retailers like Lululemon (LULU) - Get Report (up 3% Wednesday) -- higher e-commerce awareness due to the stay-at-home environment is driving a larger total available market than previously expected. That’s a theme analysts TheStreet has spoken with have emphasized. So Nike is not only taking market share in retail apparel, but it is enjoying an expanding market.
Selling online -- and efficiently so -- also means Nike can gather tons of data and create another prong of total available market expansion, analysts say. Nike, which said new products resonated with consumers well this quarter, is trying to reach new demographics. It takes a new product and stylizes it (using different colors, shapes and fits) for different types of customers for the same base product, such as a Michael Jordan-modeled sneaker.
The higher reliance on direct-to-consumer and digital also enables the operating margin to expand because the gross margins are higher than in traditional retail selling. That margin expansion -- expected to reach 16% on a sustainable basis a few years from now -- is reflected in analysts’ estimates and part of the expected earnings growth.
But if Nike can continue reaching new customers through its new channels, who knows how much runway the stock has? Even if the valuation compresses one day -- and the market isn’t indicating it wants to do that to the stock -- the stock can still run nicely over time.
One big issue: market risk. Virus-induced lockdowns, even with more fiscal stimulus, will be a huge challenge even to digitally-focused brands.