Nike Inc.’s (NYSE:NKE) stock reeled after it released Q4 fiscal 12 results.  While Nike reported a solid year-on-year increase of 12% in Q4 revenues, gross margins declined 150 basis points and missed expectations. Though Thursday’s earnings release highlighted near-term input cost pressures on Nike’s margins, we remain optimistic about the company due to near-term catalysts such as the London Olympics and growth in new product categories.
We have revised our price estimate for Nike’ stock to $111, which is nearly 30% above the current market price. The decline in our price estimate primarily reflects a slight decline in Nike’s near term EBITDA margins as well as change in the company’s net cash/debt position.
Nike’s stock tumbles on margin concerns
Nike’s Q4 fiscal 2012 gross margins declined by 150 basis points from 44.8% in Q4 fiscal 11 to 42.8% this quarter, missing market expectations. Q4 fiscal 12 EPS came in at $1.17 which also missed consensus expectations. While higher input costs was the main driver behind the decline in gross margins, accelerated investments in R&D also had an impact. Operating expenses increased due to higher marketing expenses prior to the London Olympics and European soccer championship.
Significant opportunities ahead for Nike
Though Thursday’s earnings did highlight concerns on Nike’s near-term margins, we remain optimistic due to growth opportunities available for the company in 2012. First, high marketing expenses for Euro 2012 and London Olympics should be a one time expense and should translate into revenue growth for Nike next quarter. London Olympics in particular presents a significant growth opportunity for the company as Nike is one of the biggest sponsors of the event.
Additionally, recently launched digital products such as FuelBand and Nike+ have emerged as some of the fastest growing products for Nike. We expect Nike’s digital products to gain further traction going forward as the company extends these products to other sports segments.
Note, Nike announced in May that it will be divesting Cole Haan and Umbro Brands and the company reiterated its intentions during the Q4 fiscal 12 earnings call. These brands currently make up a small percentage of Nike’s value and our model will be updated when firmer plans for these divestitures are announced.Notes: