Can Nike Sustain Its Growth Momentum This Quarter?

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Sports giant Nike (NYSE:NKE) will report its Q1 fiscal 2014 results on September 26. The company’s results in the last two quarters have been encouraging due to strong growth in top line coupled with improvement in gross margin. We expect the high growth to continue in the first quarter nudged by strong demand in North America, emerging markets as well as central and eastern Europe. Moreover, robust growth in running, basketball and football (soccer) products will continue to fuel its top line growth.

We are eager to see the company’s results in Greater China as any surprise in these results could drive a change in the company’s stock price. In Q1, we believe the sales in Western Europe will be impacted by difficult y-o-y comparisons and Japanese sales will face currency headwinds.

See our complete analysis for Nike

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Recap of Nike’s Q4 2013 Results

In Q4 2013, Nike’s revenue rose by 7% annually to $6.7 billion due to broad based growth across several product categories and geographies. Its gross margin increased by 110 basis points annually, owing to higher selling prices and lower raw material costs, which were partially offset by rise in labor wages, greater discounts (mainly in China) and adverse currency impact.

Nike brand footwear and apparel sales, which comprise for approximately 80% of our valuation for the company rose by 7% and 6% annually in Q4. Global futures orders rose by 8% in both dollar terms and constant currency terms at the end of May, 2013.

Robust Growth Is Expected In North America, Emerging Markets and Central & Eastern Europe

North America, represents the biggest market for Nike, comprising for approximately 42% of its revenues. Nike achieved 12% y-o-y top line growth in this geography in Q4 2013, and the futures orders growth stood at 12% at the end of May 2013. We expect the strong demand to continue in this market on account of factors such as category offense (focusing on discrete categories), superior innovation, strong marketing and premium distribution.

Nike brand revenues in emerging markets, grew by 16% annually (excluding currency changes) in Q4 2013, and the futures orders growth stood at 12% at the end of May, 2013. We expect the high demand to continue in this geography owing to rising economic prosperity. Strong growth is expected from markets such as Brazil, Argentina and Mexico. With major sporting events such as FIFA World Cup and Olympics to be held in Brazil in the future, we expect this region to be a key growth driver for the company.

Nike brand revenues in Central and Eastern Europe rose by 11% (excluding currency changes) in Q4 and the futures order growth was recorded at 12% (in constant currency terms) on May 31, 2013. We expect the high growth in this region to continue in Q1 2014, driven by increased demand from Turkey and Russia.

Faster than Expected Recovery In China Could Provide Positive Momentum

China is expected to be one of the key growth drivers for the athletic apparel and footwear industry owing to its growing economy and high population. Nike’s results improved in this region in Q4 as compared to the previous quarters as the company is taking various steps to enhance its growth in the region. It is clearing its excess inventory, improving its marketing activities, enhancing its product portfolio, as well as bolstering the productivity of its store base in China.

Nike continues to be conservative on the growth forecasts from this region. The futures orders growth from Greater China was flat (excluding currency changes) at the end of May. However, Nike’s management forecast revenue from this geography to be lower as compared to the previous year during the first half of fiscal 2014. Recovery is expected later during the second half. We believe investors will be closely tracking these results during the quarter, and faster than expected turnaround in this business could boost the company’s stock price.

Western European Results Will Be Affected By Difficult Y-o-Y Comparisons

Nike brand revenues in Western Europe saw flat growth (excluding currency changes) in Q4 2013, owing to difficult y-o-y comparisons. Southern markets of Italy and Spain continue to pose challenges for the company. The futures orders growth was flat (in constant currency terms) at the end of May 2013, and hence we believe difficult y-o-y comparisons will continue to impact growth in this region.

Japanese Sales Will Be Impacted By Weaker Yen

Nike brand futures orders growth from Japan was recorded at 6% (in constant currency terms) at the end of May, 2013. However, in dollar terms, it fell by 17% owing to the weaker yen. Hence currency headwinds will impact sales growth in this region.

Our $60.40 price estimate for Nike is around 10% below the current market price.

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