Why Nike Will Continue GrowingNKE) reported its fourth quarter results on Tuesday. The company shared EPS of $0.49, $0.01 higher than the analysts’ estimates, whereas revenue came in at $8.24 billion, falling short of the consensus by $40 million. The company’s revenue escalated 5.9 percent on a year over year basis.
Throughout the past few years, escalating gross margin has been the only reason behind Nike’s impressive earnings growth. As a matter of fact, the company’s gross margin accounts for one of the highest in the industry, at approximately 46.2 percent for the year.
The company’s gross margin dropped somewhat to 45.9 percent in the recent quarter, which was mainly due to the fourth quarter earnings decline.
Nike has been prosperous at increasing margins by surging average selling prices of its products and gaining more sales via direct to consumer channels instead of selling products through third-party retailers that take a cut of the sale. The company is poised to grow its gross margin even further in the imminent year mainly due to its increased focus on direct-to-consumer sales.
On the other hand, competitive strength is possibly the most significant thing to keep in mind while analyzing a company as well as its long-term outlooks. Nike holds a leading position in the industry, and has invested a huge amount of cash in sponsoring the most popular athletes around the globe, and it is almost impossible for trivial opponents to imitate this level of brand presence.
Overall revenue throughout the year concluded on May 31 was $32.5 billion, and this enormous scale provides a surplus layer of competitive protection to the business. Due to the marvelous size, the company gets to convey appropriately low prices and payment conditions with suppliers. As an outcome, the company get advantages from a robust negotiating position with retailers all around the globe.
Apart from increasing gross margin, Nike also has a big growth driver in the form of China. China has proven to be a huge and significant market for Nike, as constant-currency sales in Greater China region surged 27 percent throughout FY16. Going forward, investors can expect the company to keep gaining traction in China, thereby supplementing its overall growth.
Despite Nike’s strong growth over the years, I think the stock is still a buy because there is a lot more room left from the company to grow. Its focus on improving gross margin and growth driven by China should help the stock move higher in the future.
Published on Aug 15, 2016By Akshansh Gandhi