Nike’s (NKE) has maintained a long-term outlook that is solid, whilst shares show an inexpensive valuation. The fourth-quarter of the company reflects many strengths of Nike’s business model, though the comparables were affected by one-time items.
Nike, over many years, are strong performers regarding the company’s top line and profits.
Over the past 10 years, revenues doubled while it showed a growth in the net income by 140% and the EPS increased even better at 190% for an annual growth of 11.2%.
Nike’s growth in the top-line was driven by domestic growth in the US and the global expansion, mainly in markets featuring fast growth of middle class population such as China.
In the recent quarter, this was visible that the Nikes highest growth rates were in Greater China and the other emerging markets group of countries. The top most growth in these markets have pushed the total adjusting to growth rate as seven percent a year, besides the fact that the US market was flat.
Nike continued delivering outsized earnings growth (EPS were up 22% yoy. The first factor playing a role in Nike’s earnings growth (apart from top line growth) is the gross margin of the company which, unfortunately, declined.
Nike has a diminishing gross margin for over a year and a half and it continues in the recent quarter. Nike blames forex rates, though higher production costs also have a negative impact.
This is adverse as a growing gross margin will ensure better earnings growth owing to the impact of positive operating leverage to have flat fixed costs distributed over an increasing gross profit number; thereby you lift the company’s earnings by a wider amount.