Nike no friends. After regular market hours, that is. The biggest sports apparel and sports shoes manufacturer in the western world, and one of the most recognisable brands across the globe, reported numbers last evening for the first quarter of their financial year 2017. At face value they actually look quite good, revenues up 8 percent to 9.1 billion, in constant currencies sales were up 10 percent. Diluted earnings per share clocked 73 cents, up 9 percent when compared to the prior financial year. Here is the reason for Mr. Market being disappointed however, future orders worldwide were only up 5 percent, 7 percent in constant currencies. Here is the thing, Nike touts themselves as a growth company, and whilst I firmly believe that to be true, the company needs to deliver growth in the low to mid teens if they are going to continue to attract a premium multiple to the market.
There is no mistaking that they are a premium brand in athletic wear. There is no doubting that there is a huge push from broader society to get healthier and to get more active. I ran my first half marathon in 1997 I think, I ran my first ultra marathon in 2000. In those days there were a few hundred people in the field. There were very few races in South Africa that you had to enter a month or so before. Comrades, that you could submit your entry around 8 weeks before, there were no caps. Only in 2000 I think there was a cap, then the numbers subsided again. Nowadays, if you don't enter months and months ahead, you are not going to get in. I mean, Two Oceans entires are open already. Nuts!!! They are around halfway through the cap of 11 thousand entrants. I feel tempted .....
Enough about my amateur hap-hazard training regime and running aspirations, Paul is the real revelation around here. He is on a running streak of at least one mile a day for the last two and one quarter years. By my math, that is more than 800 days of running at least one mile a day. At Vestact these exercise regimes are serious business. And I am very sure that we are definitely not alone in this regard, companies are ditching the old ways for encouraging their employees into getting active. As such, all the apparel and shoe businesses globally will benefit from higher sales of athletic wear. This is a global theme. Equally, casual wear has morphed into athletic apparel, the so called "athleisure" category. It is not uncommon to see folks walking around in what looks like athletic clothes, comfortable is the new cool.
CEO Mark Parker had this to say about the general category on the conference call - "The active-wear market continues to outpace the overall apparel and footwear market, which itself continues to outpace global GDP growth." He is equally right here too, in the opening statements of the results release he makes some more good points about the whole sector. It is not just about making the shirts, the pants, the socks, the shoes and so on, the technology associated with the manufacturing process and the experience that the end users get when using the products are just as important nowadays:
"Q1 also showed how we're amplifying every category through sports style innovation, transforming retail by connecting the digital and physical experience and ushering in a new Era of Personalized Performance - through product, consumer connections and our supply chain. NIKE's strategic investments in these growth opportunities continue to deliver long-term value to our shareholders."
Indeed, they just announced a fairly *nice* partnership with Apple Watch, the Nike only version for runners. What is quite important to note is that the company is not everything to all sports, they saw the decline in golf across North America (participation) and decided enough was enough there. The word golf appears once there.
Other sports and athletes sponsored by Nike had a great time during the last financial quarter to August 31, a first ever all Nike affair in the Euro championship (France vs Portugal), Serena tying the Steffi Graf record of 22 grand slam singles at Wimbledon, 1500 Olympians from 60 countries were sponsored by Nike, winning 189 medals. And of course Neymar kicked the penalty that won Brazil to their first football Olympic gold medal. Mo Farah rocked it, defending both his Olympic titles. Of the 24 members of the Team USA basketball teams at the Olympics (both men and woman USA teams won), 21 wore Nike or Jordan shoes. Make no mistake, Nike (and their peers) make wonderful apparel and shoes.
Innovation remains a large part of the company. Any runner will tell you that their running shoes over a few decades (they would have to be in their late forties, early fifties) have changed drastically over time. In the old days you had to "run your shoes in". In the Pegasus range, Nike have sold over 50 million pairs since the shoe was introduced. That is pretty astonishing, considering that a Nike Air Zoom Pegasus 33 (full name) costs 1799.95 Rand on the online website. Look, running shoes will always be expensive. A single shoe weighs 306 grams, according to the website. For comparisons sake, Nike of course owns Converse (since 2003), and according to Wikipedia, Chuck Taylor All-Stars have sold over 600 million pairs. Surely that must be the best selling shoe of all time? And not the Bata Toughie people ....
So, innovation and pushing the boundaries, more personalisation (you can make your own shoes on the website) will lead to wider margins in time. We continue to see the company as a market leader. That is all very well, that is the company. We can see that it is in good hands, in a good space and has good growth prospects. The stock price on the other hand is at the same level pre-market that it was last June. That is 15 months on and we are basically at the same level. The new buyback program of 12 billion Dollars from last year November has proceeded slowly, the company has bought back only 2.2 billion of the 12 billion Dollar program. Approaching the lows of the last 52 weeks (pre-market indicated 53.89 Dollars versus 12 month low of 51.47 Dollars) means the company may get busy. The market cap is currently around 91 billion Dollars, buying back and retiring around 11-12 percent of the shares in issue has big long term implications.
The market is pricing the stock on 20 times forward earnings for the next financial year. Whilst that is not dirt cheap and equally you are not being handsomely rewarded by way of yield (1.16 percent at current levels), you are still buying a growth business. One should continue to accumulate what is a really quality business at a lower price, you will be well rewarded in the years to come, as will all their competitors no doubt.
We maintain our conviction buy recommendation.