Nike investors are running scared after the shoe and clothing maker announced disappointing quarterly results.
After Thursday's market close, Nike (ticker: NKE) reported fiscal third-quarter earnings of $523 million, or $1.08 a share, up from $1.01 a share in the year-earlier period, but below the $1.12 consensus. Revenue of $5.1 billion also came in shy of forecasts of $5.18 billion.
Nike said higher input costs and freight charges contributed to a 110 basis-point decline in gross margin to 45.8%. However, demand remained strong, with futures orders up 9% year-over-year.
The news sent the shares tumbling 9% to $77.38 in midday trading.
However, for investors willing to go the distance, Nike should do well in the long run.
Although the issue of higher costs was not a total surprise, given the company's warning after the previous earnings report, Nike admitted that sweeping price increases will likely not come quickly enough to offset pricing pressures in the fiscal-fourth or first quarter, given many contracts are already signed.
Yet, in the interim, the company will likely continue to see increasing demand, as evidenced by its strong orders number, which could stabilize the stock until price increases begin to bolster margins. (The company's sales momentum was one of the main reasons that Standard & Poor's Equity Research analyst Marie Driscoll maintained her Buy rating on the stock.)
Nike may also be able to counteract margin compression through other means, noted Sterne, Agee & Leach analyst Sam Poser: "It is likely that the margin pressures ease earlier than we are modeling, as Nike has numerous levers to pull to drive earnings, including buybacks where there is $3.3 billion remaining in the authorization."
Poser noted that looking ahead, the 2012 Olympics in London and the European Championships, along with "the World Cup and Olympics coming in Brazil, plans to have a Chinese business closing in on $4 billion by 2015, and the most innovative product and marketing platform in the business, keep us bullish despite the short-term margin issues."
It's also important to note that Nike is not alone in facing increasing commodities costs. But its market dominance, marketing prowess and pricing power should help it rise above peers.
"While rising input costs are a real threat to near-term results, we contend that Nike is one of the few wide-moat stocks in our consumer coverage--based on widespread brand acceptance, economies of scale, and power over suppliers and retailers--and as such should be better able to deal with cost and input pressures than competitors," wrote Morningstar analyst Paul Swinand in a research note this morning. "The shares are trading down sharply on inflation cost concerns, which could provide an opportunistic entry point for long-term investors."
Few who are bearish are willing to do so for an extended amount of time, given Nike's strong brand, continued strength in mature markets and growing expansion into emerging ones.
Even Goldman Sachs analyst Michelle Tan, who today downgraded the stock to Neutral, wrote that "The many long-term reasons to like Nike remain: strong brand/ product cycle (underscored by 9% futures growth with 2 year acceleration of 500 basis points); global category leadership with visible long-term emerging-market growth (China/emerging markets added 3% to total third-quarter growth), and strong management."
The stock trades at 15.4 times expected-forward earnings and offers a respectable 1.4% dividend yield. The company also has plenty of cash on its balance sheet.
In short, we think Nike still has game.
