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Morningstar | Wide-Moat Nike Ends Fiscal 2019 With Solid Quarter Despite Currency Issues; Shares Undervalued

Nike’s fiscal 2019 fourth-quarter sales of $10.18 billion slightly exceeded our $10.16 billion forecast. North America sales growth of 7.5% beat our 3.5% forecast as sales of basketball shoes and innovative products like VaporMax were strong. We are encouraged that Nike reported double-digit growth with important U.S. partners despite recent weak overall sales reports by Foot Locker, narrow-moat Nordstrom, and other U.S. apparel retailers. In greater China, sales growth of 15.6% (22% currency-neutral) for Nike in the fourth quarter beat our estimate of 13.0%. We believe the firm is on track to achieve our midteens long-term annual growth expectations for the region. Nike’s fourth-quarter EPS of $0.62 came in just below our $0.63 forecast due to a difference in share count and a higher tax rate. We believe that Nike’s intangible brand asset provides a wide moat and that the firm continues to execute well on strategies including direct-to-consumer sales, product innovation, and supply chain improvements. We view Nike’s digital business (35% growth in fiscal 2019) as key as it allows the firm to control marketing and improve pricing while reducing dependence on physical retailers.

Nike guided to sales growth in the high single digits (excluding currency) in fiscal 2020, in line with our forecast. We think currency headwinds may reduce Nike’s fiscal 2020 first-quarter gross margin by 50-70 basis points. Despite this impact and investments in RFID inventory tracking, Nike has guided to nearly 50 basis points in gross margin improvement in fiscal 2020 and slight leverage in sales, general, and administrative expenses. We believe these improvements are achievable as digital sales increase and supply chain efficiencies are realized. Nike’s fiscal 2020 guidance matches our forecast of 40- and 60-basis point improvements in gross and operating margins, respectively, so we do not expect to change our $98 fair value estimate. We continue to view the shares as undervalued.

The ongoing trade dispute between the United States and China does not affect our near-term outlook for Nike. While expanded tariffs on U.S. imports from China would bring higher costs for many apparel and footwear firms, we think the effect on Nike would be immaterial. Although about one fourth of Nike’s merchandise is manufactured in China, only a small amount of it is imported to the U.S. A large amount of Nike’s Chinese-made merchandise is now sold in China. Its sales in greater China increased by more than $1 billion in fiscal 2019 (to $6.2 billion from $5.1 billion) and constituted 21% of its total sales. We believe Nike can avoid any new tariffs by importing merchandise to the U.S. from countries likes Vietnam and Thailand. The firm has shifted production out of China in recent years for cost and efficiency reasons. Further, we do not think Nike will suffer any negative impact from possible anti-American sentiment in China. We believe Nike has been taking share from native Chinese athletic apparel firms. Over the long term, we think the greatest risk for Nike is that a lengthy trade war causes an economic slowdown in either the U.S. or China.