Morningstar | Wide-Moat Nike’s 1Q Results Led by Continued Growth in North America and E-Commerce Sales
Wide-moat Nike posted a solid fiscal 2019 first quarter headlined by continued growth in North America (up 6%) and development in direct-to-consumer and digital offerings (up 12% and 36%, respectively). While management stated that results were better than expected, full-year guidance of high-single-digit growth, gross margin expansion of 50 points, and selling, general, and administrative expense growth at the same pace of revenue remained unchanged. We see this as conservative based on the current quarter’s momentum and the strong engagement reported from the new advertisement featuring Colin Kaepernick. As a result, we continue to believe our long-term forecast remains achievable, with sales growing high single digits, gross margin expanding to 46.5% (from 43.8% in 2018), and operating margins of 16% (12.2%) on average over the next 10 years. We do not plan to materially alter our $75 per share fair value estimate.Nike’s ability to balance lifestyle versus performance goods highlighted our belief that the firm will be able to cater to consumer demands through fashion cycles, justifying our wide moat rating. In the quarter, Nike’s brand intangible assets helped it sustain top-line growth in the historically challenged North American segment, while keeping inventory flat helped the firm achieve 50 basis points of gross margin lift (to 44.2%). We believe the brand assets helped the firm create new digital partnerships with Jet.com, Flipkart, and WeChat, which will continue to aid performance in the digital channel. Finally, we are encouraged by the firm's continued investment in supply-chain and cost initiatives seen in the invention of the new plant assembly process for its Advanced Product Creation Center that reduces labor needs by 50% and cuts overall product creation cycles in half (rapid prototyping and 3D printing).
Overall, results for the quarter tracked in line with our full-year 2019 estimates, with total revenue growing 10% and operating margin of 13% (we estimate 10% and 13%, respectively).
NIKE is engaged in the design, development and marketing and selling of athletic footwear, apparel, equipment, accessories and services. The company focuses its NIKE Brand product offerings in Running, NIKE Basketball, the Jordan Brand, Football (Soccer), Training and Sportswear categories. The company markets products designed for kids, as well as for other athletic and recreational uses such as American football, baseball, cricket, golf, lacrosse, tennis, walking, and other outdoor activities. The company has license agreements that permit unaffiliated parties to manufacture and sell, using the company-owned trademarks, certain apparel, digital devices and applications and other equipment designed for sports activities.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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