Nike's Earnings Are a Tale of Two Worlds

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The deadline for a "continuing resolution" for the federal budget is fast approaching (October 1), with little to no sign of compromise or progress from lawmakers. However, that didn't stop stocks from breaking a five-day losing streak today, as the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average rose 0.3% and 0.4%, respectively.

One factor that probably contributed to lifting stocks higher: Initial jobless claims declined last week to a seasonally adjusted 305,000, bringing the trailing four-week average down to 308,000, its lowest level since Jun. 2007 -- just prior to the start of the credit crisis.


Nike's China syndrome

Nike reported its first set of quarterly earnings as a member of the Dow today, and the sports apparel company did the index proud. During its fiscal first quarter, which ended on August 31, the company earned $0.86 cents per share, a 54% year-on-year increase and 10% ahead of Wall Street's $0.76 consensus estimate.

Shareholders immediately showed their appreciation for that athletic performance. The following graph displays the spike in the share price during today's after-hours session (the orange line represents the S&P 500):

NKE Chart

NKE data by YCharts.

Nike achieved the earnings surprise on healthy revenue growth, too: 8% year on year, for worldwide sales of $6.97 billion, which is in line with the consensus estimate of $6.96 billion.

A tale of two worlds
However, when one begins to break down revenues and earnings by region, it becomes very clear that Nike's performance was split between two worlds: North America and Europe on the one hand, and the rest of the world on the other:

Region

Year-on-Year Revenue Growth
(Excluding Currency Changes

Eastern Europe

10%

North America

9%

Western Europe

8%

Emerging Markets

5%

Japan

1%

Greater China

(3%)

Source: Company documents.

Note that the split does not break down between developed and emerging markets: Eastern Europe came out on top, while Japan only came in ahead of China. Speaking of which, China was clearly the problem area for Nike this quarter, and, as my colleague Dan Carroll pointed out earlier today, it's not the first time:

China's been a sore spot for Nike investors lately, and some analysts are expecting sales in the world's second-largest economy to fall again in the first quarter. Disappointing Chinese results contributed to Nike's downbeat earnings last June that sunk the stock by more than 9% in a single day.

Furthermore, the futures orders Nike provides do not suggest an imminent turnaround in the company's fortune in China, either, with year-on-year growth for Greater China of just 2%, excluding currency changes -- only Japan was worse, at 1% ("futures" are an indication of orders for the next six months that the company provides).

Investors may have cheered Nike today and, giving credit where it's due, the quarter's results were solid. Still, it's an open question whether the company can produce the sort of results that will justify a share valuation of 23.3 times the estimate of the next 12 months' earnings -- and that's before any after-hours pop.

Nike can still dominate high-growth markets
If your investment time horizon stretches beyond the next quarter, it ought to be clear that Nike has an enormous growth runway ahead of it in China, which accounted for just 8% of the company's revenues last quarter. Nike isn't alone in that respect, either -- profiting from our increasingly global economy can be as easy as investing in your own backyard. The Motley Fool's free report "3 American Companies Set to Dominate the World" shows you how. Click here to get your free copy before it's gone.

The article Nike's Earnings Are a Tale of Two Worlds originally appeared on Fool.com.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him @longrunreturns. The Motley Fool recommends and owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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