Nike Reports Strong Earnings; X Marks the Spot


Nike's Swoosh is one of the world's most recognized brand images. Image credit: Nike.

You'd be hard pressed to find a handful of people across the globe that can't recognize Nike's Swoosh -- one of the most iconic brand images ever. Nike helped build its Goliath footwear and apparel business through the success of its elite athletes, such as Michael Jordan and Tiger Woods. In a sad day for all hoops fans, Jordan recently turned 50, and Woods has seen better days -- but Nike hasn't skipped a beat.

As the stock price sits near all-time highs, the company delivered another strong earnings report yesterday. Here are the details and why "X" marks the sweet spot for Nike investors.

By the numbers
Let's kick things off with the top-line revenues. Nike posted an 8% increase to $7 billion. Revenue growth in its main NIKE brand was up 7% and showed growth in Running, Basketball, Soccer, and Men's Training lines. In addition to the revenue growth, Nike's gross margin increased 120 basis points to 44.9% due in large part to easing raw material costs as well as a consumer shift toward higher-margin products. That translated well on Nike's bottom-line net income, which increased 33% to $780 million. The improved net income equated to a diluted earnings per share of $0.86, a 37% increase and well ahead of estimates.

One key thing investors watch for is Nike's future orders. The company reported that worldwide deliveries scheduled from September 2013 through January 2014 were 8% higher than the same period last year. That's a great sign for investors and will help keep Nike's recent sales momentum strong as its sponsorship of the FIFA World Cup 2014 approaches.

X marks the spot
Aside from an ever-appreciating share price, which Nike has accomplished, one of the best things to see from a large company is its ability to return value to shareholders. During the quarter Nike repurchased a total of 8.4 million shares for roughly $526 million. That's just a drop in the bucket of its four-year $8 billion program approved in September 2012.

Investors love to see a gradual decline in shares outstanding with a consistent increase in dividends; an X marks the spot.

NKE Shares Outstanding Chart
NKE Shares Outstanding Chart

NKE Shares Outstanding data by YCharts.

The next hurdle
If you're a Nike shareholder, you own a company with a sizable competitive advantage through its pricing power. This will be an extremely important factor for company profits if inflation takes hold in the years to come; you'll want to own companies that can raise prices.

"The results were strong, and what surprised me was the North America business was better than expected," said Brian Sozzi, CEO of Belus Capital Advisors, according to Investors Business Daily. "They were very successful in pushing through price increases everywhere. That tells us if you have a brand and product like Jordan sneakers that people want, they will pay full price for it. Other consumer companies don't have that luxury."

In addition to its pricing power, Nike is a completely diverse company. Its products span the globe, mitigating any dependence on one particular product line or market for success. One thing that investors need to keep an eye on is Nike's revenue growth in China. Right now future orders in China are up only 3%, compared to 11% and 25% for North America and Central/Eastern Europe, respectively. The quicker that region improves, the faster top-line revenues and bottom-line profits will improve.

One thing is clear: Even as Nike's cornerstone athletes age and fade away, its iconic brand image looks to battle Father Time much longer, and more successfully; Nike will continue to be a winner for shareholders.

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Fool contributor Daniel Miller has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool 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.

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Originally published