Though North American headwinds are unlikely to abate soon, the wide-moat company remains well positioned for the long term.
With the market bracing for the worst after negative updates from other athletic apparel/footwear companies, Nike
turned in a solid third quarter that reinforced our wide moat rating and our positive long-term outlook. While soft futures orders (down 4% on a reported basis and 1% on a currency-neutral basis), a fourth-quarter outlook calling for reported revenue growth slightly below that of the third quarter (implying less than 5%), and 150-175 basis points of gross margin compression amid heavy promotional activity pose near-term risks, we walked away optimistic about Nike's prospects for two reasons.
R.J. Hottovy, CFA, is a consumer strategist for Morningstar.
The first is Nike's continued momentum outside North America, including double-digit currency-neutral growth in China, Western Europe, and emerging markets. This validates Nike's global brand-building strategies, which should reap future benefits as disposable income and athletic participation trends rise in these regions. The second is Nike's business model adjustments are adapting to evolving consumer views about personalization and technology ahead of its peers. This is evident in Nike's "triple-double" strategy focused on product innovation (better balancing performance and style), supply chain (prototype production enhancements that optimize personalization and speed to market), and direct-to-consumer investments (greater personalized shopping at Nike stores, running/training club memberships, and mobile app refinements). While these efforts may weigh on near-term margins, they should position Nike to withstand the pressures facing athletic apparel/footwear rivals and develop into a meaningful competitive advantage.
We believe these efforts will drive future demand and pricing power and support our five-year outlook calling for average annual revenue growth of 8%-9% and operating margins pushing 18% (versus 14% in fiscal 2017). While we'd wait for a wider margin of safety before building/adding to positions, we plan to maintain our $58 fair value estimate.
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