Nike Smartly Adapts to Changing Consumer Environment

Wide-moat

While foreign currency will be a headwind in fiscal 2018, and North America futures orders (down 10%) still suggest a uneven retail environment, fourth-quarter trends (revenue growth of 7% on a currency neutral basis, operating margins up 100 basis points to 13.3%) and the fiscal 2018 outlook (mid-single-digit reported revenue growth, 50-plus basis points of margin expansion, mid-single-digit reported SG&A growth) reflect a healthy underlying business.

We believe investors should focus on three areas. First, Nike's "triple-double" and consumer direct offense strategies align with what successful consumer brands are doing to stay relevant in an evolving industry. This includes innovation (infusing footwear and apparel with new cushioning and Flyknit technologies), speed (prototype production enhancements that optimize personalization and speed-to-market), and direct-to-consumer investments (personalized shopping at Nike stores, running/training club memberships, and mobile app refinements).

Second, we're intrigued by the potential of Nike's pilot program with

Finally, Nike's momentum outside North America continues, including double-digit currency-neutral growth in China, Western Europe, and emerging markets. This validates Nike's global brand-building strategies and should reap future benefits as disposable income and athletic participation trends rise in these regions.

We're planning to tweak near-term assumptions, but don't expect major changes to our fair value estimate beyond time value of money adjustments. While we'd wait for a wider margin of safety, we believe Nike offers investors a compelling longer-term cash flow story.

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