Morningstar

Nike on Solid Footing

Average selling price increases across most categories, improved basketball sales, and strong top-line momentum in China and other emerging markets suggest the wide-moat brand retains its dominance.

Securities In This Article
Nike Inc Class B
(NKE)

While tepid futures orders, gross margin compression, and higher inventory levels are in focus after

Admittedly, a 2% increase in futures orders was weaker than anticipated. While competition from Adidas/Under Armour and the trend shift toward lifestyle fashion versus performance products played a part, we continue to believe that Nike's expanded direct-to-consumer capabilities (constant-currency DTC revenue increased 25%--including 11% comps at Nike stores--which also explains the 9% increase in inventories) have diminished the correlation between futures orders and revenue. As such, we still find full-year guidance calling for high-single-digit top-line growth achievable. Management attributed gross margin pressures to higher product costs, foreign currency, and a higher mix of off-price goods due to retailer consolidation, but we expect the product cost and off-price mix issues to subside as the year progresses.

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About the Author

R.J. Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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