Footwear, apparel, equipment, and accessory products manufacturer Nike Inc. (NKE) stays on our ‘Neutral’ list following leveraged selling and administrative expenses and lower share count in second-quarter 2012, which boosted the bottom line.
Nike’s second quarter earnings of $1.00 per share were well above the Zacks Consensus Estimate of 97 cents and surged 6.4% from the prior-year quarter. Also, the company’s revenue grew by 18% due to growth wherever it operates, except Japan. The company also witnessed growth in all key categories of NIKE Brand, except Action Sports, resulting in strong quarterly revenue.
Apart from a strong quarterly performance, Nike’s aggressive expansion strategy in the emerging markets, specially China, and focus on direct-to-consumer business and other brands, continues to impress us. These will not only help in expanding its market share, but will also facilitate in strengthening its competitive position.
More positively, the company’s almost unleveraged balance sheet offers ample financial flexibility to drive future growth.
However, we fear Nike’s operating performance getting hurt by sluggish discretionary spending and intense competition amid rapidly changing customer preferences. Further, the company remains exposed to political, social and economic risks associated with operations in developing countries, such as China, Vietnam, Indonesia and Thailand, where its entire range of footwear products is manufactured.
Being an international player, Nike’s performance also remains prone to currency fluctuations and intense competition from established players, such as Adidas AG, PVH Corporation (PVH) and Brown Shoe Company Inc. (BWS).
Based on strong quarterly performance and risks that offset the positives, Nike maintains a Zacks # 3 Rank, which translates into a short-term Hold rating.
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