Morningstar

Nike's Long-Term Story Intact

While softer future orders are grabbing headlines, the wide-moat company's manufacturing and mobile efforts will drive future demand and pricing power.

Securities In This Article
Nike Inc Class B
(NKE)

While the market is justifiably focused on

While the softer futures orders can be attributed in part to competition from Adidas/Under Armour, as well as a trend shift toward lifestyle fashion versus performance products, we share management's views that this metric doesn't fully capture demand as Nike continues to evolve its direct-to-consumer capabilities (constant-currency DTC revenue increased 22%--including impressive 49% growth at Nike.com--which also explains the inventory increase). Management attributed gross margin pressures on foreign currency, the exit of the golf business, a higher mix of off-price goods due to retailer consolidation, and manufacturing investments, all of which are consistent with industry commentary and imply gross margin improvement as the year progresses.

Altogether, Nike's first-quarter update will not materially alter our $57 fair value estimate, and we view shares as modestly undervalued. We still find full-year guidance calling for high-single-digit top-line growth achievable.

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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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