Interactive Investor

Don't run from this iconic stock, it can take the heat

29th September 2021 08:58

Rodney Hobson from interactive investor

It sells more sportswear than anyone else, but shares dropped after latest results. Our overseas investing expert has spotted a buying opportunity.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

There looked to be a pretty clear road ahead for sportswear group Nike (NYSE:NKE) until quarterly results dropped a boulder into its path. Investors need to hold their nerve.

Nike is the largest sportwear group in the world with 300 factories in 30 countries, selling through retail stores and online. It is best known for its footwear, which still accounts for two-thirds of its sales. However, other lines include equipment and accessories, which gives a wider base for generating income. Also, it is betting its future on a policy of boosting direct sales to customers rather than relying on sales partners in the retail sector.

Latest results, for the three months to 31 August, were not bad. Pre-tax profit in what is the first quarter of Nike’s financial year leapt 23% year on year, from $1.72 billion to $2.11 billion. Revenue was 16% higher, from $10.59 billion in the same quarter of 2020 to $12.25 billion this time. What spooked the market was that this was a 0.8% slip from the March-May quarter, and it fell $250 million short of analysts’ expectations. The shares eased 2.5% on the news.

Source: interactive investor. Past performance is not a guide to future performance

Chief executive officer John Donahoe was defiant, describing the results as strong, even though he spoilt the effect with a dose of pure management speak by referring to “our deep consumer connections, unrelenting innovation pipeline and a digital advantage that fuels our brand momentum”. Nike, he claims has “the right playbook to navigate macroeconomic dynamics”.

The company needs more than glib phrases as it faces inflationary pressures that could prove difficult to curb while various governments, especially in the United States, move beyond the stage of economic stimulus and towards unwinding measures already taken, not only in the dark days of the pandemic but still overhanging from the financial crisis of 2008.

Worries over supply chains that were forged in the spirit of just-in-time arrangements apply to making sports shoes and clothing as much as other industries and the continuing trade tensions between the US and China have raised concerns about sales in what is potentially the second-largest market in the world.

It is reassuring, therefore, that sales in China rose 11% year-on-year in the latest quarter and were 2.5% up on the previous three months. This was not spectacular compared with North America, 15% ahead of last year, or Europe, Middle East and Africa, 14% ahead, let alone compared with the spectacular 30% achieved in Asia Pacific and Latin America. 

However, it was much better than investors’ reasonable fears and, after all, China accounts for only 20% of revenue. Equally reassuring is that North America, which accounts for 40%, is performing strongly.

The latest quarterly figures are particularly important because those for the previous three months were heavily distorted by the effect of the pandemic, with comparisons against the worst period of retail shutdowns when the company made a loss. Comparatives will continue to get tougher, but the signs are that Nike can take the heat.

Nike raised its quarterly dividend 12% to 0.275 cents when it produced full-year figures for 2020-21 in May, the 19th consecutive year of dividend increases. This year will surely see that trend continuing. There is also a programme of share buybacks.

The shares peaked at $172.80 after a spectacular run from below $70 at the bottom of the pandemic panic. They have slipped back to a more realistic $145, where they should find support as this was a sticking point on the way up. Should this level fail to hold, there was solid support around $130 on the way up.

Hobson’s choice: The yield is admittedly pretty miserly at 0.75% and the price/earnings demanding at nearly 40, but the future should bring further rewards. Buy below $150. Cautious investors could hold off and hope to get in below $140, but that may not happen.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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