Nike Shares Trip Up on Earnings

Over the past year, apparel giant Nike (NYSE: NKE) shares were on an incredible run … until Wednesday that is, when the company announced disappointing earnings results. Nike stock tumbled as much as 4% after reporting earnings, even though the company beat analyst expectations on earnings by a wide margin.
Why did Nike stock decline despite such a resounding beat? It could be because the stock has simply come too far, too fast. Nike stock is up 28% just in the past one year, which elevated its valuation multiple to levels not seen in several years.
This came back to bite investors, as Nike’s quarterly revenue result didn’t meet expectations, due in large part to the strong U.S. dollar. But while investors seem to be questioning Nike’s valuation, it remains a very strong company. Don’t be too scared off by a short-term dip in the stock price; a decline is simply a great buying opportunity for long-term investors.

Nike Disappoints on Revenue

One of the recurring themes in the stock market over the past year was the damage being done to multi-national companies by the strong U.S. dollar. Indeed, the rally in the U.S. dollar has been a major headwind for companies that conduct significant business overseas. A higher domestic currency versus international currencies makes exports less competitive, and reduces the value of internationally-generated revenue.
Nike’s results are a perfect example of this. Earnings jumped 22% year-over-year, to $0.55 per share. That handily beat analyst expectations, which called for $0.48 per share.
However, Nike’s revenue didn’t measure up. The company reported sales of $8.03 billion, versus expectations of $8.2 billion. Revenue grew 8% year-over-year, which was lower than analysts projected. That being said, excluding foreign currency fluctuations, Nike produced 14% revenue growth, which would have soundly beat expectations.
Investors are rethinking whether Nike deserves such a high valuation multiple, in light of its disappointing revenue number. Moreover, its forward guidance calls for high-single-digit revenue growth, which would be a slowdown from prior growth figures.
But it’s important to remember that the company can’t control foreign exchange. Investors should keep focused on the long term. Currency movements tend to smooth themselves out over time. In the meantime, Nike is an excellent brand.
Nike’s futures orders, a key gauge of future product demand, were up 12% last quarter, or 17% excluding currency. That includes 36% future order growth in Greater China.

Nike Shares Under Pressure

Investors seem to be disappointed with Nike’s growth, which should make prospective investors think twice about buying the stock right now. To be sure, there is little doubt that Nike is a great company. It holds one of the strongest brands in the world, and is growing sales and profit.
But whether the stock is a good investment is a different question. Even great companies can amount to poor investments if too high a price is paid.
For all Nike’s qualities, it’s an expensive stock. Even after its post-earnings drop, shares still trade for 30 times earnings. The takeaway is that there comes a point when expectations are too high, even for a great company like Nike. If investor sentiment continues to change, Nike could suffer contraction of its valuation multiple.
That being said, should Nike stock continue to decline, investors should view it as a buying opportunity. Nike is a phenomenal business. It continues to see strong demand, particularly in the emerging markets. And it’s also doing great things with its women’s apparel line.
The only reason Nike’s revenue growth disappointed is because of foreign exchange. But long-term investors should focus on what a company can control, not on what it can’t.

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