You can smell him the moment he walks in the door. Mr. Market is absolutely trashed and is peddling his Nike shares for a discount after the company hit an absolute home run on quarterly earnings. Priced significantly less than the S&P500 on a P/E basis but with a favorable balance sheet, a market position more dominant than their marquee athletes at their respective sports, and a growth story rivaling that of Visa. Even sales in China are on a roll, a region where many American companies struggle to gain a foothold. The company is reducing shares outstanding via a $12B buyback program only $3.6B completed. And Nike pays a small but not insignificant dividend, which they increased 12.5% YOY back in December.
The reason this company is so compelling for long-term investors is that they sell a product that is consumable. Shoes wear out and need replacement. Anytime we visit the palace gym, people are decked out in swooshes. The fact that the company reduced its selling and administrative expenses by 7% and yet maintained market share is plain incredible given the threat of its emergent competitors.
Whenever the market or a particular stock moves big, a narrative begins to form about “why” – and this time around, two factors are blamed for a 6.5%+ drop on the day: an increase in inventories and a less rosy outlook than analysts had expected. Regarding the inventories, Nike is ramping up its DTC (direct to consumer) efforts, i.e. selling their products online. This requires more shoes on-hand, because they need to run out the door the moment the buyer clicks checkout. Fast delivery is critical, and any increase in DTC should logically be followed by an increase in company inventories. For analyst expectations the remainder of the year, who cares? We’re investing for 10, 20, 30 years. This company has a stellar track record and is poised to expand upon its incredible growth story for the coming decades. It’s one where we’ll look back in some time in the 2030’s and slap ourselves for not scrounging up cash to buy more.
Yes, btw, Nike owns the Converse brand, if you were a little confused by the image. And keep your eyes and ears out for the word “VaporMax” – faster speed for athletes and faster growth for Nike.
Disclaimer: Long NKE.