(By Mani) Nike, Inc.
) is set to benefit from emerging catalysts such as accelerating ASP increases, apparel share gains and improving gross margin outlook that would offset concerns in China.
Beaverton, Oregon-based Nike is a designer and marketer of athletic footwear, apparel, equipment, and accessories for a wide variety of sports and fitness activities. Wholly-owned Nike subsidiaries include Brand Jordan, Umbro, Converse, and Cole Haan, which markets a line of men's and women's dress and casual shoes and accessories.
Nike's US footwear sales at retail have accelerated in the first quarter to-date compared to the fourth quarter levels, according to the industry data. Nike's US footwear sales at retail improved to more than 20 percent in the first quarter to date compared to 15 percent plus in the fourth quarter.
Moreover, year-over-year average selling price (ASP increases) have continued to accelerate in the first quarter after price increase in February. Nike footwear ASP's increased 5 percent in February through May, but have accelerated to 8.5 percent plus as of July.
"In our view, accelerating YOY ASP increases lately should be incrementally positive for Nike's GM's," UBS analyst Michael Binetti said in a client note.
In addition, Nike's aggressive spring apparel price increases resulted in significant order cancellations for some core products. However, Nike has since reversed those price increases and volume growth for the affected items has re-accelerated.
"Importantly, we believe that Nike will be gaining shelf space in key cold weather apparel categories (like fleece) in the fall—including some gains coming from Under Armour," the analyst noted.
Though Nike has not historically had a large cold weather apparel business, the increasing share particularly from Under Armour, and with that brand's dominant cold weather position is a positive for the Nike apparel program.
"We believe stabilizing sales volumes after a pricing reset and signs of share gains ahead will result in re-accelerating US apparel sales in F1Q. We are forecasting +15% US apparel growth in F1Q," Binetti added.
On the flip side, Nike's gross margins have been an ongoing sore spot for investors, as the company has missed its publicly stated gross margin targets for the past three quarters. Gross margins for the the company's fourth quarter fell to 42.8 percent from 44.3 percent a year ago on higher product costs.
"While we have been discouraged by recent GM misses, we believe there is emerging evidence that YOY GM trends could finally begin to improve in F1Q," Binetti said.
The recent increases in ASPs suggests that selling prices are now more favorably aligned to input cost pressures the company has felt for some time.
As high inventories in China remain a risk to gross margin's, the company has increased support for China retailers to help clear inventories.
"We believe improving trends in developed markets will outshine ongoing potential China margin risks," Binetti added.
For the fourth quarter ended May 31, 2012, the company reported net income of $549 million or $1.17 per share, compared to $594 million or $1.24 per share for the year-ago quarter. Revenues for the fourth quarter rose 12 percent to $6.47 billion. The results came in below Wall Street view that called for earnings of $1.37 a share and revenue of $6.51 billion.
Revenue from North America, the company's largest market, increased 13 percent to $2.4 billion, and Greater China revenue rose 18 percent to $667 million.
Meanwhile, Nike's stock performance has lagged the global brand peer group by 20 percent since June. At current levels, Nike's relative P/E multiple to the S&P 500 is roughly in line with its 3-year historical average.
"We are re-raising our target P/E multiple to 17x core EPS (from 16x previously) based on our view that consensus EPS estimates are poised to rise in the near-term," Binetti said.
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