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Nike Inc (NKE): What To Watch At Oct. 9 Analyst Day

 October 07, 2013 01:43 PM
 


Nike, Inc. (NYSE:NKE) is expected to hold its analyst day on Oct.9. The event, which comes after the recent first quarter earnings beat of 8 cents, should be an additional catalyst for the shares.

Oregon-based Nike is the world's leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities.

Nike is expected to reiterate its long-term targets for high single digit revenue and mid-teens EPS growth at the analyst day.

Meanwhile, the market expects to hear Nike's plans about how the US division can maintain its recent strength. At Nike's 2011 analyst day, it guided for developed markets (including the North America market) to grow revenues at mid single digits over the long term. Since that time, Nike has grown its North America revenues by more than 20 percent, partly boosted by the acquisition of the NFL apparel license.

[Related -Lululemon Athletica inc. (LULU): Near-Term Risks Could Further Derail Investor Confidence]

A key question from investors is whether the company can continue to drive double digit growth after two years of rapid growth and already high market share.

"Ongoing share gains, increasing shelf space at key retailers, pricing power and solid innovation should support continued double digit revenue growth in the US, in our view," UBS analyst Michael Binetti wrote in a note to clients.

Nike continues to gain share in the US athletic footwear market. It is currently gaining 200-300bp of market share on top of 500-600bp of share gains a year ago. In addition, the ongoing shift of US retail capacity towards athletic footwear/apparel bodes well for Nike.

[Related -Nike Inc. (NYSE:NKE) Q2 Earnings Preview: Just Doing It, Again]

In recent months, several investors have asked whether the company has altered its US distribution strategy—perhaps implying an incremental push in downstream distribution (e.g. promotional retail channels like department stores or national shoe chains) to prop up growth rates.

"Our analysis of NPD US footwear data suggests that the percentage of Nike's incremental revenues from the premium athletic/sporting goods retail chain has been consistently increasing—from 67% in 2011 to 78% in 2013 YTD," Binetti said.

While the unit volume growth opportunity at department stores and national shoe chains is certainly part of Nike's US distribution strategy, the company does a excellent job of leading with pinnacle innovation in the premium athletic retail channel to reinforce long-term consumer loyalty for the brand—and adds additional growth through the promotional channel secondarily.

At its analyst day, Nike should also showcase its upcoming product pipeline—potentially including further iterations of low cost manufacturing techniques like those developed for FlyKnit.

Meanwhile, Nike's commentary on the Status of the China recovery is key. At Nike's 2011 analyst day, the company forecasted China revenues to double to $3.4 billion by fiscal 2015 from its fiscal 2010 base of $1.7 billion.

However, China revenues (ex-forex) have been negative in each of the last four quarters, and Nike does not expect China to sustainably return to positive growth until FY15.

"Our current forecasts only assume $2.8B in China revenues by FY15 (compared to the $3.4B implied target from the 2011 analyst day)," Binetti noted.

That said, Nike has made progress in China by clearing inventories and investing in more productive assets to differentiate its retail locations from a crowded athletic space in China.

There are signs that revenues are poised to return to sustained positive growth—and with regional margins that are 465bp below prior peak—should translate to an accelerating EPS contribution from Nike's China business in coming quarters.

While Nike will likely have to push out its target for $3 billion plus in Chinese revenues, the market expects positive comments about the pace of the transformation of the market in China at the analyst day.

"We believe cancellation rates and returns from retailers (which have been significant drags to China region margins) stabilized significantly in the quarter. With retail sell-ins and sell-throughs seemingly becoming more balanced lately, we look forward to Nike's updated comments on when the China market can return to sustained positive revenue growth," Binetti said.

As of the end of the first quarter, Nike had $5.5 billion in cash and cash equivalents on its balance sheet accounting for about 9 percent of its current market cap. Investors may be interested in hearing details around the company's plan for its huge cash balance next week.

The company has an $8 billion share repurchase authorization. While the company has a history of preferring to deploy capital to drive top line growth, the Street will be curious to hear the company's updated thinking on share repurchases and the dividend. 

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