The retail sector is a difficult area for many firms to generate strong corporate profits. Corporate profits tend to be at the whim of the fickle consumer. This is true for many firms in the retail sector, except for NIKE, Inc. (NYSE/NKE). NIKE has consistently outperformed many other firms in the retail sector, delivering a 17.5% annual return over the past five years.
Corporate profits for NIKE have continued to grow for several reasons. NIKE’s strategy to grow its presence in the retail sector across many different nations, including the emerging markets, has generated strong growth in corporate profits. Emerging market sales increased 23% from the previous year.
China continues to be a strong market for NIKE in the retail sector, as the company continues to expand. With over 7,000 stores currently in China, NIKE plans to double its revenue over the next several years.
Because the retail sector is so finicky, innovation is the key to driving corporate profits. NIKE is a leader in innovation, which is one reason why corporate profits continue to grow.
Several interesting developments will be drivers for corporate profits later this year. The Olympics, starting in July, will be a nice push in corporate profits for NIKE going into late summer. In the fall, NIKE now has the contract for the NFL. As the exclusive provider for the NFL, NIKE should see a nice bump up in corporate profits near the end of 2012 and first quarter of 2013.
The newest in lightweight shoes, the “Flyknit,” will debut in July at a cost approximately of $150.00. The amazing thing about this shoe is the way it’s produced. This shoe is made by a computer-controlled weaving machine that makes the top portion of the shoe, which is then sewn to the bottom portion. Traditionally, a running shoe would have 37 pieces sewn together, a very labor-intensive procedure that hurts corporate profits. This new process only has two sewn pieces, a definite benefit to corporate profits. The lightweight running category is a huge and growing business for NIKE.
These new lightweight running shoes will weigh approximately half as much traditional running shoes, at 5.6 ounces versus 10.2 ounces. They will be more expensive when sold and less labor-intensive to make, which combines for better corporate profits.
Chart courtesy of www.StockCharts.com
But here’s the question: have investors priced all of these good things into the stock already? The forward price-to-earnings ratio is almost 19, and the price-to-book is over five times. These are very expensive multiples for NIKE. If we look at the stock over the last three years, it has made a tremendous run. While the retail sector has being good to NIKE and corporate profits have grown, this percentage move cannot be sustainable forever.
Technically, the stock is near a key trend level that, if broken, would be a significant warning sign. If that level were to be broken, we could see a pullback initially to the $90.00 range, which should offer some support. If things got even worse, the next level of support could be as low as $75.00, which would also coincide with the 200-day moving average.
While I personally love NIKE’s products and think its innovations have allowed it to be a market leader in the retail sector, the stock price is very high and I certainly wouldn’t be putting money to work right now. A smarter strategy would be to wait until the fall when we’ll get more information regarding the company’s sales of the Flyknit shoe, Olympics clothing and NFL gear. At that point, the stock might have sold off and allowed an even better entry point. Over the next decade, I do see NIKE continuing to be a market leader in the retail sector.