Nike Eyes "Athleisure" Wear

01/02/2017 8:00 am EST

Focus: STOCKS

Jason Clark

Contributing Editor, The Prudent Speculator

This footwear and apparel titan reported better than expected results for its fiscal Q2 2017, notes long-term value investor Jason Clark in The Prudent Speculator.

Nike (NKE) said it had adjusted earnings per share of $0.50, versus consensus analyst estimates of $0.43. Revenue for the three months was $8.18 billion, versus forecasts of $8.09 billion.

The quarter benefited from cost cutting and direct to consumer sales, with some of that seemingly inventory liquidation that boosted revenue but squeezed margins.

Despite significant investment back into the business, Nike also was able to buy back 17.0 million shares during the quarter for approximately $900 million as part of the four-year, $12 billion repurchase program approved in November 2015.

As of November 30, a total of 56.0 million shares had been bought back under this program for approximately $3.1 billion.

There is little doubt to us that the company’s key to success in its increasingly heated battle with Adidas (ADDYY) and Under Armour (UAA) will be product innovation.

NKE Chairman and CEO Mark Parker said, “With industry-defining innovation platforms, highly anticipated signature basketball styles and more personalized retail experiences on the horizon, we are well-positioned to carry our momentum into the back half of the fiscal year and beyond.”

We continue to suspect the near-term will be a bit bumpy as Nike is in the middle of a transition from sport-specific apparel to products that are part-athletic and part-leisure.

The comfortable, versatile “athleisure” wear has tremendous potential and should eventually appeal to a wider variety of customers than sport-specific products.

The company will also have to continue to navigate currency headwinds and the ebbs and flows of product input costs.

Still, we like that Nike sports an excellent balance sheet with net cash and equivalents of almost $2.5 billion. Our Target Price for high-quality NKE has been lifted to $73.

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