“Consumer sentiment is usually an important indicator for the U.S. economy. More than two-thirds of this country’s GDP comes from consumer spending. Traditionally, when consumers are unhappy, retailers are unhappy. That is, until this year. Times are still uncertain. The economy is still fragile. And while I don’t normally think of retail as a defensive sector, I can’t ignore the demonstrated resiliency of consumers. And unlike traditional defensive sectors, if economic conditions improve, the retail sector has tremendous upside potential. ...
“When it comes to athletic apparel, Nike, Inc. (NKE) is the market leader— and the company keeps gaining market share. ... Nike is known for its ability to provide high performance specialty footwear and apparel—whether your sport is basketball, soccer, running, tennis, wrestling or cheerleading. As a stock, Nike also delivers high performance. In the last five years, Nike has delivered an annual total return of 16.1%, compared with an average annual loss of 1.2% in the S&P 500 Index. More recently, Nike has performed well financially. On October 6, Nike reported the results from its first quarter of fiscal 2012 (ended August 31, 2011). The company grew revenues by 18% and net income by 15% over the same period a year ago.
“Nike’s net revenues grew by double-digits in every geographic region. The grumpy U.S. consumer spent 16% more on Nike products than a year earlier. Of course, sporting goods always sell well in the U.S. But China is one of the fastest growing markets for sports apparel. One of China’s leading sports apparel companies, China Dongxiang, has been losing market share to Nike, forcing the resignation of the company’s CEO on October 23. And Nike is stepping up the pressure.
“Nike has been very successful connecting with China’s youth market by featuring Chinese athletes such as the 100-meter hurdle Olympic gold medalist Liu Xiang, National Basketball Association player Yi Jianilian, and Li Na, the 2011 French Open grand slam winner. Nike currently sells its products in more than 7,000 stores in China, with sales of more than $2 billion annually. Recently, Nike announced it planned to more than double its revenues from China in the next four years. Growing sales in emerging markets also hold another major advantage for Nike. Most of Nike’s manufacturing is done in China and other Asian countries where currencies have been strong and inflation has been higher than most of the rest of the world. This has put some pressure on Nike’s manufacturing costs. But if Nike sold a greater percentage of its goods into those markets, some of its margin pressures would be mitigated.
“Nike’s ‘swoosh’ is one of the most recognized logos on the planet. ‘Just do it,’ wasn’t just a successful ad slogan, it became the mantra for a generation of young athletes. Nike figured out how to deliver more than just a quality product—it figured out how to deliver a way for consumers to say something more about themselves. That kind of power can prevail in any economic environment. And I want that power in my portfolio.
Action to Take
“I will be buying 45 shares of NKE on the afternoon of October 31. This is about half the position I intend to ultimately have in this top-tier company. But considering the market’s recent run-up, I’d like to spread out my purchase to minimize market risk in the event of a market pullback.”
Amy Calistri, StreetAuthority’s Stock of the Month, 10/28/11
