Can Nike Stock Keep Running?

As the market has pulled back over the last couple of weeks, Nike (NYSE:NKE) stock has quietly continued to move higher. Classic Nike. While much of the market's attention has been on technology and other stocks benefitting from the stay-at-home economy, Nike has gone about its business —and seen its stock climb to fresh record highs.

Often when the market heads into correction mode, investors hide out in defensive consumer staples shares. But in recent years Nike, a consumer discretionary company, has become a safe bet in both good times and bad.

Why? Because investors recognize the solid business model and know the growth prospects are as good as ever. Although the pandemic has impacted Nike sales as it has other consumer brands, investors also know that underlying demand for Nike's footwear and apparel is strong.

Why is Nike Stock so Strong?

Nike stock's steady run has seen few non-market-related blips throughout its 36-year trading history. Its remarkable stamina largely stems from its willingness to adapt to changing times.

Recently, that has meant responding to changing consumer preferences. Today's fitness and fashion-minded customers alike want relevant, personalized products—and they want them now. They value comfort, performance, and style. Nike delivers all of this and then some.

Management has done an outstanding job executing its Triple Double Strategy. That's two-times the innovation, two-times the direct, and two-times the speed. It has been firing on all cylinders by continually coming out with new products and connecting directly with the consumer like never before. The Triple Double strategy meshes particularly well with increasingly demanding millennial consumers who will drive the next wave of economic growth.

Prior to the pandemic, Nike's direct-to-consumer (DTC) sales were expected to grow around 15% to 20% annually. While the growth trajectory has been temporarily set off course, Nike should be able to get back on track.

This year, investments in the DTC channel have served Nike well amid store closures and slower retail sales. Its company owned stores, websites, mobile apps, and digital partnerships have effectively bridged the gap with its loyal customer base. Digital sales jumped 75% last quarter and accounted for roughly 30% of total revenue.

What Should Investors Expect When Nike Reports Next Week?

Nike is getting set to report quarterly earnings after the market close on September 22^nd. The consensus estimate of earnings per share is $0.41.

Investors should expect the theme of the report to be continued strength in the DTC business driven by digital sales. The gross margin may be similar to last quarter's 37.3% due to the elevated expense level tied to market conditions. But investors need not worry. Ultimately Nike's digital transformation should continue to drive higher operating margins and propel the stock higher over time.

Nike has topped earnings expectations in 18 of the last 20 quarters. Last quarter was one of the rare misses but was largely associated with the uncertain economic backdrop. The stock dipped a bit in response but has since rebounded strongly. That's because the market has been able to see the forest from the trees. Nike's growth opportunities over the long run are solid.

From Where Will Nike Get Growth in the Future?

Aside from the DTC channel, Nike's women's business is a major long-term growth catalyst. Less than a quarter of Nike's sales comes from women's products. Yet as the company has noted, the market for women's footwear and apparel is actually much larger than that of men's.

Women are increasingly embracing the casual, sneaker culture to the point that Nike athletic gear has become fashionable. The Nike yoga collection has been especially popular. Management has responded to this shift by making the women's category a priority. It is investing heavily in women's product development including shoes, sports bras, and other apparel. It is also devoting some big-time marketing dollars to connect with female consumers.

Emerging market growth is another long-term catalyst for Nike. Not surprisingly, China is the key market here. Nike's sales growth in the Greater China region has outpaced its overall top-line growth. While overall sales were down last quarter, China sales actually increased 8%. Pre-pandemic China sales were growing at a 20%-plus clip and a return to this growth may not be far away.

Meanwhile, Nike's core strength remains its global brand recognition. This is what ultimately allows the company to raise prices—and still increase sales. Its presence in the high-end footwear market is particularly strong because of its marketing prowess and endorsements from popular professional athletes.

Is Nike Stock a Buy?

In terms of valuation, Nike shares don't appear cheap at 51x forward earnings. But while a premium valuation is warranted, the high multiple is a reflection of the current economic climate. The three to five-year growth outlook is what's more important here.

Yes, the next few quarters will probably be choppy. As the economy attempts to stage a comeback, the status of professional, collegiate, and youth sports worldwide is still very much unknown. This will continue to have an impact on Nike's sales of athletic apparel and equipment in the near term.

However, as economic conditions improve, no one is better positioned than Nike to capitalize on the global appetite for high quality athletic gear.

For new money, investors may be better off waiting for a better entry point. But as we saw after last quarter's report, any weakness should be viewed as a buying opportunity.

Existing Nike shareholders should continue to hold and enjoy the run. Nike has the stamina to build off its dominant market position and enjoy a multi-year run of above-industry growth. Strong global brand recognition, product innovation, and economies of scale suggest there is plenty of fuel in the tank.