Nike's Long-Term Story Intact
While softer future orders are grabbing headlines, the wide-moat company's manufacturing and mobile efforts will drive future demand and pricing power.
While the market is justifiably focused on
While the softer futures orders can be attributed in part to competition from Adidas/Under Armour, as well as a trend shift toward lifestyle fashion versus performance products, we share management's views that this metric doesn't fully capture demand as Nike continues to evolve its direct-to-consumer capabilities (constant-currency DTC revenue increased 22%--including impressive 49% growth at Nike.com--which also explains the inventory increase). Management attributed gross margin pressures on foreign currency, the exit of the golf business, a higher mix of off-price goods due to retailer consolidation, and manufacturing investments, all of which are consistent with industry commentary and imply gross margin improvement as the year progresses.
Altogether, Nike's first-quarter update will not materially alter our $57 fair value estimate, and we view shares as modestly undervalued. We still find full-year guidance calling for high-single-digit top-line growth achievable.
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