Home to some of the strongest brands on the planet, Nike (NKE) is simply a fantastic company. Brand value is quantifiable through the company’s ability to monetize it in the form of future free cash flows, but while the company’s future free cash flows don’t justify scooping up shares at present levels of ~$90 per share, fundamentals at the company have never been stronger.
Nike’s fiscal 2015 first quarter results, released September 25, were nothing short of impressive. Revenue jumped 15%, while diluted earnings per share leapt 27% during the period. A shift in mix to higher-margin products, higher average selling prices and continued growth in its higher-margin direct-to-consumer business drove the firm’s gross margin higher. A lower tax rate in the period and reduced share count augmented the fantastic growth in earnings per share. Nike’s growth rates are phenomenal for a company of its size.
Worldwide futures orders for the September 2014-January 2015 were up 14% excluding currency changes, suggesting the fundamental momentum should continue in coming periods. Innovation remains the firm’s core competency, in our view, with ongoing success with its Nike Dri-FIT rain jacket, the Nike Pro collection, Dri-Fit Knit, Nike Tech Fleece, the Air Jordan 29, and Lebron 12, the latest example of its Zoom Air Technology. Management believes the Lebron 12 is “just the beginning of the revolution.” The firm’s outlook for the fiscal second quarter and 2015 speaks to continued optimism:
We entered FY15 with tremendous brand and business momentum that drove outstanding Q1 financial results. Our updated FY15 guidance reflects continued momentum over the remainder of the year, fueling sales growth in revenue and EPS as well as enabling continued investments for sustainable, profitable growth.
For revenue, we now expect constant dollar growth for Q2 and full year in the low double digits. This accelerated growth reflects robust consumer demand in our largest markets and categories, with particular strength in our DTC business. Our current outlook for reported revenue growth is 1 to 2 points lower, reflecting the stronger dollar.
We now expect gross margin for Q2 to expand by 125 to 150 basis points. This is above our prior expectations, as our strategies to increase average selling prices continue and growth in our higher margin businesses, including DTC, continue to accelerate.
These benefits will help to offset increases in product input costs, particularly labor and our actions to clear excess inventory in the emerging markets geography. In addition, given current exchange rates, we expect FX will have a neutral impact on gross margin for the balance of the year, versus the benefit we recorded in Q1. For the full year, we now expect gross margin expansion of about 125 basis points.
For full year full year 2015, we now expect the effective tax rate will be approximately 24.5%. Overall, assuming no material changes in FX rates, we expect earnings per share to grow at a high-teens rate for Q2, and about 20% for the full year, reflecting strong top line momentum and continued gross margin expansion, partially offset by strategic investments in our biggest growth drivers.
The one concern we have from a capital deployment standpoint is that Nike continues to aggressively buy back stock. Shares aren’t necessarily cheap, but during the first quarter, Nike repurchased a total of 10.6 million shares. The four-year, $8 billion buyback program has been value-creative thus far, with an average cost of ~$68 per share (below our fair value estimate), but purchases at present levels aren’t creating value (and may be destroying it). Read more about which buybacks are value-creating and which are value-destroying here >> We generally would prefer Nike to raise its dividend than buying back stock at current levels. Shares yield a paltry 1.2%.
Though it may be easy to fall in love with newer brands such as Lululemon (LULU) and Under Armour (UA), Nike remains tried-and-true, and its outlook and dedication to innovation speak to ongoing strength in its fundamentals. We value shares at $80 each.