Is NIKE, Inc. a Buy?

Shares of Nike (NYSE: NKE) rallied more than 30% over the past 12 months as the footwear and athletic apparel maker's sales growth accelerated over the past three quarters. That turnaround was remarkable -- Nike had been dismissed as an also-ran that was losing ground to Adidas (NASDAQOTH: ADDYY).

Is it too late for investors to buy Nike after that rally? Let's discuss the bullish and bearish cases to find out.

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Why the bulls love Nike

The bulls believe that Nike's sales growth, which accelerated over the past few quarters, indicates that the company is landing some blows against Adidas, which started an aggressive five-year turnaround plan in 2015.


Q1 2018

Q2 2018

Q3 2018

Q4 2018

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Nike attributes its growth to a recovery in North America, which had been a tough market due to saturation, competition, and the bankruptcies of major athletic footwear retailers. Its sales in North America rose 2.8% annually last quarter, crushing expectations for 1% growth. Nike's other growth engine is China, where its sales surged 35% (25% on a constant currency basis) annually.

Nike's investments in direct-to-consumer (DTC) and e-commerce channels are also paying off. Its Nike Direct revenues rose 12% annually last quarter, as its digital commerce revenues climbed 25%. Apparel sales also outpaced footwear sales, with 15% growth versus 8% growth. This suggests that Nike is wisely cashing in on the rising demand for athleisure apparel.

As for footwear, demand for Nike's new Air VaporMax, React, Air Max 270, and ZoomX shoes was still robust. New footwear and apparel categories accounted for 80% of Nike's incremental sales growth in 2018. Meanwhile, Nike's gross margin rose 60 basis points annually to 44.7% last quarter thanks to the company's pricing power and its focus on DTC and e-commerce channels.

Nike also announced a new $15 billion buyback last quarter. That's enough to repurchase 12% of its outstanding shares at current prices, and should buoy its earnings growth over the next four years.

What the bears believe

Analysts expect Nike's revenue to rise 8% this year as its earnings grow 11%. For comparison, Adidas expects its sales to rise 10% (on a constant currency basis), and for its net earnings to rise 15% at the midpoint. Adidas' forward dividend yield of 1.5% is also higher than Nike's 1.1% yield.

Nike's stock currently trades at 29 times this year's earnings, while Adidas' stock trades at just 22 times this year's earnings. These numbers indicate that Adidas is a cheaper stock with better growth potential than Nike. Comparing the two companies' gross margins also tells a similar tale -- Nike's margins are improving, but Adidas' margins are better.

Nike's 3% sales growth in North America is encouraging, but Adidas' North American sales rose a whopping 21% on a constant currency basis last quarter. Therefore it's far too early to say that Nike is mounting a "comeback" against Adidas.

Demand for Nike's Converse brand, which accounted for 5% of its sales last quarter, also remains weak. Sales of the brand tumbled 14% annually on a constant currency basis last quarter, and 11% for the full year. Nike claims that the decline was driven by changes to wholesale distribution, and that direct-to-sales efforts should boost demand again -- but the brand could remain a sore spot over the next few quarters.

Lastly, a stronger dollar will also become a major headwind for Nike, since a weak dollar significantly inflated its sales growth in Greater China and the EMEA (Europe, Middle East, and Africa) regions last quarter.

So is it time to buy Nike?

Nike's prospects are improving, but I don't think it's a compelling buy. Plenty of other stocks trade at lower valuations than Nike, but have better growth prospects and higher dividends. Adidas also still seems like a much better play on athletic footwear than Nike. I might consider buying Nike on a pullback, but I think the stock has gotten ahead of itself at these prices.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends Nike. The Motley Fool has a disclosure policy.