5 Things To Watch When Nike Reports Earnings On Tuesday

Analysts are projecting an EPS of $0.56 for Nike this quarter, along with $8.87 billion in revenue. Last year, Nike's Q1 was incredible from an EPS standpoint, coming in at $0.69—a stratospheric 25% growth in profitability. No such growth surprise is expected this year. Regarding revenue, Nike is projected to continue healthy growth with a 5% rise above last year's Q1.

Nike's two primary corporate segments are Sportswear and Running. Sportswear is Nike's biggest segment, bringing in $7.5 billion dollars, or 27.5% of Nike's annual wholesale revenue, which makes it essential for the continued overall growth of the company. Fortunately for Nike, this segment had the strongest growth during fiscal 2016, which ended last quarter. Sportswear came in at 22% growth on a currency neutral basis, or 14% growth when factoring in foreign exchange headwinds.

Nike's other major segment, Running, accounts for $5 billion of its wholesale revenue, or 18% of annual revenue. Because a lot of the growth in the Running division came from the Eurozone, China and Japan, the foreign exchange effect took a greater toll here, diminishing moreof Nike's top line growth in dollars. For Running, growth was just 3% when factoring foreign exchange costs. The better news is that on a currency neutral basis, this segment grew by 10% over the last year. Double digit growth in the company's biggest and most important segments? Yes please!

In the past few years, growth-hungry investors have been particularly keen on the female demographic. Makes sense, since women represent 50% of the population more or less, meaning this group of consumers is way too big to ignore. Growth here is fueled by active women buying more sport-related clothing and equipment from Nike, across all product segments. Fortunately for Nike, just when sales growth among men started to slow, their women's line began to take off.

Since 2013, growth in its women's line has been regularly outpacing its men's offering. Better still, annual growth during the past four years has been above 10% YoY, coming in at 17% on a currency neutral basis.

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Nike has two ways of selling equipment to the general public—either wholesale-to-retailers, or direct sales to consumers. Wholesale-to-retailers is pretty straightforward. These sales are generated via middlemen in the form of a traditional retail network of stores, such as Dick’s Sporting Goods (NYSE:DKS) or Macy's (NYSE:M) for instance.

The appeal of direct sales to consumers is obvious. It allows Nike to cut out the middlemen, eliminate wholesale discounts and improve margins on products sold. Which is why NKE launched a brand new app in August, in hopes of cashing in on direct-to-customers sales while riding the mobile shopping trend. The revenue split between wholesale and direct-to- consumers was 80/20 two years ago; It's now 75/25, with the growth at the wholesale end. Margins have increased by 140 basis points in the past two years, reflecting the rise of direct sales to consumers.

Alongside Nike's other opportunities, described above, it's appropriate to finish with the Chinese market. China's consumers are known for their love of premium brands. That puts the world-famous Nike brand squarely in the sights of modern China's burgeoning middle class, which by some estimates is at least half a billion strong . This is nothing short of a gold mine for companies like Nike, which has been growing at an amazing of 24% and 29% annually in the People's Republic, over the past two years respectively. Naturally, Nike management is well aware that 20%+ growth won't last forever, but the expectation is for double digit growth into the foreseeable future.

Conclusion

From this vantage point, Nike's prospects are stellar. It has all the hallmarks of a classic growth company. Management has proven it's capable of seizing opportunities early on, and the brand name is recognized—and coveted—worldwide. Nike is currently trading at around $55 a share, after hitting a high of $68 in late 2015.

Its P/E ratio is just under 25, which isn't cheap, but isn't expensive either, considering the many likely avenues of growth available, and the fact that the average P/E of the entire stock market has been trending upward during the past few years.

Nike is a strong business, one that's now cheaper than peers such as Under Armour Inc (NYSE:UA) or lululemon (NASDAQ:LULU). The 2016 slump, which began at the close of 2015, means the stock is 20% off its all-time high as of this writing.

We see this as an excellent buying opportunity for anyone looking to add a successful, well-run company to their portfolio. But grab it while you can. We wouldn't be at all surprised to see it regain its previous highs sooner rather than later.

Written By: Investing.com