Nike’s stock price (NYSE: NKE) fell as much as 4.3% on Friday, after the company reported 3rd quarter financials late on Thursday. Despite results that were generally better than expected, investors appeared to focus on the outlook that pointed to slowing sales in North America.

Diluted EPS came in at $0.68, while analysts expected $0.65. Revenue for the quarter was $9.61 billion which was in line with consensus estimates. However, North American revenues of $3.81 billion fell short of the $3.87 billion that analysts expected.

The stock price was up 19% for the year, so Friday’s weakness could be attributed to profit taking as well as the sales outlook.

 

Strong Growth Continues Online and in China

Online sales rose 36% from the previous year, and sales in China grew 20%.

Overall sales rose 7% but would have been 11% without foreign currency translation losses from Europe and China. While North America’s sales growth of 7% was disappointing, other regions and channels were strong.

Online sales rose 36% from the previous year, and sales in China grew 20%. Sales in the rest of the Asian Pacific region and Europe grew 14% and 12%, respectively, when adjusted for currency losses. The gross margin rebounded to 45% from 43% a year earlier.

The company sees growth for the 4th quarter in the low single digits range as a result of further forex related headwinds but sees those forex related losses slowing after that. For the full year, Nike expects revenue growth to be just below 10%, while analysts expected 10.6%. The company expects margins to improve further and earnings growth to rebound in the 2020 financial year.

 

Nike Continues to Invest for Future Growth

Nike has always invested heavily in innovation to ensure it can maintain its market leadership position and continue to grow in the future. The company continues to do so in several areas of its business.

Besides R&D for new product lines, the company has invested in a new website, new types of stores in New York and L.A., and more efficient manufacturing techniques. Supply chains are also being improved to allow products to be shipped faster, particularly at the lower end of the market.

Nike is also investing in product lines targeted towards women. The global footwear and apparel market for women is far larger than it is for men, yet less than 25% of Nike’s sales are to female customers. This represents another area where Nike may be able to grow revenues in the future.

Expenses rose 17% in the last quarter, which seems reasonable given the potential return on investment.

 

Is the Valuation Too High?

Nike’s trailing PE is in the mid-60s, and the forward PE is around 28. When you consider the long-term growth rates, those multiples do look steep. At these levels the stock would also be very exposed to a recession, especially in China.

On the other hand, Nike is one of the strongest brands in the world and has demonstrated its ability to keep growing and defending its market share. For this reason, the stock seldom appears cheap without a lot of bad news.

Nike is definitely not a bargain at current levels, though if or when it might become a bargain is hard to say. History has shown that this is a stock to buy into bad news. There may, however, be some medium-term trading opportunities if further price weakness is followed by improving fundamentals.