Nike is starting to look even better – Nike Inc. (NYSE: NKE)

It was better than I expected.

Nike (NKE) reported the results of its fiscal third quarter 2018 this Thursday, after the bell. Revenues of $ 8.98 billion led the consensus for a considerable amount of $ 140 million. The solid results of the high line did not come as a surprise, given the heavy spending by consumers during the important shopping season, as I mentioned last week. The non-GAAP EPS of $ 0.68 was substantially higher than the consensus $ 0.53, particularly when (1) the margins arrived relatively strong and (2) a low effective single-digit tax rate must have taken more by surprise.

Credit: Free Market

On the results of the quarter

It seems that Nike took advantage of two of its key areas of strength to produce the impressive quarter results: DTC (direct channel to the consumer) and international business. In Greater China, for example, sales of footwear and clothing grew by a solid 21% and 36%, respectively. However, a weak dollar contributed a lot to the rise in revenues. Without FX, I estimate that Nike's income would have been much more shy $ 8.73 billion.

Perhaps what surprised me the most was Nike's gross margin, still 64 bps in the YOY comparison but 43.8% resistant. The last quarter, for example, the gross margin of 43.0% had fallen more than one percentage point. Better yet, the winds against the currency were blamed for much of the softness, which I find encouraging since pressures speak little of Nike's operations. Solid profitability left aside, at least for the moment, the concern that I had a more pronounced margin deterioration.

Adjusted opex increased in both digits, which may seem worrisome to some at first glance. However, those who invest in the inventory should expect investments in the direct channel and increased marketing spend to support the brand and innovation efforts. In the end, the adjusted operating margin of 13.0% seemed in line, if not an inch above my expectations. Helping to produce the great EPS beat was a non-GAAP effective tax rate of only 9.1% which I doubt many badysts and investors have counted on. If the tax rate had been the same 13.8% last year, I estimate that the earnings per share would have fallen three cents below the reported number.

See below a summary of Nike's profit and loss results in fiscal 3Q18.

Source: DM Martins Research, using data from company reports

My opinions about stock

I had already given a bullish turn in NKE, starting around November of last year. However, I had been reluctant to take advantage of the investment opportunity due to margin pressures and a slow division of North America that, to be fair, still does not seem impressive to me.

NKE PE Ratio (Forward) data by YCharts

Now, and after the results that I find very robust, I feel more comfortable calling NKE a solid investment in sports clothing and commercial space. The company owns a brand that is unlikely to lose its global appeal in the short term, while its DTC channel seems to be a good response to the challenges faced by retailers in general, such as Amazon (AMZN) and death threats from Mall. [19659015] All these positive attributes have a price that, although it is not low, I consider justifiable: send P / E of 27.6x that is on par with the pair Lululemon (LULU) 26.3x and PEG of little more than 2.0x. As a result, I continue to find NKE one of the most interesting and high quality plays to consider in this space.

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Disclosure: We have no positions in any of the mentioned actions, and I have no plans to start any positions within the next 72 hours.

I wrote this article myself, and expresses mine opinions I am not receiving compensation for it (other than Seeking Alpha). I have no business relationship with any company whose actions are mentioned in this article.

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