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Nike's Upside Limited, With Profit Margins Slipping

Nike Inc. (NKE) continues to be a Hold for us right now, as the company does not have enough upside potential for us to want to buy it right now. The company's latest earnings were most of the reason for us to slash our price target, as costs rose and margins shrunk. A lot of that drop was on higher costs of doing business and restructuring efforts in Europe. Additionally, the company's tax rate rose from 23% to 26%.


At the same time, it was one quarter, and drops/discounts are buying places for one of the strongest brand names in the world. We still believe the company can grow 5-7% in FY 2013, as well as FY 2014, as it is positioning itself well in the soccer arena in Europe, emerging markets, and is planning to get rid of the struggling Cole Haan and Umbro lines. These lines are struggling and weighing on margins right now, and we believe selling both those lines will improve margins.


Margins have declined for Nike to fairly low levels, but one of the company's best assets is that it has a wide economic moat with strong profitability. Right now, the company's profitability needs to improve for us to increase our expectations for the company. We believe with the sale of Cole Haan and Umbro, as well as what should be an improving landscape in Europe in 2013-2014, these margins can swing back up. Until then, NKE will most likely stay in check.


Nike's financial health is pretty strong, with a very solid current and quick ratio, pretty low debt levels, and good FCF. The company has a very solid debt-to-equity ratio as well. Nike's financial health is very solid, and we believe that the company has limited risk in this area.
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