I've pointed out before in this space that shoe retailers and manufacturers - particularly those specializing in athletic shoes - have enjoyed an outstanding year in 2010, as companies make big inroads into Asian markets. Nike Inc., adidas AG and Foot Locker Inc. have risen between 22 per cent and 75 per cent this year.
That makes Nike's setback on Wednesday all the more notable. Nike shares were down about 6 per cent in afternoon trading after the company reported its fiscal second quarter results on Tuesday after markets closed. Revenue rose 10 per cent, more than offsetting an 8 per cent gain in input costs. And net earnings rose 22 per cent, to 91 cents (U.S.) a share after excluding one-time items, beating analysts' expectations for earnings of 88 cents.
So why are investors bailing out? They appear to be concerned about costs rising even more in the coming quarters, making it difficult for Nike to keep up with higher prices and fewer discounts. As Dow Jones pointed out, Nike management believes that costs for labour, cotton and transportation should rise over the next three or four quarters, putting pressure on earnings.
However, Michael Binetti, an analyst at UBS, believes that the setback in Nike's share price should give investors a buying opportunity. He stuck to his "buy" recommendation and $100 price target on the stock.
He argues that Street earnings estimates are poised to rise after the quarterly earnings "beat." Plus, with Nike's orders rising 16 per cent year-over-year in the fiscal second quarter, he thinks that ongoing order growth of at least 10 per cent should translate into a valuation premium for the stock. Mr. Binetti's target price-to-earnings ratio on the stock is 17.5, versus a 10-year average of 17.