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What Recession? Says Nike - China, Women Lead Company To All-Time High

It's not surprising that Nike (NYSE:NKE) had a good quarter, but the company exceeded all expectations. With its forward guidance looking strong through 2016, and the company probably underestimating its outlook, it's setting itself up to surpass expectations going forward.

Leading the charge was revenue growth in China, which was up 30 percent year-over-year, and secondarily, its female market grew in the double digits, suggesting a long-term upward move which should continue to add to the top and bottom lines of the company.

Gross margin was also up, with more improvement expected in international markets, which also should be a great earnings catalyst over the next year.

Considering the volatility and growing concerns of the global economy, Nike has shown a company with a strong brand that is properly marketed and leveraged, can still do very well.

It's also one of the reasons I recently mentioned investors need to start focusing on individual companies rather than what the Federal Reserve is going to do with interest rates.

Taking into account Nike is one of the stronger performers in these tough conditions, it's still a confirmation there are companies out there that will continue to outperform if we dig deep enough to find them.

Taking into account currency exchange has an impact on performance, it's instructive to look at the performance before that is taken into account, so an accurate view of how the company actually performed can be ascertained.

With that in mind, revenue in the quarter jumped 14 percent. Including currency exchange, revenue growth was still up a decent 5 percent.

On future orders, not including currency exchange, it stood at 17 percent. That points to strong demand for its products, reinforcing the near-term future of the company looks strong.

Now as to the numbers including currency effects, earnings per share climbed to $1.34, a gain of 23 percent. This blew away the $1.19 analysts estimates surveyed by Thomson Reuters. With the brand able to command this level of margin expansion, it is a testimony to how strongly it is positioned around the world. Even in difficult times consumers are willing to pay a higher price of their Nike gear.

On the direct to consumer level, gross margin was up 47.5 percent, or 90 basis points. Pricing power was the main contributor to that performance.

China revenue growth

It appears the revenue numbers from China were a big surprise, and there are a couple of things to look at there.

First, China is attempting to transition to a consumer-led economy. It's quite possible the consumers of China are cooperating with that strategy by buying up goods as other areas of its economy slow down.

The mindset of the Chinese is different than the Western mindset, and it isn't a stretch to make this highly probable association between consumer actions and official government economic policy.

I don't see that necessarily as the major factor in the performance of Nike in China for the quarter, but I do believe it played a part. It will definitely play a part in the future, although Nike will still have to deliver to grow share.

The second and most important reason for the strong growth, is China is increasingly holding sporting events in the country, which include popular athletes wearing Nike gear. That has of course increased brand awareness and loyalty, which obviously is starting to pay off.

In the last quarter a number of big-name NBA players participated in Nike basketball events across China, including Kobe Bryant and Lebron James. It also hosted the Track and Field World Championships, where those wearing Nike footwear won the most medals, creating more of a marketing opportunity.

The area of hosted sports events and marketing strategies associated with top athletes touring to build brand recognition in the country, is an area investors should look closely at. Most traders aren't going to make the connection between sales in China and these events. It will be an advantage to see the possibility of a surprise performance by Nike in the market.

One such event is unfolding in the next quarter, as the company has enlisted none other than Michael Jordan to travel to China in order to celebrate the 30th anniversary of the Air Jordan brand. That is a good test to see if there is a direct correlation between Nike's sales in China and the depth of brand awareness.

In other words, it's obvious brand awareness in China is growing. It's the depth of that awareness and how it impacts sales that I'm talking about. If hosted events featuring Nike products and marketing via big name athletes is proven to be a huge catalysts, it'll give more visibility to the quarterly outcomes.

Women's market

China will be the main revenue driver in the near term for Nike, but it has a lot of long-term potential in marketing to women as well. Numbers may not be as dramatic there, but they could represent a steady growth trajectory for years to come.

Revenue in this market grew in the double digits in the latest quarter, and there is nothing to suggest this won't be the rate this demographic grows in the future. It's just starting to really take off.

The company cited "the global shift towards health and fitness as part of her lifestyle" as a major impetus for sales growth, but I think it's a little more subtle than that. Now the perceived shift is real, but whether or not that is translating into people working out more is doubtful.

What the health and fitness industry does is provide a fashion opportunity, and that I believe will drive the women's market. In other words, looking like you've been working out is probably more of a driver than actually going to do a workout.

Why that's an important distinction is because there could be reported decline in gym memberships or other fitness-related enhancers, which may not have an impact on sales because women still want to look the part. This is why the company released its new training shoe the MetCon 1, while also offering products like Nike pro tights with fashion primarily in mind.

Health fashion is in, and that's a great opportunity for increased sales. The fashion trend is what counts, not the number of women actually working out. That doesn't mean there aren't more women working out, just that it's not the only thing driving Nike's sales to them.

To attract more women to its stores, it has improved the look of its physical stores, making them more upscale, while adding more product options on a consistent basis to keep women coming back and spending on a more consistent basis. That's good news for investors.

Outlook for future orders

As mentioned earlier, excluding currency effect, future orders jumped 17 percent, easily exceeding the 10.3 percent expected by analysts.

These numbers are based upon orders from retailers around the world for delivery between September and January. Including currency impact, future order growth stood at 9 percent.

Leading future orders was China, which increased 22 percent. Other strong markets are North America, Western Europe and Japan. Weakness came from emerging markets and Central and Eastern Europe.

Wholesale unit inventories jumped 8 percent in the quarter, accounting for 10 percent of the overall year-over-year growth, which now stands at $4.4 billion.

The compelling story for Nike is the strength of its brand. At a time when the global economy is slowing down, Nike is able to not only hold its own, but excel by being able to raise prices and increase margin in that economic environment. Very few companies have been able to do so recently.

I'm not big on encouraging investors to buy on the dips, especially at this time, but with Nike, there is so much visibility concerning its performance and outlook, most of that is already priced in. It'll be hard to make much money unless you're in for the long haul.

That said, China is where the growth story is at for the short term, and looking at various marketing initiatives and sporting events China hosts, which would include Nike products worn by the athletes, is where surprises could come, and that only takes a little research to discover.

So far that has been a differentiator, and is likely to be in the future. Once brand awareness permeates China, it will level off to a more realistic pace, but there is still a long way to go before that happens.

Another factor which could surprise is in margin and earnings, where it appears there is room for improvement at the international levels. That means there is still room to raise prices, and increasing loyalty to the brand is a key catalyst there.

Already competing in a tough market, Nike continues to show it has the ability to perform strongly and produce impressive numbers. I would forget about the short term and look to take a long-term position in the company and ride its growth and performance.