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Analysts are gushing over Nike, but they aren't telling you everything

Global footwear giant Nike (NKE) released its second quarter 2014 earnings report after the close of the market on Thursday, and the news was good. The company's revenue $7.98 billion, which was up 15% from the year-ago quarter and above the consensus estimate of $7.8 billion. As for the bottom line, the company's net income was $962 million or $1.09 per share. That beat the consensus estimate of $0.88 by 23%. There also are a host of encouraging intangibles in the report, including falling supply chain costs, rising profit margins, and a continued shift toward online selling.

This is exactly the sort of report that lends itself, perhaps too freely, to sports-derived hyperbole – shares jumped, investors scored, etc. Though these were generally subtle, I fear I must nominate “Nike Threw Down a Powerful Dunk in the Face of Athletic Retailers,” from TheStreet.com, for the hyperbole hall of shame. Jeff Macke of Yahoo Finance went in another direction entirely, however, with “Nike is why America is Great.” I was surprised by the jingoistic tone of the piece (one can, but needn't necessarily, read this as tongue in cheek) considering that Macke doesn't seem to care much about America when he cheers on companies that engage in tax-expatriatism.

NKE share are up 11% in Friday morning trading, and that's enough. Why? In the last ten years, Nike has picked up a powerful rival in Under Armour (UA). The company is growing faster than Nike, but has thusfar only really competed in the United States. Now, Under Armor has grown big enough to challenge Nike everywhere. Even if Nike keeps most of the market, there will be more price competition, and that will mean narrower margins.

Also, Nike has been drinking deeply from the share-repurchase well. In just the most recent quarter, Nike spent $912 million on share repurchases, considerably more than the $661 million it has spent on dividend payments over the last four quarters. Nike should be asked the same questions every other company doing this is being asked, including “Why, if your prospects for expanding your revenue are as good as you claim, are you spending money on share buybacks that could be spent on expansion?”

Sadly, I fear the only honest response any company could have to that question is “Why bother? This way is easier, and we keep getting away with it.”

Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.