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We have retained our Neutral stance on Nike Inc. (NKE - Analyst Report), as we remain impressed by its quarterly performances, robust future orders, focus on expanding its global footprint and brand enhancement, offset by intense competition amid rapidly changing customer preferences.

Why Neutral?

Nike’s strong portfolio of globally recognized brands, Nike, Converse, Chuck Taylor, Hurley, All Star, One Star, Star Chevron, and Jack Purcell along with a focus on innovation has helped further strengthen its leadership position. These attributes also provide Nike a competitive edge over its peers, Adidas AG-ADR (ADDYY) and Brown Shoe Co. Inc. (BWS - Snapshot Report).

Nike is sincerely striving to find opportunities to expand its global footprint and augment its market share via acquiring new brands, developing its direct-to-customer business and divesting its underperforming brands. Put together, these strategies position the company strongly among competitors.

Moreover, this footwear and athletic apparel retailer has outperformed the Zacks Consensus Estimate in 3 of the trailing 4 quarters, recording an average beat of 3.5%. In the most recent quarter, it posted an earnings surprise of 14.0% and an 11.0% increase in earnings per share, aided by solid top-line growth, leveraged selling, general & administrative (SG&A) expenses and lower share count. Net sales surged 7.0% year over year driven by superior demand for Nike brand.

Going forward, we note that the company’s avenues to boost its top line remain strong as evident from escalating future orders.

However, higher input costs as well as a mix shift towards low margin businesses continued to weigh on the company’s gross margin, which contracted 30 basis points to 42.5%. Beside the quarter’s implications, we expect the sluggish discretionary spending and intense competition amid rapidly changing customer preferences to undermine Nike’s future prospects. Consequently, we prefer to be on the sidelines at this juncture.

Other Stocks to Consider

Besides Nike, other stocks worth considering in the shoes and related apparel industry are Adidas and Steven Madden Ltd. (SHOO - Snapshot Report), both of which hold a Zacks Rank #2 (Buy).

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