Nike Inc. reported a modest gain in earnings in the fourth quarter ended May 31, but results topped Wall Street's estimates by 3 cents a share. More impressively, revenues grew 10.9 percent to $7.43 billion, thanks to strong sales in North America and Western Europe. Futures on a currency-neutral basis advanced 12 percent.

Highlights of the quarter include:

  • Fourth quarter revenues from continuing operations up 11 percent to $7.4 billion
  • Fourth quarter diluted earnings per share from continuing operations up 3 percent to $0.78
  • Fiscal 2014 revenues from continuing operations up 10 percent to $27.8 billion
  • Fiscal 2014 diluted earnings per share from continuing operations up 11 percent to $2.97
  • Worldwide futures orders up 11 percent; 12 percent growth excluding currency changes
  • Inventories as of May 31, 2014 up 13 percent

Nike, Inc. noted that despite the negative impact of changes in foreign exchange rates, diluted earnings per share for the quarter increased 3 percent as revenue growth, gross margin expansion and a lower average share count more than offset increased SG&A investments and a higher tax rate.

Fiscal 2014 diluted earnings per share rose 11 percent to $2.97, reflecting 10 percent revenue growth, gross margin expansion, a lower tax rate and a lower average share count, which more than offset the impacts of higher SG&A investments and foreign exchange headwinds.  

“These results demonstrate the energy and excitement Nike brings to the market,” said President and CEO Mark Parker. “Our ability to relentlessly innovate for consumers drove our growth in FY14, and will continue to fuel it for years to come. And as we grow, we remain focused on managing all areas of our business to drive sustainable, profitable growth for our shareholders.”*

FOURTH QUARTER CONTINUING OPERATIONS INCOME STATEMENT REVIEW
Revenues for Nike, Inc. rose 11 percent to $7.4 billion, up 13 percent on a currency neutral basis.
Revenues for the Nike Brand were $7.0 billion, up 13 percent on a currency neutral basis powered by growth in every key category and geography except Japan, where revenues were in line with the fourth quarter last year.
Revenues for Converse were $410 million, up 15 percent on a currency neutral basis, mainly driven by strong performance in our largest direct distribution markets:  the United States, China and the United Kingdom.
Gross margin expanded 170 basis points to 45.6 percent. The increase was primarily attributable to higher average selling prices and continued growth in the higher margin Direct to Consumer (DTC) business, partially offset by higher product input costs and unfavorable foreign exchange rates.

Selling and administrative expense increased 21 percent to $2.4 billion. Demand creation expense was $876 million, up 36 percent, driven by marketing support for the World Cup and key product initiatives. Operating overhead expense increased 13 percent to $1.6 billion due to higher costs for the expanding DTC business, as well as investments in infrastructure and digital innovation.

Other expense, net was $17 million, comprised primarily of foreign exchange losses. For the quarter, the Company estimates the year-over-year change in foreign currency related gains and losses included in other expense (income), net, combined with the impact of changes in currency exchange rates on the translation of foreign currency-denominated profits, decreased pretax income by approximately $30 million.

The effective tax rate was 23.5 percent, compared to 22.9 percent for the fourth quarter last year. The effective tax rate for the prior period was lower due to a reduction in tax reserves related to foreign operations.
Net income increased 1 percent to $698 million while diluted earnings per share increased 3 percent to 78 cents a share, reflecting a decrease in the weighted average diluted common shares outstanding. Wall Street's consensus estimate was 75 cents a share.

FISCAL 2014 CONTINUING OPERATIONS INCOME STATEMENT REVIEW
Revenues for NIKE, Inc. rose 10 percent to $27.8 billion, up 11 percent on a currency neutral basis.

Revenues for the Nike Brand were $26.1 billion, up 11 percent excluding the impact of changes in foreign currency.
Nike Brand wholesale revenues increased 8 percent on a currency neutral basis while DTC revenues grew to $5.3 billion, up 22 percent excluding the impact of changes in foreign currency, driven by 10 percent growth in comparable store sales, new store expansion and a 42 percent increase in e-commerce sales. As of May 31, 2014, the Nike Brand had 768 DTC stores in operation as compared to 678 a year ago.

On a currency neutral basis, Nike Brand revenue growth was driven by growth in every geography, key category and across the Brand’s Men’s, Women’s and Young Athletes’ (Kids’) businesses.

Revenues for Converse were $1.7 billion, up 15 percent on a currency neutral basis, mainly driven by strong performance in our largest direct distribution markets:  the United States, China and the United Kingdom.
Gross margin expanded 120 basis points to 44.8 percent. The increase was primarily due to higher average selling prices and continued growth in the higher margin Direct to Consumer business, partially offset by higher product input costs and unfavorable foreign exchange rates.

Selling and administrative expense grew 12 percent to $8.8 billion. Demand creation expense was $3.0 billion, up 10 percent, due to an increase in sports marketing expense, as well as marketing support for the World Cup and key product launches. Operating overhead expense increased 14 percent to $5.7 billion due to higher costs for the expanding DTC business,  investments in digital innovation and operational infrastructure.

Other expense, net was $103 million for the fiscal year, mainly comprised of foreign exchange losses. For the year, the Company estimates the year-over-year change in foreign currency related gains and losses included in other expense (income), net, combined with the impact of changes in currency exchange rates on the translation of foreign currency-denominated profits, decreased pretax income by approximately $139 million.

The effective tax rate was 24.0 percent, lower than the effective tax rate of 24.7 percent last year primarily due to an increase in earnings from low tax jurisdictions.

Net income increased 10 percent to $2.7 billion while diluted earnings per share increased 11 percent to $2.97, reflecting a decline in the weighted average diluted common shares outstanding.

MAY 31, 2014 BALANCE SHEET REVIEW FOR CONTINUING OPERATIONS
Inventories for NIKE, Inc. were $3.9 billion, up 13 percent from May 31, 2013. Nike Brand wholesale unit inventories increased 12 percent.  Changes in the average product cost per unit, combined with the impact of changes in foreign currency exchange rates, drove approximately 1 percentage point of net Nike Brand wholesale inventory growth. 
 
Cash and short-term investments were $5.1 billion, $823 million lower than last year as growth in net income was more than offset by share repurchases and higher dividends, as well as capital investments in the business.
SHARE REPURCHASES

During the fourth quarter, NIKE, Inc. repurchased a total of 12.3 million shares for approximately $912 million as part of the four-year, $8 billion program approved by the Board of Directors in September 2012. As of the end of fiscal 2014, a total of 51.9 million shares had been repurchased under this program for approximately $3.4 billion, at an average cost of $65.83 per share.

FUTURES ORDERS
As of the end of the quarter, worldwide futures orders for Nike Brand athletic footwear and apparel scheduled for delivery from June through November 2014 totaled $13.3 billion, 11 percent higher than orders reported for the same period last year, and 12 percent higher on a currency neutral basis.*