Nike, Inc. reported earnings increased 5.2% in its third quarter ended Feb. 28, but results came in below expectations due to rising costs of oil and cotton. Revenue climbed 7.0% to $5.1 billion and was ahead 8% excluding currency changes. Nike brand futures orders were up 11% or up 9% excluding currency changes.
On a conference call, Nike executives said the company will begin to raise prices on a broad variety of products in an effort to offset rising oil, cotton, labor and air-freight costs. It indicated its gross margins will continue to lag in the near team due to these costs pressures.
Nike executives added that the price increases won't begin to mitigate that margin pressure until next fiscal year but indicated that coming price increases will be “across the board,” the company said.
Net income reached $523 million, or $1.08 a share, compared with $497 million, or $1.01 cents a share, in the year-earlier quarter. That was beow analysts' average expectation of $1.12 per share, according to Thomson Reuters I/B/E/S.
“Our solid third-quarter results demonstrate the power of the Nike, Inc. portfolio,” said Mark Parker, President and CEO of Nike, Inc. “Our unique ability to create deep connections with consumers, led by an impressive pipeline of innovative product and exciting retail experiences, continues to strengthen our brands and accelerate growth. Moving forward, we'll continue to leverage our scale, financial resources, and operational discipline to drive near and long-term value to shareholders.”*
Futures Orders
As of the end of the quarter futures orders for Nike Brand athletic footwear and apparel, scheduled for delivery from March through July 2011, totaled $7.9 billion, 11% higher than orders reported for the same period last year. Excluding currency changes, reported orders would have increased 9%.*
By geography, futures orders were as follows:
Geography Reported Futures Orders Excluding Currency Changes
- North America +11% +11%
- Western Europe +4% 0%
- Central and Eastern Europe +9% +9%
- Greater China +19% +13%
- Japan +4% +2%
- Emerging Markets +21% +18%
- Total Nike Brand Futures Orders +11% +9%
* Revenues for Nike, Inc. increased 7% to $5.1 billion or up 8% on a currency neutral basis. Revenues for the Nike Brand were up 8%. Excluding the impacts of changes in foreign currency Nike Brand revenues rose 9% driven by growth in all seven Nike Brand key categories and every geography except Japan. Revenues for our Other Businesses increased 1%, with minimal impact from changes in foreign currency exchange rates, as growth in Converse, Cole Haan, and Hurley was largely offset by lower revenues in Umbro and Nike Golf.
* Gross margin declined 110 basis points to 45.8% mainly as a result of higher product costs, elevated freight costs, including additional airfreight incurred to meet strong demand for Nike Brand products, and a smaller proportion of license revenue due in part to the conversion of Converse's U.K. business to direct distribution. These factors more than offset the positive impacts of favorable year-over-year changes in foreign exchange rates, a higher mix of full-price sales, the benefits of ongoing product cost reduction initiatives, and growing sales from our Direct to Consumer operations.
* Selling and administrative expenses grew at a slower rate than revenue, up 5% to $1.6 billion. Operating overhead expenses increased 6% to $1.1 billion as a result of additional investments made in both our wholesale and direct to consumer businesses. Demand creation expenses rose 3% to $578 million due to marketing support for key product initiatives and investments in retail product presentation for wholesale accounts.
* Other income was $17 million, comprised largely of non-recurring items and foreign exchange gains, primarily from currency hedges. For the quarter, we estimate the year-over-year change in foreign currency related gains included in other income, net, combined with the impact of changes in foreign currency exchange rates on the translation of foreign currency-denominated profits had an insignificant impact on pretax income.
* The effective tax rate was 26.0% compared to 24.9% for the same period last year. The effective tax rate was higher due to a larger percentage of pretax income coming from operations in the United States which has a higher effective tax rate than operations abroad.
* Net income increased 5% to $523 million and diluted earnings per share increased 7% to $1.08, reflecting higher net income and a 1% decline in the number of diluted weighted average common shares outstanding.
February 28, 2011 Balance Sheet Review
* Inventories for Nike, Inc. were $2.5 billion, up 18% from February 28, 2010, to meet strong demand and given comparisons to extremely low levels last year when inventories were down 13%.
* Cash and short-term investments at period-end were $4.5 billion, 11% higher than last year mainly as a result of higher net income.
Share Repurchases
During the third quarter, Nike, Inc. repurchased a total of 5.5 million shares for approximately $468 million as part of its four-year, $5 billion share repurchase program, approved by the Board of Directors in September 2008. As of the end of the third quarter the company has purchased a total of 22.9 million shares for approximately $1.7 billion under this program.
| NIKE, Inc. | ||||||||||||||||
| QUARTER ENDED | % Change | % Change Excluding Currency Changes 2 | YEAR TO DATE ENDED | % Change | % Change Excluding Currency Changes 2 | |||||||||||
| DIVISIONAL REVENUES1 | 2/28/2011 | 2/28/2010 | 2/28/2011 | 2/28/2010 | ||||||||||||
| (In millions) | ||||||||||||||||
| North America | ||||||||||||||||
| Footwear | $ 1,273 | $ 1,186 | 7% | 7% | $ 3,645 | $ 3,386 | 8% | 7% | ||||||||
| Apparel | 481 | 408 | 18% | 18% | 1,534 | 1,293 | 19% | 18% | ||||||||
| Equipment | 81 | 85 | -5% | -4% | 260 | 257 | 1% | 1% | ||||||||
| Total | 1,835 | 1,679 | 9% | 9% | 5,439 | 4,936 | 10% | 10% | ||||||||
| Western Europe | ||||||||||||||||
| Footwear | 563 | 577 | -2% | 6% | 1,689 | 1,727 | -2% | 7% | ||||||||
| Apparel | 294 | 300 | -2% | 7% | 955 | 1,016 | -6% | 3% | ||||||||
| Equipment | 50 | 52 | -4% | 4% | 162 | 193 | -16% | -8% | ||||||||
| Total | 907 | 929 | -2% | 6% | 2,806 | 2,936 | -4% | 5% | ||||||||
| Central and Eastern Europe | ||||||||||||||||
| Footwear | 143 | 137 | 4% | 9% | 409 | 384 | 7% | 12% | ||||||||
| Apparel | 91 | 85 | 7% | 13% | 271 | 259 | 5% | 10% | ||||||||
| Equipment | 17 | 17 | 0% | 18% | 57 | 59 | -3% | 2% | ||||||||
| Total | 251 | 239 | 5% | 11% | 737 | 702 | 5% | 11% | ||||||||
| Greater China | ||||||||||||||||
| Footwear | 333 | 279 | 19% | 16% | 843 | 707 | 19% | 17% | ||||||||
| Apparel | 201 | 153 | 31% | 28% | 574 | 491 | 17% | 15% | ||||||||
| Equipment | 20 | 26 | -23% | -23% | 79 | 79 | 0% | 0% | ||||||||
| Total | 554 | 458 | 21% | 18% | 1,496 | 1,277 | 17% | 15% | ||||||||
