Nike’s Q1 Earnings Runs Past Estimates

Wall Street's consensus estimate on average was 78 cents a share.

“We had a great first quarter driven by our unrelenting commitment to delivering innovative products and services to athletes around the world,” said Mark Parker, President and CEO of Nike, Inc. “Our powerful portfolio of businesses combined with unmatched leadership and resources allows us to capitalize on opportunities that drive long-term value for our shareholders. I am more excited than ever about our potential to continue to innovate with purpose, and fuel Nike's growth.”*

First Quarter Continuing Operations Income Statement Review

Starting in the first quarter of fiscal 2014, the Company changed the reporting structure for what was historically identified as Other Businesses. Hurley and Nike Golf have been included in the overall financial results for the Nike Brand and for individual geographies, reflecting the operational integration of these businesses into the Nike Brand category offense. Converse will now be reported as a separate segment, reflecting the ongoing operation of this brand as a stand- alone business.

Revenues for Nike, Inc. increased 8 percent to $7.0 billion. Changes in foreign currency exchange rates did not have a significant impact on total reported revenue growth.

Revenues for the Nike Brand were $6.5 billion, up 7 percent on a currency neutral basis, with growth in every product type and every geography except Greater China. For the first quarter, Nike Brand revenues were higher in Running, Basketball, Football (Soccer) and Men’s Training, offsetting a slight decline in Sportswear.

Revenues for Converse were $494 million, up 16 percent on a currency neutral basis, driven by strong performance in our largest owned markets: the United Kingdom, North America and China.

Gross margin increased 120 basis points to 44.9 percent. Gross margin benefitted from easing raw material costs, a shift in the mix of the Company’s revenues to higher margin products, lower discounts and growth in the higher margin Direct-to-Consumer business. These benefits were partially offset by higher labor costs and unfavorable changes in foreign exchange rates.

Selling and administrative expense was in line with the same period last year at $2.1 billion. Demand creation expense was $731 million, down 16 percent versus the prior year, which included higher spending supporting key product initiatives, as well as the Olympics and European Football Championships. Operating overhead expense increased 12 percent to $1.3 billion due to investments in digital innovation and other growth businesses, as well as higher Direct to Consumer costs driven by growth and new store openings.

Other expense, net was $28 million, comprised primarily of foreign currency 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 $38 million.

The effective tax rate was 25.0 percent, compared to 26.9 percent for the same period last year, an improvement due primarily to a lower effective tax rate on operations outside the United States.

Net income increased 33 percent to $780 million while diluted earnings per share increased 37 percent to $0.86, reflecting a 1 percent decline in the weighted average diluted common shares outstanding.

August 31, 2013 Balance Sheet Review for Continuing Operations

Inventories for Nike, Inc. were $3.5 billion, up 6 percent from August 31, 2012. Nike Brand wholesale unit inventories increased 8 percent to support future demand. Changes in foreign currency exchange rates and product cost drove approximately a 2 percentage point decline in Nike, Inc. inventory growth.

Cash and short-term investments were $5.6 billion; $2.3 billion higher than last year mainly as a result of proceeds from the issuance of debt and sale of the Umbro and Cole Haan businesses in the prior fiscal year, in addition to higher net income and continued focus on working capital productivity.
Share Repurchases

During the first quarter, Nike, Inc. repurchased a total of 8.4 million shares for approximately $526 million as part of the four-year, $8 billion program approved by the Board of Directors in September 2012. As of the end of the first quarter, a total of 23.7 million shares had been repurchased under this program at a cost of approximately $1.3 billion.

Futures Orders

As of the end of the quarter, worldwide futures orders for Nike Brand athletic footwear and apparel scheduled for delivery from September 2013 through January 2014 were 8 percent higher than orders reported for the same period last year. Excluding currency changes, reported orders would have increased 10 percent.*