Nike, Inc. reported revenues from continuing operations rose 7 percent in its fourth quarter ended May 31, to $6.7 billion, or up 9 percent excluding currency changes. Fourth quarter diluted earnings per share from continuing operations up 27 percent to 76 cents a share. Nike Brand futures orders up 8 percent.
Results were slightly of Wall Street's consensus target that been looking for EPS of 75 cents on revenue of $6.64 billion.
The earnings gains were largely due to gross margin expansion, a lower effective tax rate and a lower average share count.
Fiscal 2013 revenues from continuing operations were $25.3 billion, up 8 percent, or 11 percent excluding the impact of changes in foreign currency. For continuing operations, fiscal 2013 diluted EPS growth outpaced revenue growth, up 11 percent to $2.69, primarily due to gross margin improvement, a lower tax rate and a lower average share count, which more than offset the impact of SG&A deleverage.
“Fiscal 2013 was a great year for Nike, driven by our innovative products and the power of our brands,” said Mark Parker, President and CEO of Nike, Inc. “And we’re excited about what lies ahead. We have the best leadership team in the industry and a deep innovation pipeline. Both are aligned against our biggest opportunities to drive growth, manage risk and drive long-term shareholder value.”
Fourth Quarter Income Statement Review – Continuing Operations
Revenues for Nike, Inc. increased 7 percent to $6.7 billion, or up 9 percent on a currency neutral basis. Excluding the impact of changes in foreign currency, Nike Brand revenues rose 8 percent with growth across each product type and in every geography except Western Europe and Greater China. For the fourth quarter, Nike Brand revenues were higher in Running, Basketball, Men’s Training, and Women’s Training, offsetting slight declines in Sportswear, Action Sports and Football (Soccer), which reflects comparisons to strong sales in advance of the European Football Championships in 2012. Revenues for Other Businesses grew 10 percent, including a 1 point reduction from changes in currency exchange rates, as revenues increased for each business during the quarter.
Gross margin increased 110 basis points to 43.9 percent. Gross margin benefited from pricing actions, easing materials costs and favorable comparisons to last year, when gross margin was reduced by higher investments in the company’s digital business and an unanticipated customs assessment in the Emerging Markets geography. The positive impact of these factors was partially offset by higher labor costs, unfavorable changes in foreign exchange rates and higher discounts, particularly in Greater China as the company continues to work with its retailers to optimize marketplace inventory.
Selling and administrative expenses grew at the same rate as revenue, up 7 percent to $2.0 billion. Demand creation expenses were $642 million, down 13 percent due to higher prior year spending in support of the European Football Championships, the Summer Olympics and key product launches. Operating overhead expense increased 19 percent to $1.4 billion due to additional investments in the company’s wholesale and Direct to Consumer businesses.
Other expense, net was $13 million, primarily comprised 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, net, combined with the impact of changes in foreign currency exchange rates on the translation of foreign currency-denominated profits, decreased pretax income by approximately $18 million.
The effective tax rate was 22.8 percent compared to 23.9 percent for the same period last year. The decrease was primarily driven by a net reduction of tax reserves on foreign operations, partially offset by an increase in the percentage of earnings in higher tax jurisdictions.
Net Income increased 25 percent to $696 million while diluted earnings per share increased 27 percent to $0.76, reflecting a 2 percent decline in the number of weighted average diluted common shares outstanding.
Fiscal 2013 Income Statement Review – Continuing Operations
Revenues for Nike, Inc. were up 8 percent to $25.3 billion, up 11 percent on a currency neutral basis.
Nike Brand revenues rose 11 percent excluding the impact of changes in foreign currency, driven by growth in each key category, product type and geography except Greater China. On a currency-neutral basis, Nike Brand wholesale revenues increased 8 percent to $18.4 billion, while Direct to Consumer revenues grew 24 percent to $4.3 billion, driven by 14 percent growth in same store sales and new door expansion. As of May 31, 2013 the Nike Brand had 645 DTC stores in operation as compared to 557 a year ago.
Revenues for Other Businesses grew 9 percent with no significant impact from changes in foreign currency exchange rates, driven by growth across all businesses.
Gross margin increased 10 basis points to 43.6 percent, primarily driven by higher selling prices and easing material costs. These positive factors were largely offset by higher labor costs, unfavorable changes in foreign exchange rates, a shift in the mix of the company’s revenues to lower margin geographies, products and businesses, and higher discounts, particularly in Greater China.
Selling and administrative expenses grew at a faster rate than revenue, up 10 percent to $7.8 billion. Demand creation expense increased 5 percent to $2.7 billion due to marketing support for the European Football Championships, Summer Olympics and other key product and brand initiatives, as well as an increase in sports marketing expense. Operating overhead expense increased 13 percent to $5.0 billion due to additional investments made in the company’s wholesale and Direct to Consumer businesses.
Other income, net was $15 million for the fiscal year, primarily comprised of non-operating items and net foreign currency related losses. For the year, the company estimates the year-over-year change in foreign currency related gains and losses included in other income, net, combined with the impact of changes in foreign currency exchange rates on the translation of foreign currency-denominated profits, decreased pretax income by $56 million.
The effective tax rate was 24.7 percent compared to 25.0 percent for fiscal 2012.
Net Income increased 9 percent to $2.5 billion and Diluted earnings per share increased 11 percent to $2.69, reflecting higher net income and a 2 percent decline in the number of weighted average diluted common shares outstanding.
May 31, 2013 Balance Sheet Review
Inventories for Nike, Inc. were $3.4 billion, up 7 percent from May 31, 2012. Nike Brand inventories increased 8 percent, with 6 percentage points of growth due to higher unit inventories to support future demand and the remainder driven by changes in foreign exchange rates and product costs.
Cash and short-term investments at period-end were $6.0 billion, $2.2 billion higher than last year mainly as a result of proceeds from the issuance of debt in the fourth quarter, proceeds from the sale of the Umbro and Cole Haan businesses, higher net income and continued focus on working capital management.
Share Repurchases
During the fourth quarter, Nike, Inc. repurchased a total of 4.2 million shares for approximately $242 million. For the fiscal year, the company repurchased a total of 33.5 million shares for approximately $1.7 billion.
Repurchases for the fiscal year were made in conjunction with two approved repurchase programs. In the second quarter of fiscal 2013, the company completed its previous four-year, $5 billion share repurchase program approved by the Board of Directors in September 2008 under which the company purchased a total of 118.8 million shares. Having completed the previous program, the company began repurchases under the four-year, $8 billion program approved by the Board of Directors in September 2012. Of the total shares repurchased during the fiscal year, 15.3 million shares for approximately $789 million were purchased under this program.
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 2013 totaled $12.1 billion, 8 percent higher than orders reported for the same period last year. Changes in foreign currency exchange rates did not have a significant impact on total reported futures orders growth.
Discontinued Operations
The company continually evaluates its existing portfolio of businesses to ensure resources are invested in those businesses that are accretive to the Nike Brand and represent the greatest growth potential and highest returns. During the 2013 fiscal year, the company completed the divestures of the Umbro and Cole Haan businesses, allowing the company to focus resources on driving growth in the Nike, Jordan, Converse and Hurley brands.
For the 2013 fiscal year the company’s net income from discontinued operations was $21 million, which represents the net gain on the sale of these two businesses, net of operating losses, divestiture transaction costs, and tax expense. As of May 31, 2013 the company had substantially completed all transition services related to the sale of both businesses.
| NIKE, Inc. | ||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF INCOME | ||||||||||||||||||||||
| For the period ended May 31, 2013 | ||||||||||||||||||||||
| THREE MONTHS ENDED | % | TWELVE MONTHS ENDED | % | |||||||||||||||||||
| (Dollars in millions, except per share data) | 5/31/2013 | 5/31/2012 | Change | 5/31/2013 | 5/31/2012 | Change | ||||||||||||||||
| Income from continuing operations: | ||||||||||||||||||||||
| Revenues | $ | 6,697 | $ | 6,236 | 7 | % | $ | 25,313 | $ | 23,331 | 8 | % | ||||||||||
| Cost of sales | 3,757 | 3,567 | 5 | % | 14,279 | 13,183 | 8 | % | ||||||||||||||
| Gross profit | 2,940 | 2,669 | 10 | % | 11,034 | 10,148 | 9 | % | ||||||||||||||
| Gross margin | 43.9 | % | 42.8 | % | 43.6 | % | 43.5 | % | ||||||||||||||
| Demand creation expense | 642 | 735 | -13 | % | 2,745 | 2,607 | 5 | % | ||||||||||||||
| Operating overhead expense | 1,380 | 1,161 | 19 | % | 5,035 | 4,458 | 13 | % | ||||||||||||||
| Total selling and administrative expense | 2,022 | 1,896 | 7 | % | 7,780 | 7,065 | 10 | % | ||||||||||||||
| % of revenue | 30.2 | % | 30.4 | % | 30.7 | % | 30.3 | % | ||||||||||||||
| Interest expense (income), net | 3 | 1 | – | (3 | ) | 4 | – | |||||||||||||||
| Other expense (income), net | 13 | 37 | -65 | % | (15 | ) | 54 | – | ||||||||||||||
| Income before income taxes | 902 | 735 | 23 | % | 3,272 | 3,025 | 8 | % | ||||||||||||||
| Income taxes | 206 | 176 | 17 | % | 808 | 756 | 7 | % | ||||||||||||||
| Effective tax rate | 22.8 | % | 23.9 | % | 24.7 | % | 25.0 | % | ||||||||||||||
| NET INCOME FROM CONTINUING OPERATIONS | 696 | 559 | 25 | % | 2,464 | 2,269 | 9 | % | ||||||||||||||
| NET (LOSS) INCOME FROM DISCONTINUED OPERATIONS | (28 | ) | (10 | ) | – | 21 | (46 | ) | – | |||||||||||||
| NET INCOME | $ | 668 | $ | 549 | 22 | % | $ | 2,485 | $ | 2,223 | 12 | % | ||||||||||
| Earnings per share from continuing operations: | ||||||||||||||||||||||
| Basic earnings per common share | $ | 0.78 | $ | 0.61 | 28 | % | $ | 2.75 | $ | 2.47 | 11 | % | ||||||||||
| Diluted earnings per common share | ||||||||||||||||||||||
