Nike Beats Q1 Earnings Estimates

Sports equipment and apparel leader Nike Inc. (NKE) yesterday came up with robust first-quarter fiscal 2014 results, driven primarily by strong demand for NIKE branded products. The company’s earnings from continuing operations of 86 cents per share climbed 37% year over year and beat the Zacks Consensus Estimate of 78 cents. The year-over-year bottom-line growth was primarily due to an increase in both revenues and margins, along with reduced tax rate and lower share count.

Better-than-expected quarterly results boosted investors’ confidence as was reflected in the company’s share price which soared 6.34% to $74.80 in the extended trading hours.

Quarter in Detail

Nike's total revenue grew 8% year over year to $6,971 million but marginally fell short of the Zacks Consensus Estimate of $6,973 million. During the quarter, effects of the currency exchange rate were negligible on Nike’s top-line growth. The year-over-year rise in revenue was primarily driven by robust performances across all geographical regions, except for Greater China. Moreover, the company registered growth in all the product categories.

Nike has announced that from first-quarter fiscal 2014, its reporting segment structure has undergone a change. The company’s Hurley and NIKE Golf businesses, which were earlier reported as Other Businesses, are now included under the NIKE Brand segment. Moreover, its Converse business is now reported as a separate segment. With this, Other Businesses segment has ceased to exist.

During the reported quarter, revenues of NIKE Brand grew 7% year over year to $6,468 million while the Converse segment registered a revenue increase of 18% to $494 million, primarily driven by strong performances in the U.K., North America and China.

Nike's gross profit grew 11% from the year-ago quarter to $3,132 million, and gross margin expanded 120 basis points (bps) to 44.9%. The margin expansion mainly resulted from better mix toward higher margin products and lower material costs, partially offset by increased labor expenses and adverse foreign exchange rates.

Selling and administrative expenses were almost flat year over year at $2,056 million, as a rise of 12% in operating overhead costs were fully offset by a decline of 16% for demand creation expense. Overhead expenses rose due to increased Direct to Consumer costs, resulting from new store openings and mounting expenses at existing stores as well as investments in digital innovations and other businesses.

Income before interest and other expenses and income taxes for the quarter rose nearly 40% year over year to $1,076 million, while as a percentage of sales it expanded 350 bps to 15.4%. The year-over-year expansion in margins was primarily due to higher gross margin and leveraged operating selling and administrative expenses.

Balance Sheet

Global inventories increased 6% at the end of quarter to $3,472 million, compared with $3,263 million at the end of year-ago comparable quarter. The increase was primarily led by an 8% rise in the NIKE Brand inventories.

Nike ended the quarter with cash and short-term investments of $5,578 million, up approximately 70.7% from $3,267 million as of Aug 31, 2012. Increase in cash and cash equivalents was due to proceeds from the issuance of debt in fourth-quarter fiscal 2013, sale of Umbro and Cole Haan businesses, a higher net income, and enhanced working capital productivity. Moreover, the company has a long-term debt of $1,207 million (excluding current maturities) and shareholders’ equity of $11,282 million at the end of first quarter.

Share Repurchase

During the quarter, this Zacks Rank #3 (Hold) company repurchased 8.4 million shares for about $526 million under its $8.0 billion stock repurchase program approved in Sep 2012. Since the beginning of this new stock repurchase program, Nike has repurchased 23.7 million shares for nearly $1.3 billion.

Futures Orders

Global futures orders for NIKE Brand footwear and apparel scheduled for delivery from Sep 2013 through Jan 2014 were up 8%. The year-over-year increase in futures orders was led by 11% increase in North America, 25% in Central & Eastern Europe, 12% in Western Europe, 3% in Greater China and 1% in Emerging Markets. However, future orders in Japan declined 19%.

Other Stocks to Consider

Currently, Nike carries a Zacks Rank #3 (Hold). Better-performing stocks in the retail industry include Deckers Outdoor Corporation (DECK), Carter’s, Inc. (CRI) and Brown Shoe Co. Inc. (BWS). All of these have a Zacks Rank #2 (Buy).

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