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Nike Earnings Top, Future Orders Jump

Nike (NKE) reported fiscal second-quarter earnings late Thursday that just stepped over estimates as the athletic shoe and apparel powerhouse picked up the pace in Europe, North America and China, with its innovative products selling well even at higher prices.

Earnings rose 4% to 59 cents a share, edging past analysts' forecasts for 58 cents. That ended a four-quarter string of accelerating growth, including 34% in Q1, due to higher-than-normal cost increases.

Nike sales rose 8% to $6.43 billion, just below estimates for $6.44 billion. Revenue climbed 5% excluding currency effects. Footwear sales jumped 10%, or 8% excluding currency effects.

Mixed Outlook

Global future orders climbed 12% vs. a year earlier and 13% excluding forex effects. Future orders rose 11% in North America. They shot up 26% in Western Europe and 13% in Central and Eastern Europe. Future orders in greater China were up 4%, slightly higher than Q1's 3% rise.

Gross margin rose 140 basis points to 43.9%. But Nike said gross margin growth will slow in the second half of fiscal 2014, citing pressure from raw material costs and increased discounts to clear out inventory.

Nike shares fell about 1% in after-hours trading.

"Shares were down because the earnings didn't beat the whisper numbers on Wall Street," said Brian Sozzi, CEO of Belus Capital Advisors. "Nike beat so big during its last quarter people were expecting another blowout quarter, and while we got strong numbers we didn't get blowout numbers.

Sozzi added: "I think any retailer would take the quarter Nike has put up. Their future orders rose 12%, which was stronger than many on the Street were looking for.

Earnings growth slowed due to higher expenses related to investments in digital and marketing for the World Cup and Winter Olympics, Sozzi adds.

China was a bright spot in Q2.

"It looks like the China business has come back stronger than the market expected," Sozzi said.

Nike has been winning in the marketplace, even as it has raised prices over the past few quarters.

Pricing Power

"They're one of the few brands that you will see in Macy's (M), Kohl's (KSS) and Foot Locker (FL) stores that is able to raise prices in this type of competitive retail environment," said Sozzi. "The only way you're going to be able to raise prices when everyone else is trying to lower them boils down to product. They have the most visually appealing merchandise in the stores.

He cited the Jordan sneaker line that's "visually different" than other basketball shoes.

Nike also has "closed the gap nicely with Under Armour (UA) in terms of better quality and more floor space at stores such as Dick's Sporting Goods (DKS).

Nike's brand power has played well across the globe.

Nike continues to gain market share in North America, with footwear driving a 240-basis-point increase over the past 13 weeks, said Susquehanna Financial analyst Christopher Svezia.

"That gain is coming from its innovative products and in key categories like running and basketball," he said.

Paying For Innovation

He cites Nike's Flyknit technology used in making the upper part of the shoe as among the offerings that's driving good demand.

"There are a lot of innovative and unique products from Nike at premium prices that have helped them increase their share in North America.

Nike has also been taking share from other athletic brands in the U.K., Germany and other parts of Western Europe, added Svezia. That's driven by bringing new products like Nike Free sneakers to those nations.

As prices have risen there's been a "mix shift" with some product categories moving to a more "premium level" relative to last year, said Deutsche Bank analyst David Weiner.

And consumers are willing to pay the price for Nike products because it's offering "differentiated" products in both footwear and apparel, Weiner adds.

In Nike We Trust

In apparel, he cited offerings such as Nike Dri-FIT Knit line of running clothes as another premium-priced line that's been doing well and helping to drive the business.

"Nike is a trusted brand," Sozzi said. "But at the end of the day you need the product to maintain that trust and they have continued to show time and again they're able to put out new products seemingly every week, while their competition stays still."