U.S. Markets close in 3 hrs 58 mins

Nike's Pain: Falling Profits Drag Down Margins As China Orders Drop

Agustino Fontevecchia
GUANGZHOU, CHINA - NOVEMBER 25: A detail of a...

Nike has been struggling in China - Image credit: Getty Images via @daylife

Nike continued to suffer the global slowdown as net income dropped 12% in their fiscal first quarter.  More troubling was the compression in margins, which the company blamed, not on a weaker Chinese or global economy, but on rising input costs.  Shares in the footwear and apparel company took a tumble in post market trading on Thursday.

“Strong demand for Nike brands propelled first quarter revenue to new record highs,” read the first line of the earnings release, in which the Beaverton, Oregon-based company pulled off top and bottom-line beats.  Nike earned $567 million in the quarter, a 12% decline from the same period a year ago; in a per share basis, the company made $1.23, beating the consensus estimate which called for $1.12.

While the decline in net income may be troubling, Nike saw revenue grow 10% to $6.7 billion in a currency neutral-basis, above the $6.44 billion estimate.

Gross margin, one of Nike’s most closely scrutinized statistics, declined 80 basis points to 43.5%.  The company highlighted the positive aspects of pricing actions and product cost reduction, but both of these were more than offset by higher costs for materials and labor.  Nike’s management also noted the shift to “lower margin businesses” and the conversion of their Chinese market to direct distribution for the Converse brand.

Western Europe and Japan were among worst-performing geographic locations for Nike, with revenues sliding 5% and 6% respectively to $1.17 billion and $183 million.  While many investors look to China to provide growth for companies exposed to those markets, it was North America that moved the needle for Nike: Chinese revenue grew 8% to $572 million while U.S. sales jumped 23% to $2.7 billion.  Their emerging markets unit saw revenue grow 8% to $867 million.

Nike’s inventories grew 10% to $3.4 billion, in line with revenues and, according to management, reflecting strong demand.  The forward looking element of the report, future orders, also showed an increase.  Orders grew 6% to $8.9 billion from September 2012 to January 2013, compared to the same period a year ago.

These confirmed Nike’s weakness in China.  Reported future orders fell 5% as the company looks to clear inventory in China.  On the flip side, their North American and their Emerging Markets orders were up 13% and 9% respectively.

China, and the more generalized global slowdown, has had an impact on several companies over the last few months.  Earlier this week, global bellwether Caterpillar gave a grim forecast for the world economy, Abram Brown repoted, as FedEx had done previously.  Slower than expected growth in China has also thrown stocks like Yum Brands and Starbucks off their highs over the last couple of months.

In order to support its share price, Nike has been aggressively buying back stock.  Through their first fiscal quarter, the company of the swoosh bought $779 million in shares to finalize a four-year $5 billion plan, just as it announced a new $8 billion plan for the coming four years.

The stock, which had gained moderately during the trading session, fell in after-hours trade as investors digested the news.  By the end of post-market trading, Nike was down 3.5% to $92.61.