Nike's Strong Results Send Shares Higher

Sep.27.13 | About: Nike Inc. (NKE)

In the after-hours of Thursday, Nike (NYSE:NKE) announced its quarterly earnings, which met or beat the analyst estimates both in revenues and profits. The company continues to outperform and the growth story is far from over.

The company generated $6.97 billion in revenues and $0.86 per share in net income. The revenues are up 8% compared to the same quarter a year ago. The analysts were looking for Nike to report $0.78 per share in earnings, which the company beat easily. Nike's quarterly income represents a 37% increase compared to the same quarter last year.

Nike's top line and bottom line were helped by the price increases implemented in the quarter. Apparently, the price increases did not deter consumers from buying Nike products across the world. In many parts of the world, Nike is known as the high-end company (as in Apple of sports goods) and many people are willing to pay a premium for the company's products.

Apart from the price increases, the company's latest earnings benefited from multiple factors including a recent buyback which reduced the share count, a lower than usual tax rate (25.0% vs. 26.9% last year), and some cost cutting measures implemented by Nike. The company's revenues also benefited slightly from currency exchange rates during the quarter, but this did not have a major impact on earnings.

The Converse brand, which reports its numbers separately as a standalone company saw its revenues go up by 16% to $494 million. The brand's performance was particularly strong in the United Kingdom, the US, Canada and China where most growth came from.

Nike's gross margin was an impressive 44.9%, up from 43.7%. During the quarter, Nike benefited from softening raw material prices and selling more of higher-margin items and less of lower-margin items compared to the previous quarter. In addition, during the last quarter, Nike offered less discounts to consumers than it typically does. Moreover, some of Nike's expenses rose moderately and the biggest rising cost item for the company was labor costs.

The company's selling and administrative expenses were flat compared to the same period last year, which is good because these costs now make up a smaller percentage of its revenues (29.5% vs. 31.8%). Furthermore, Nike's marketing costs were down by 16% compared to the last summer, which is expected because last summer featured the summer Olympics and the European soccer championship, where Nike has heavy involvement as a sponsor.

Speaking of share repurchases, Nike spent $526 million in order to reduce its share count by 8.4 million. Last year, the company approved a large buyback program with a budget of $8 billion and this program is still in process as the company spent roughly $1.3 billion of this budget so far.

At the end of last August, Nike's cash balance was $3.27 billion, which increased to $5.58 billion in the last 4 quarters, implying a positive cash flow of $2.31 billion during this period. This result was attained despite an ongoing repurchase program. Since last year, Nike's book value rose by 12% and the value of the company's assets rose by 17%.

In North America, the equipment sales rose by 13% while footwear and apparel sales rose by 9%. In Western Europe (which is barely coming out of a deep recession that looked like it was never going to end) Nike's footwear sales were up by 12% and apparel sales were up by 1% while equipment sales were down by 3%. Overall, Nike's revenues grew by 8% in Western Europe. In Central and Eastern Europe, Nike's footwear revenues rose by 13% and its equipment revenues rose by 14% while apparel revenues were up by 6%. In Greater China, Nike's Footwear revenues fell by 7% and equipment revenues fell by 11% while apparel revenues jumped by 6%. In Greater China, Nike's overall revenues were down by 3% and the weak Chinese currency takes part of the blame there. While Nike's revenues were up 1% in Japan, the company posted a revenue growth of 5% in the rest of the world.

As for net income, Nike saw a 50% increase in Central and Eastern Europe, a 26% increase in North America and 25% increase in Western Europe. In China, Nike's net income rose by 3% and in Japan, the figure rose by 4%. In emerging markets, Nike's net income fell by 5%.

In the after-hours, Nike's share price jumped by 6% after being up by 2% during the regular trading hours. In the last 4 quarters, Nike earned a total of $2.92 per share and the company's current share price of $75 provides it with a P/E ratio of 26. While the number is high, the company still has plenty of growth left in front of it. The analysts expect Nike to earn $3.01 this year, $3.44 next year and $3.98 in the following year. This would give the company a forward P/E ratio of 19.

Nike's future earnings will rely heavily on its marketing spending, global currency exchange rates, the amount of share repurchases and the overall economy in the emerging markets. Since the beginning of the year, Nike rewarded its investors with a 40% share appreciation (which helped the company in joining the Dow Jones Index) and the story might continue if Nike can deliver on its growth promises.

Disclosure: I am long NKE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.