Nike Beats, U.S. and China Outshine

Jun.28.11 | About: Nike Inc. (NKE)

Nike Inc. (NYSE:NKE) posted strong fiscal 2011 fourth-quarter earnings of $1.24 per share, up 17.0% from the year-ago earnings of $1.06 per share, handily beating the Zacks Consensus Estimate of $1.16 per share.

Strong quarterly growth in revenue coupled with lower selling, general and advertisement expenses as a percentage of revenue drive the company to post a record fourth-quarter 2011 earnings.

Quarterly Details

Despite macroeconomic headwinds, Nike's total revenue grew 14.0% to $5,766.0 million from $5,077.0 million in the prior-year quarter, primarily driven by exceptional growth in North America and Greater China regions. The company continued to benefit from its strategy of consistently focusing on innovative products that provide a competitive edge over its rivals. Revenue for the quarter surpassed the Zacks Consensus Estimate of $5,532.0 million.

Excluding currency impact, NIKE Brand revenues rose 12.0% led by growth in all key categories of NIKE Brand except Football (Soccer) and in geographic regions excluding Japan and Central and Eastern Europe.

Nike's quarterly gross profit inched up 6.0% year over year to $2,554.0 million, while gross margin contracted 310 basis points to 44.3%. The decline was primarily attributable to higher product and freight cost, which was partially offset by favorable profitability from Direct to Consumer operations, positive foreign currency impact and benefits from cost reduction initiatives.

Selling and administrative expenses for the quarter grew 2.0% to $1,772 million from $1,738.0 million in the year-earlier period. Operating income for the quarter grew 13.4% to $777.0 million from $685.0 million in the year-ago period. Operating margin came in at 13.5%, which remains flat with the year-ago period.

Global inventories were up 33.0% year over year to $2,715.0 million, mainly to meet strong demand and counter tough comparison. Nike ended the quarter with cash and cash equivalents of $1,955.0 million compared with cash balance of $3,079.0 million in the year-ago period. During the quarter, the company repurchased 7.5 million shares for about $607.0 million as part of its 4-year, $5.0 billion program approved in September 2008.

Future Orders

Nike reported an increase of 15.0% year over year in future orders, which are scheduled for delivery from June 2011 through November 2011; and the order amount reaching $10.3 billion. Future orders measure customer orders, which are scheduled for delivery in the coming season and are a widely used metric to gauge the performance of retailers.

Nike is the industry leader by a stretch in the U.S. footwear and athletic apparel industry. Furthermore, a strong portfolio of globally recognized brands, Cole Haan, Converse, Chuck Taylor, Hurley and Umbro provides a competitive advantage to the company and bolsters its dominant position in the market.

However, Nike faces an intense competition in both domestic and international markets from local players as well as established players, such as Adidas AG (including Reebok) and Brown Shoe Company Inc. (BWS). All these companies are primarily in athletic wear and want to grab market share in active wear or lifestyle consumer products. Moreover, the athletic footwear and apparel industry is characterized by rapidly changing customer preferences and technology, which requires continuous innovation in order to stay ahead of trends and competitors.

Currently, Nike maintains a Zacks #3 Rank, which translates into a short-term 'Hold' rating. Moreover, we retain a long-term 'Neutral' recommendation on the stock.