Athletic apparel giant Nike (NKE) reported disappointing results for the fourth quarter of its 2012 fiscal year. Earnings per share fell 5.5% year over year to $1.17, which was far below the consensus estimate. However, net of a $38 million restructuring charge, earnings per share came in at $1.28. Gross margins fell 150 basis points to 42.8%, compared to its 2011 fourth quarter. The company is struggling to keep product expenses down with labor and commodity costs continually rising. We still like Nike's competitive position, but we thought the shares were a bit pricey trading in the triple-digit range, so the drop is not surprising to us. We highlighted as much in our report from late March (click here for the PDF). We don't expect to make a material change to our fair value range.
As has been the case, sales in Western Europe were noticeably weak. Sales in the region only grew 2%, though sales did grow 7% in constant currency. Even more telling, EBIT was down 6% for the quarter and 18% for the fiscal year. Somewhat surprisingly, sales in China were also weaker than expected. Apparel growth has decelerated from 40% in the second quarter to just 7%, and the overall growth rate fell from 34% in the second quarter to 18% in the fourth quarter. Nike has historically performed well in China, so we belive this slowdown could have broader implications. Futures orders in China were up only 2%, excluding currency.
Nike's weak North American apparel growth of 8% has some serious read through to Under Armour (UA), in our view. We think Nike was hurt by summer apparel sales being pulled into its third quarter, and we expect similar problems at Under Armour. In fact, although management noted that 10% of inventory growth is due to higher costs, we think a good portion of the firm's inventory build is related to winter apparel, which was significantly marked down at Dick's Sporting Goods (DKS). Footlocker (FL), in our view, is not as negatively impacted by the news. North American footwear still grew 14%, and we think Footlocker will continue to benefit from strong demand and higher MSRPs on Nike products. Nike basketball and running, two of Footlocker's important segments, grew double digits in North America.
Foreign exchange will continue to impair the firm's long-term double-digit earnings growth target. Nike forecast earnings to grow in the single digits for fiscal year 2013, as well as revenue growth in the mid-single digits on a reported basis. Though management was noticeably more conservative than usual on the conference call, we think the Olympics and NFL license could provide a nice catalyst in the second half of the firm's fiscal year. Futures orders, excluding currency impacts, were still up 12% compared to a year ago, so we do not think Nike will see its business collapse. We're still enthusiastic about sustained footwear growth in North America, and we think apparel growth will accelerate in the back half of the company's fiscal year.
Nike is the best-of-breed athletic retailer, but even some of the strongest companies in the world are facing significant pressures from unfavorable foreign exchange rates and high input costs. If input costs moderate in its fiscal year 2013, the firm will see upside operating leverage. Any change to our fair value estimate range as a result of the report will not be material in nature.