Nike: Massive Repurchase Program Is Overshadowed By Slowing Orders, Margin Compression

Sep.28.12 | About: Nike Inc. (NKE)

Shares of Nike (NKE), the designer and marketer of footwear, apparel and accessories, fell 3.5% in after hours trading. The company reported its first quarter results for its fiscal 2013 on Thursday after the market close.

First Quarter Results

Nike reported first quarter revenues of $6.67 billion, up 10% on the year. Excluding the adverse effects of a strong US dollar, revenues rose 15% on the year. First quarter revenues came in ahead of analysts consensus of $6.43 billion. Worldwide orders for the quarter rose 6% to $8.9 billion, up 8% on a constant currency basis.

Nike reported gross margin compression of 80 basis points, to 43.5%. Higher input costs driven by labor and material costs could not be offset by pricing actions and cost reduction initiatives.

Selling, general and administrative expenses rose 18% to $2.2 billion. Marketing expenses rose 29% to $891 million, due to marketing support for the Olympics and the European Football Championships.

Net income fell by 12% to $567 million as a result of the higher input costs and operating costs. Diluted earnings per share fell by 10% to $1.23, as the number of outstanding shares fell by 3%. In May, Nike announced to divest Umbro and Cole Haan. Pro-forma, excluding these two businesses, earnings per share came in at $1.27 per share. Earnings beat analysts consensus of $1.12 per share.

CEO Mark Parker commented on the results, "We had a strong first quarter and a great start to the fiscal year. NIKE delivered an amazing carry of innovation across some of the biggest moments in sport. Innovation is how great companies sustain growth and built competitive separation. We'll continue to make strategic investments across our portfolio of businesses to capture our full potential over the long term and drive shareholder value."

Share Repurchases

During the quarter, Nike repurchased 8.2 million shares for a total consideration of $779 million. As these repurchases depleted the existing $5 billion repurchase plan, the company announced a new four-year $8 billion repurchase plan.

Valuation

Nike ended its first quarter with $3.3 billion in cash, equivalents and short term investments. The company operates with $364 million in notes payable, short and long term debt, for a net cash position of around $3.0 billion.

For the full year of 2012, Nike generated annual revenues of $24.1 billion. The company net earned $2.2 billion, or $4.73 per diluted share. Factoring in a 4% decline in after hours trading, the market values the firm at $42 billion, or $39 billion for the operating assets of the firm.

The market values Nike at 1.6 times annual revenues, and 18 times annual earnings.

Currently, Nike pays a quarterly dividend of $0.36 per share, for an annual dividend yield of 1.5%.

Investment Thesis

Year to date, shares of Nike have fallen almost 5%. Shares rose from $95 to $110 during the spring months. Shares fell to $90 in July after the company gave a downbeat update on the full year outlook for its fiscal 2013. In June, the company guided for high single digit earnings per share growth, for the full year of its fiscal 2013.

Over the past five years, shares have rise some 70%. Shares more than doubled from lows of $40 in the beginning of 2009. Shares steadily rose to $110 in the beginning of 2012, before falling back some 15% to $90-$95.

Between 2009 and 2012, Nike expanded its annual revenues from $19.1 billion to $24.2 billion. Net income rose from $1.5 billion to $2.2 billion. As the company repurchased roughly 5% of its shares outstanding, earnings per diluted share rose from $3.03 in 2009, to $4.73 in 2012.

Shares are falling on Thursday in after hours trading after the quarterly report marked the seventh consecutive quarterly decline in gross margins. The continued margin pressure and slowdown in global orders is causing fear among investors, who value Nike at 18 times 2012s annual earnings.

Even a new four year $8 billion repurchase program, sufficient to retire a fifth of shares outstanding, could not spark enthusiasm among investors. Despite the sizable program, Nike will continue to have a strong financial position.

In March of this year, I already warned for a stretched valuation, amidst falling margins. Despite the fact that shares have fallen some 15% from that point in time, I reiterate my stance and remain on the sidelines. Valuations are anything but very appealing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.