Nike Posts Robust Q3 Earnings - Analyst Blog

Athletic apparel, footwear and accessories retailer, Nike Inc. NKE reported third quarter fiscal 2014 results wherein its earnings per share of 76 cents rose 4% year over year and surpassed the Zacks Consensus Estimate of 73 cents.

Results were driven by an impressive top line, lower tax rate, improvement in gross margin and moderately lower average share count, partly offset by higher selling, general and administrative (SG&A) expenses and negative effect of currency rates.

Delving Deeper

Excluding the impact of the currency, the top line surged 13% to $7 billion on the back of robust demand for the company's brands and significant growth in its main categories and all its locations. Sales also came ahead of the Zacks Consensus estimate of $6.8 billion. Further, at the company's Converse subsidiary, revenues soared 16% to $420 million on a currency neutral basis, powered by solid performance in the U.S., UK and China, all being the company's biggest distribution centers.

Gross profit escalated 13.4% to $3,103 million with the gross margin increasing 30 basis points (bps) to 44.5%. Gross margin was facilitated by greater average prices, sustained growth in the direct to consumer operations with high margins, partly offset by greater discounts, greater product input expenses and negative impact from exchange rates.

SG&A rose 16% to $2.2 billion, on account of an 18% rise in demand creation cost and a 15% surge in operating overhead costs.

Demand creation costs surged 18% due to increased promotions towards key product launches, investment in retail product presentations and the forthcoming Football World Cup. On the other hand, operating overhead costs were pushed by infrastructure related investments, greater direct to consumer expenses (owing to growth of same store sales and introduction of new outlets) and expenses related to digital innovations.

Balance Sheet

Nike ended the quarter with cash and short-term investments of $5,029 million, compared to $4,042 million last year. Improved net income and proceeds from debt issuance led to this rise in cash and short-term investments. Inventories advanced 12% to $3,825 million.

Nike's long-term debt stood at $1,201 million, compared to just $161 million last year. Shareholders' equity was $11,133 million at the end of the quarter, as against $10,667 million last year.

Share Repurchase

During the quarter, Nike bought back 10.4 million shares worth $788 million. This buy back was part of the 4-year authorization worth $8 billion, made by the board in Sep 2012. So far under the program, the company has bought back 39.6 million shares worth $2.5 billion.

Future Orders

The company's global future orders, slated to be delivered between March – July 2014, soared 12% to $10.9 billion, from the comparable prior-year period. This excludes the effect of currency rates.

Conclusion

Nike's solid quarterly performance reflects its concentration on making innovations, to keep up with its customers. In spite of macroeconomic headwinds, the company's results remain impressive, backed by its continuous focus on exploiting growth opportunities along with managing its risk. Going forward, Nike plans to continue doing this in order to enhance shareholder value in the long run.

Other Stocks to Consider

This Oregon based retailer currently holds a Zacks Rank #3 (Hold). Other better-ranked stocks in the apparel-shoe industry include Iconix Brand Group, Inc. ICON with a Zacks Rank #1 (Strong Buy) along with Skechers USA Inc. SKX and Columbia Sportswear Company COLM, both sporting a Zacks Rank #2 (Buy).