Nike Still Fairly Attractive

Headquartered in Beaverton, Oregon, Nike Inc. (NKE - Analyst Report) is one of the largest athletic footwear and apparel makers in the world. The company recently reported mixed financial results for the fourth quarter and full year ended May 31. Both top-and bottom-lines were hurt in the quarter on account of foreign exchange volatility and the global slowdown that led to lower consumer spending.

NKE's net income dropped to $341.4 million (EPS $0.70, basic and diluted) in the reported quarter, down from the year-ago figure of $490.5 million (EPS $0.98 diluted, $1.00 basic). Similarly, revenues fell 7.4% year-over-year to $4.71 billion from $5.09 billion. However, the comparison is clouded since the year-ago numbers were boosted by the run-up to the European Football Championships and Olympics. Excluding changes in currency exchange rates, net revenue was flat over the year-ago period.

Overall, gross margin contracted 240 basis points to 43.4% in the reported quarter, from 45.8% in the year-ago period. Margins fell due to higher product input costs and greater product markdowns for managing inventories. However, NKE demonstrated prudent inventory management (inventory is down 3% year-over-year) and raised its market share. The company also slashed its workforce by 5%, incurring a $195 million pretax restructuring charge. Although the apparel downslide was affected by lower consumer spending, the company also shifted its focus from value products to premium ones.

NKE witnessed a synchronized contraction of its markets worldwide in the quarter ended May 31, 2009. US sales shrunk 2% in the fourth quarter from the year-ago period. This is significant as NKE faced reversals in the domestic market for the first time since 2004. Footwear and equipment revenues rose marginally, but were offset by a 15% fall in apparel revenues year-over-year.

Similarly, European sales fell 19% year-over-year due to a strong dollar. Excluding currency impacts, revenues were down only 3%. The Asia Pacific region reported flat sales year-over-year. Before currency changes, revenue grew 3% even though the year-ago period was helped by the Beijing Olympics. The 3% fall in the Americas was solely due to currency impact. Sales in the region actually spiked 20% year-over-year before currency effects. Revenue for NKE's other businesses like Converse, Cole Haan, Hurley, and Nike Golf contracted 5% year-over-year.

In fiscal 2009, the company's top line rose 3% to $19.2 billion (a 4% increase excluding currency impact). However, net income fell by 21% to $1.5 billion (EPS $3.03 diluted, $3.07 basic) from $1.9 billion in fiscal 2008 (EPS $3.74 diluted, $3.80 basic).

NKE maintained a strong balance sheet at the end of fiscal 2009. With a low to debt-to-capital ratio of approximately 5%, ROE around 17% and more than $2.2 billion in liquid assets, the company will be able to resume its $3 billion share repurchase program.

However, its near-term performance will be affected by a currency translation headwind, lower orders, and realignment of product portfolio in U.S.A. The stock spike of more than 10.5% over the past three months and a stable dividend yield of 1.95% make it fairly attractive. We will keep a cautious eye on the company, but for now the consensus recommendation remains a BUY.