NIKE Ties Ends, Keeps Running

NIKE, Inc. (NKE - Analyst Report) reported mixed financial results for the fourth quarter and full year ended May 31, 2009. Fourth quarter results affected both top and bottom lines, mainly on account of the global economic slowdown leading to lower consumer spending and foreign exchange volatility.

At the same time, NKE displayed prudent inventory management (inventory is down 3% year-over-year), and cornered another incremental slice of the market.

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 were down 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. Although excluding changes in currency exchange rates, net revenue was flat over the year-ago period.

Overall in the reported quarter gross margin contracted 240 basis points over the year-ago quarter to 43.4% from 45.8%. Margins were lower due to higher product input costs and greater product markdowns for managing inventories. Finally, NKE slashed its workforce by 5%, incurring a $195 million pretax restructuring charge.

NKE witnessed a synchronized contraction of its markets worldwide in the quarter ended May 31, 2009. Sales in the U.S. shrunk 2% in the fourth quarter over the year-ago period. This is significant since NKE is facing reversals in the domestic market for the first time since 2004.

Footwear and equipment revenues rose marginally, but were dragged down by 15% lower apparel revenues year-over-year. Although the apparel downslide was affected by lower consumer spending, the company at the same time shifted its focus from value products to premium ones.

Similarly in Europe, sales were affected 19% year-over-year due to a strong dollar. However, excluding currency impacts, revenues were down only 3% attributed to product sales for the 2008 European Championships.

The Asia-Pacific region reported flat sales year-over-year, though excluding currency changes revenues grew 3%. The year-ago quarter demand was boosted by the Olympic Games held in Beijing.

The bearish trend was reflected in the Americas region, where sales fell 3% solely due to currency impact (excluding currency impact sales spiked 20% year-over-year). NKE's Other business (Converse, Cole Haan, Hurley and Nike Golf) revenues contracted 5% year-over-year.

In fiscal 2009, top line rose 3% to $19.2 billion (excluding currency impact, top line rose 4%). 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's strong balance sheet at year-end fiscal 2009 -- with low to debt-to-capital ratio of approximately 5%, ROE around 17% and more than $2.2 billion of liquid assets -- will permit the company to resume its $3 billion share repurchase program.

In the near term, however, 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 watchful eye on the company, though the consensus recommendation remains a BUY.