Nike Exceeds Estimates

Nike Inc. (NKE - Analyst Report) posted strong fiscal 2012 first-quarter earnings of $1.36 per share, up 19.3% from the year-ago earnings of $1.14 per share, handily beating the Zacks Consensus Estimate of $1.21 per share.

Strong quarterly growth in revenue coupled with lower selling and administrative expenses as a percentage of revenue, tax efficiencies and lower average share count drive the company to post a record first-quarter 2012 earnings.

Quarterly Details

Despite macroeconomic headwinds, Nike's total revenue grew 18.0% to $6,081.0 million from $5,175.0 million in the prior-year quarter, primarily driven by growth in every region, where it operates except the Western European region. The company continued to benefit from its strategy of consistently focusing on innovative products that provide a competitive edge over its rivals. Revenue for the quarter surpassed the Zacks Consensus Estimate of $5,762.0 million.

Excluding currency impact, NIKE Brand revenues rose 12.0% led by growth in all key categories of NIKE Brand except Football (Soccer) and in geographic regions excluding Western Europe. Growth in Western Europe remains flat during the quarter due to negative impact from changes in the timing of shipments and last year's strong comparison to world cup related sales.

Nike's quarterly gross profit surged 11.0% from the year-ago quarter to $2,693.0 million, while gross margin contracted 270 basis points to 44.3%. The decline was primarily attributable to higher product and higher mix of off-price revenues sold at lower margin, partially offset by favorable profitability from Direct to Consumer operations, positive pricing actions impact and benefits from cost reduction initiatives.

Selling and administrative expenses for the quarter grew 9.0% to $1,823.0 million from $1,673.0 million in the year-ago quarter. Earnings before taxes (EBT) for the quarter grew 13.0% to $852.0 million from $755.0 million in the year-ago period. However, EBT margin contracted 60 basis points from the prior-year quarter to 14.0%.

Global inventories were up 41.0% year over year to $3,107.0 million, mainly driven by higher average unit product cost, growth in total units and changes in currency exchange rates.Nike ended the quarter with cash and cash equivalents of $1,608.0 million compared with cash balance of $2,010.0 million in the year-ago period.

During the quarter, the company repurchased 7.7 million shares for about $649.0 million as part of its 4-year, $5.0 billion program approved in September 2008.

Future Orders

Nike reported an increase of 16.0% in future orders to $8.5 billion from the prior-year quarter, scheduled for delivery from September 2011 through January 2012. Future orders measure customer orders, which are scheduled for delivery in the coming season and are a widely used metric to gauge the performance of the retailers.

Nike is the industry leader in the U.S. footwear and athletic apparel industry. Furthermore, a strong portfolio of globally recognized brands, such as Cole Haan, Converse, Chuck Taylor, Hurley and Umbro provide a competitive edge to the company and bolsters its dominant position in the market.

However, Nike faces intense competition in both domestic and international markets from local as well as established players, such as Adidas AG (including Reebok) and Brown Shoe Company Inc. (BWS - Snapshot Report). These companies are primarily in athletic wear and intend to grab market share in active wear or lifestyle consumer products. Moreover, the athletic footwear and apparel industry is characterized by rapidly changing customer preferences and technology, which requires continuous innovation in order to stay ahead of trends and competitors.

Currently, Nike maintains a Zacks #4 Rank, which translates into a short-term 'Sell' rating. Moreover, we retain a long-term 'Neutral' recommendation on the stock.