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Nike Inc. (NKE - Analyst Report), a global leader in sports equipment and apparel, came up with its first-quarter 2013 earnings of $1.27 per share, which ran past the Zacks Consensus Estimate of $1.12. However, the quarterly earnings dipped 9% year over year resulting from poor gross margin, higher SG&A and increased tax rate.

Nike's total revenue augmented 10% to $6,669 million driven by superior demand for Nike brand. Adjusting for currency effect, the company’s revenue grew 15%. Revenue for the quarter also surpassed the Zacks Consensus Estimate of $6,438 million.

On currency neutral basis, revenue for Nike brands elevated 16%, while other businesses delivered 9% growth. Revenue from Cole Haan and Umbro, which are to be divested, was up by 6%. During the quarter, the company witnessed strength across all key categories and geographies, except Japan.

Quarter in Detail

Nike's quarterly gross profit surged 8% from the year-ago quarter to $2,903 million, while gross margin contracted 80 basis points to 43.5%. The margin contraction mainly resulted from higher input costs due to higher materials and labor expenses, offset by better pricing actions and product cost reduction initiatives. Another factor which pulled down the gross margin was NIKE Brand switching to a mix focused on lower margin businesses as well as the transformation of the China market to direct distribution for Converse.

Selling and administrative expenses increased 18% to $2,153 million, including a 29% surge in demand creation expense and a 12% growth in operating overhead expense. Higher demand creation expenses came from increased marketing support for key product initiatives, as well as supporting events like Olympics and European Football Championships. Overhead expenses rose on the back of increased investments in the wholesale business and higher Direct to Consumer costs due to opening of new stores.

Global inventories registered a 10% growth year over year, rising to $3,411 million. The growth was at par with revenue and was driven by the strong demand for the company’s products. Nike ended the year with cash and cash equivalents of $2,165 million compared with cash balance of $1,608 million in the year-ago period.

During the quarter, the company repurchased 8.2 million shares for about $779 million as part of its 4-year, $5.0 billion share repurchase program approved in September 2008. As of August 31, 2012, the company’s total share repurchases under the program totaled 58.5 million for an aggregate value of $4.9 billion. The company completed the said $5 billion program in the second quarter and commenced a new 4-year, $8 billion repurchase program.

Our Take

Nike is the industry leader in the U.S. footwear and athletic apparel industry. In an attempt to expand its global reach and market share, Nike is aggressively expanding its operations in the emerging markets while focusing on direct-to-consumer business and other brands, which augur well for future operating performance. In fiscal year 2012, Nike exhibited significant strength by innovative products and services that helped boost its top lines.

Moreover, the company’s near-to-debt free balance sheet offers financial flexibility to drive future growth.

However, Nike faces intense competition in both domestic and international markets from local as well as established players, such as Adidas AG (including Reebok), PVH Corporation (PVH - Analyst Report) 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.

Currently, Nike maintains a Zacks #3 Rank, which translates into a short-term Hold rating. We retain a long-term ‘Underperform’ recommendation on the stock.

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