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Nike Inc. (NKE - Analyst Report) – a global leader in sports equipment and apparel – came up with its second-quarter fiscal 2013 earnings of $1.14 per share, which surpassed the Zacks Consensus Estimate of $1.00. Moreover, the quarterly earnings climbed 11% year over year, resulting from increased revenues, leveraged selling, general & administrative (SG&A) expenses and lower share count, partially offset by a slightly weaker gross margin and higher tax rate.

Nike's total revenue grew 7% to $5.955 billion driven by superior demand for the Nike brand. Adjusting for currency effect, the company’s revenue grew 11%. However, revenue for the quarter fell short of the Zacks Consensus Estimate of $6.019 billion.

On currency neutral basis, revenue for Nike brands grew 10%, while other businesses rose 6%. During the quarter, the company witnessed strength across all the key categories, product types and geographies, except Greater China.

Quarter in Detail

Nike's quarterly gross profit grew 6% from the year-ago quarter to $2.530 billion, while gross margin contracted 30 basis points to 42.5%. The margin contraction mainly resulted from higher labor expenses and adverse foreign exchange rates, partially offset by benefits of pricing actions and lower material costs. Another factor that pulled down the gross margin was NIKE Brand switching to a mix focused on lower-margin businesses.

Selling and administrative expenses increased 6% to $1.836 billion, including a rise of 10% in operating overhead expense. 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.

Operating income for the quarter increased 12.66% year over year to $712 million, while operating margin expanded 56 basis points to 11.96%. The year-over-year expansion in margins was primarily due to increased revenue and leveraged SG&A expenses, partially offset by lower gross margin.

Global inventories increased 9% year over year to $3.318 billion. The growth was at par with the company’s strategy of supporting future demand for its products. Nike ended the quarter with cash and cash equivalents of $2.291 billion compared with a cash balance of $1.929 billion as of November 30, 2011.

During the quarter, the company repurchased 4.0 million shares for about $384 million and completed its $5.0 billion share repurchase program approved in September 2008. Under the recently completed share repurchase program, Nike repurchased approximately 59.4 million shares at an average price of $84.16.

Further, of the 4.0 million shares repurchased during the quarter, 3.1 million shares were bought back under the $8.0 billion share repurchase program approved in September 2012.

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 its future operating performance. In fiscal year 2012, Nike exhibited significant strength by innovative products and services that helped boost its top line. Moreover, the company’s nearly debt-free balance sheet offers financial flexibility to drive future growth.

Currently, Nike maintains a Zacks #2 Rank, which translates into a short-term Buy rating.

However, in the long run, we prefer to remain on the sidelines given the sluggish discretionary spending, ongoing European crisis and slowdown in China.

Moreover, 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.

Therefore, we retain our long-term ‘Neutral’ recommendation on the stock.

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