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Nike's Earnings Beat Estimate

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Nike Inc. (NKE - Free Report) – a global leader in sports equipment and apparel – came up with robust fourth-quarter and fiscal 2013 results, driven primarily by strong demand for NIKE branded products. The company’s fourth-quarter earnings of 76 cents per share climbed 27% year over year and beat the Zacks Consensus Estimate of 74 cents. The year-over-year rise in the bottom line was primarily due to increased revenues, improved margins, reduced tax rate and a lower share count.

Quarter in Detail

Nike's total revenue grew 7% year over year to $6,697 million and came ahead of the Zacks Consensus Estimate of $6,636 million. In adjusting for the currency effect, the company’s revenues increased 9%. The year-over-year rise in revenues was primarily driven by robust performances across all geographical regions, except for Greater China and Western Europe. Moreover, the company registered growth in all key categories, excluding Sportswear, Action Sports and Football.

On a currency neutral basis, revenues for NIKE brands climbed 8%, while other businesses delivered 10% growth. Increase in Nike’s other businesses revenues were primarily led by strong performances at Converse, NIKE Golf and Hurley.

Nike's quarterly gross profit grew 10% from the year-ago quarter to $2,940 million, and gross margin expanded 110 basis points (bps) to 43.9%. The margin expansion mainly resulted from better pricing actions and lower material costs, partially offset by increased labor expenses, higher discounts in Greater China and adverse foreign exchange rates.

Selling and administrative expenses increased 7% to $2,022 million, primarily due to a rise of 19% in operating overhead costs, partially offset by a decline of 13% for demand creation expense. Overhead expenses rose due to increased investments in the wholesale business and higher Direct to Consumer costs due to new store openings and mounting expenses at existing stores.

Operating income for the quarter increased 18.8% year over year to $918 million, while operating margin expanded 130 bps to 13.7%. The year-over-year expansion in margins was primarily due to higher gross margin.

Fiscal 2013, in brief

In fiscal 2013, Nike’s revenues shot up 8% to $25,313 million, primarily driven by robust performances across all geographical regions except Greater China. Moreover, the company’s revenues for the fiscal surpassed the Zacks Consensus Estimate of $25,280 million. Further, Nike’s earnings for the fiscal surged 11% to $2.69 per share from $2.42 in the comparable prior-year period and outpaced the Zacks Consensus Estimate of $2.67.

Balance Sheet

Global inventories increased 7% at the end of fiscal 2013 to $3,434 million, compared with $3,222 million at the end of fiscal 2012. The increase was primarily led by an 8% rise in NIKE Brand inventories –including a 6% rise in wholesale unit inventories and 2% due to change in foreign exchange rates and product costs.

Nike, which competes with Deckers Outdoor Corporation (DECK - Free Report) and Skechers USA Inc. (SKX - Free Report) , ended the fiscal with cash and short term investments of $5,965 million, up approximately 59% from $3,757 million as of May 31, 2012. Increase in cash and cash equivalents was a result of proceeds from issuance of debt in the fourth quarter, sale of Umbro and Cole Haan business, and a higher net income. Moreover, the company has a long-term debt of $1,210 million and shareholders’ equity of $11,156 million at the end of fiscal 2013.

Share Repurchase

During the quarter, this Zacks Rank #3 (Hold) company repurchased 4.2 million shares for about $242 million under its $8.0 billion share repurchase program approved in Sep 2012. Since the beginning of this new share repurchase program, Nike has repurchased 15.3 million shares at a cost of nearly $789 million. During fiscal 2013, Nike bought back 33.5 million shares for nearly $1.7 billion.

Future Orders

Global future orders for footwear and apparel scheduled for delivery from June through November this year were up 8% to $12.1 billion. The year-over-year increase in future orders was led by 12% increase in both  North America and emerging markets, 14% in Central & Eastern Europe, 2% in Western Europe and 3% in Greater China. Future orders in Japan declined 17%.

Major Events in Fiscal 2013

In an effort to cut costs and focus more on its NIKE, Jordan, Converse and Hurley brands, Nike divested 2 of its brands – Cole Haan and Umbro – during fiscal 2013.

The Umbro brand sold to Iconix Brand Group Inc. (ICON - Free Report) at the end of 2012 garnered $225 million, while the sale of the Cole Haan affiliate brand to Apax Partners generated $570 million.

Nike is the pioneer in the U.S. footwear and athletic apparel industry. In an attempt to broaden 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. Year-to-date, Nike is strongly positioned, with innovative products and services that had helped boost its top and bottom lines. Moreover, the company’s near-to-debt free balance sheet offers financial flexibility to drive future growth.

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