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Nike Q2 Earnings Beat by a Penny

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Sporting gear retailer Nike Inc. (NKE - Free Report) came up with robust second-quarter fiscal 2014 results, on account of a rise in revenue across the globe, higher gross margin and a lower tax rate, offset by elevated SG&A investments in the company’s brands and business capabilities.

Nike’s earnings from continuing operations of 59 cents per share climbed 4% year over year and beat the Zacks Consensus Estimate by a penny.

Quarter in Detail

Nike's total revenue grew 8% year over year to $6,431 million, while it fell marginally short of the Zacks Consensus Estimate of $6,456 million. Adjusted for the currency impact, Nike’s top line grew 9% year over year in the second quarter. The year-over-year rise in revenue was primarily driven by robust performance across all geographical regions and product categories.

During the reported quarter, revenues of NIKE Brand grew 7% year over year to $6,070 million while the Converse segment registered a revenue increase of 14% to $360 million. Improved sales across all product types, regions and categories contributed to the rise in sales at NIKE Brand, while Converse benefited from strong sales in the U.K., North America and China.

Nike's gross profit grew 12% from the year-ago quarter to $2,826 million, and gross margin expanded 140 basis points (bps) to 43.9%. The margin expansion mainly resulted from the mix shift toward higher margin products, rise in average sales prices, lower material input costs and strong performance at the high margin direct-to-Consumer business, partially offset by increased labor expenses and adverse foreign exchange rates.

Selling and administrative expenses rose 14% year over year at $2,088 million, driven by a 14% upside in operating overheads and a 13% increase in demand creation expense. Overhead expenses rose due to increased Direct to Consumer costs, resulting from new store openings and mounting expenses at existing stores as well as investments in digital innovations and other businesses.

On the other hand, demand creation expenses surged due to increased marketing expenses to support new product launches, sponsor customer running events and upcoming global sporting events like the World Cup and Winter Olympics.

Income before interest and other expenses and income taxes for the quarter rose nearly 6.3% year over year to $738 million, while as a percentage of sales it contracted 20 bps to 11.5%.

Balance Sheet

Global inventories increased 11% at the end of quarter to $3,695 million, compared with $3,318 million at the end of the year-ago comparable quarter. The increase was primarily led by a 7% rise in the NIKE Brand wholesale unit inventories.

Nike ended the quarter with cash and short-term investments of $5,187 million, up approximately 47.1% from $3,525 million as of Nov 30, 2012. Increase in cash and cash equivalents was due to proceeds from the issuance of debt, sale of Umbro and Cole Haan businesses and a higher net income.

Moreover, the company has a long-term debt of $1,201 million (excluding current maturities) and shareholders’ equity of $11,344 million at the end of the second quarter.

Share Repurchase

During the quarter, this Zacks Rank #3 (Hold) company repurchased 5.5 million shares for about $402 million under its 4-year $8.0 billion stock repurchase program approved in Sep 2012. Since the beginning of this new stock repurchase program, Nike has repurchased 29.2 million shares under the program for nearly $1.7 billion or $58.82 per share.

Futures Orders

Global futures orders for NIKE Brand footwear and apparel scheduled for delivery from Dec 2013 through Apr 2014 were up 12% to $10.4 billion.


Looking ahead, Nike projects revenue to grow in the high-single digit to low-double digit range for the third quarter and in the low double-digit range in the fourth quarter. As a result, fiscal 2014 revenue is expected in the high-single to low-double digit range.

Further, the company expects gross margin to expand 25 basis points each in the third and fourth quarters and 75 basis points in fiscal 2014. The upside in the second half of fiscal 2014 is based on continued gain from mix shift to higher margin products, higher average selling prices and continued strength in the DTC business. However, the company expects costs to rise due to higher raw material costs, increased discounts to clear excess inventory as well as higher labor expenses and currency impact.

SG&A expenses in the third quarter are expected to increase in the high-teens range, based on a 20% and more rise in demand creation expenses due to increased spending to support key sporting events and a high-teens growth in overhead expenses due to ongoing investments in strategic initiatives. Full year SG&A expenses are projected in the low-teens rate.

Effective tax rate in fiscal 2014 is expected to be about 25%.

Other Stocks to Consider

Better-performing stocks in the retail industry include Deckers Outdoor Corporation (DECK - Free Report) , Iconix Brnad Group Inc. (ICON - Free Report) and Sequential Brands Group Inc. (SQBG - Free Report) . All of these have a Zacks Rank #2 (Buy).

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