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Nike 3Q EPS Beats, Rev Misses

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Nike Inc. (NKE - Free Report) – a global leader in sports equipment and apparel – came up with its third-quarter fiscal 2013 earnings of 73 cents per share, which surpassed the Zacks Consensus Estimate of 67 cents. Moreover, the quarterly earnings climbed 19.7% year over year, resulting from increased revenues, improved margins, lower share count and reduced tax rate.

Quarter in Detail

Nike's total revenue grew 9% year over year to $6,187 million but fell short of the Zacks Consensus Estimate of $6,229 million. Adjusting for the currency effect, the company’s revenues increased 10%. The year-over-year elevation in revenues was primarily driven by robust performances across all geographical regions barring Greater China and Japan. Moreover, the company registered growth in all key categories excluding Sportswear and Action Sports.

On a currency neutral basis, revenues for Nike brands elevated 10%, while other businesses delivered 9% growth. Increase in Nike’s other businesses revenue was primarily led by strong performance at Converse and NIKE Golf, which was partially offset by weak sales at Hurley.

Nike's quarterly gross profit grew 10% from the year-ago quarter to $2,736 million, and gross margin expanded 30 basis points to 44.2%. 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. Another factor that pulled down the gross margin was the switch of the NIKE Brand to a mix focused on lower margin businesses.

Selling and administrative expenses increased 9% to $1,863 million, including a rise of 11% and 5% in operating overhead costs and demand creation expense, respectively. Overhead expenses rose on the back of 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 12.4% year over year to $873 million, while operating margin expanded 40 basis points to 14.1%. The year-over-year expansion in margins was primarily due to higher gross margin.

Balance Sheet

Global inventories increased 4% at the end of third quarter to $3,329 million compared with $3,206 million in the same period of fiscal 2012. The year-over-year increase in global inventories was primarily led by a 7% rise in NIKE Brand wholesale unit inventories, partially offset by a 3% negative impact from unfavorable foreign currency translations.

Nike, which competes with Deckers Outdoor Corporation (DECK - Free Report) and Skechers USA Inc. (SKX - Free Report) , ended the quarter with cash and cash equivalents of $2,557 million compared with cash balance of $2,021 million as of Feb 29, 2012. Moreover, the company has a long-term debt of $161 million and shareholders’ equity of $10,667 million at the end of third quarter.

Share Repurchase

During the quarter, this Zacks Rank #3 (Hold) company repurchased 4.9 million shares for about $253 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 11.1 million shares at a cost of nearly $548 million.

Future Orders

Global future orders for footwear and apparel scheduled for delivery from March through July 2013 were up 6% to $9.9 billion. Excluding currency effects, worldwide future orders increased 7%. The year-over-year increase in future orders was led by an 11% increase both  in North America and Central & Eastern Europe, 12% in Emerging market and 4% in Greater China. Future orders in Japan and Western Europe declined 8% and 5% respectively.

Recent Events

In an effort to cut costs and sharpen focus on its NIKE, Jordan, Converse and Hurley brands, Nike, in May 2012, revealed its intention of divesting 2 of its brands – Cole Haan and Umbro. The company’s decision to sell these brands is guided by the fact that the performances at the Cole Haan and Umbro brands failed to match up to that of its other brands.

Going ahead with its pre-planned strategy, Nike, during the second quarter of fiscal 2013 entered into an agreement to shed certain assets of the Umbro brand to Iconix Brand Group Inc. (ICON - Free Report) . The deal closed at the end of 2012 and fetched $225 million.

Moving ahead, in February this year, this global athletic footwear retailer, successfully sealed the previously agreed upon deal to sell its Cole Haan affiliate brand to Apax Partners for a sum of $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 exhibited significant strength by innovative products and services that helped boosts 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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