20 Mar Nike’s Q3 Earnings Climb 16 Percent
Nike Inc. reported earnings rose 16.0 percent in its third quarter ended Feb. 28, to $791 million, or 89 cents a share, a penny ahead of Wall Street’s consensus target. Sales rose 7.0 percent to $7.46 billion. Sales on a currency-neutral basis grew 11 percent for the Nike brand and 33 percent for Converse.
The North America saw the smallest gain, although still up a solid 6 percent.
Among other regions, Western Europe saw the strongest gain, up 21 percent; followed by Greater China, 17 percent; Emerging Markets, 12 percent; Japan, 8 percent; and Central & Eastern Europe, 7 percent.
Nike noted that EPS was 19 percent due to higher revenues as a result of continued strong demand for its brands and gross margin expansion, partially offset by higher SG&A investments and a higher effective tax rate.
“Our strong third quarter results show that our growth strategies are working, even under challenging macroeconomic conditions,” said Mark Parker, President and CEO, Nike, Inc. “Nike has the ability to deliver consistent shareholder value due to the strength of our brand, our relentless commitment to innovation and our powerful portfolio that allows us to invest in the opportunities with the highest potential for growth as well as manage risk.”*
Third Quarter Income Statement Review
- Revenues for Nike, Inc. rose 7 percent to $7.5 billion, up 13 percent on a currency neutral basis.
- Revenues for the Nike Brand were $6.9 billion, up 11 percent on a currency neutral basis driven by growth in every geography and in most key categories.
- Revenues for Converse were $538 million, up 33 percent on a currency neutral basis, mainly driven by continued growth and timing of shipments in North America, the transition to direct distribution in AGS (Austria, Germany, Switzerland) and growth in the Direct to Consumer (DTC) business.
- Gross margin expanded 140 basis points to 45.9 percent. Gross margin benefitted from a continued shift in mix to higher margin products, partially offset by higher product input and warehousing costs.
- Selling and administrative expense increased 10 percent to $2.4 billion. Demand creation expense was $731 million, flat to the prior year as increased investments in digital brand marketing and sports marketing were offset by lower advertising expense due to product launch timing. Operating overhead expense increased 15 percent to $1.6 billion, reflecting growth in the DTC business and targeted investments in infrastructure and consumer-focused digital capabilities.
- Other income, net was $5 million, comprised primarily of net foreign exchange gains. For the quarter, the Company estimates the year-over-year change in foreign currency related gains and losses included in other income, net, combined with the impact of changes in exchange rates on the translation of foreign currency-denominated profits, decreased pretax income by approximately $20 million.
- The effective tax rate was 24.4 percent, compared to 22.5 percent for the same period last year, primarily due to the impact of tax expense on intercompany transactions, partially offset by the retroactive reinstatement of the U.S. research and development tax credit.
- Net income increased 16 percent to $791 million, driven by strong revenue growth and gross margin expansion, while diluted earnings per share increased 19 percent to $0.89, reflecting a 2 percent decline in the weighted average diluted common shares outstanding.
Feb. 28, 2015 Balance Sheet Review
- Inventories for Nike, Inc. were $4.2 billion, up 12 percent from February 28, 2014, driven by a 12 percent increase in Nike Brand wholesale inventories as well as higher inventories associated with growth in DTC. Nike Brand wholesale inventories were higher due to a 17 percent increase in units, while changes in the average product cost per unit, combined with the impact of changes in foreign currency exchange rates, decreased growth by approximately 5 percentage points.
- Cash and short-term investments were $5.4 billion, $332 million higher than last year as growth in net income and collateral received from counterparties as a result of hedging activities more than offset share repurchases, higher dividends and investments in working capital.
Share Repurchases
During the third quarter, Nike, Inc. repurchased a total of 6.5 million shares for approximately $612 million as part of the four-year, $8 billion program approved by the Board of Directors in September 2012. As of the end of the third quarter, a total of 74.1 million shares had been repurchased under this program for approximately $5.3 billion, an average cost of $71.13 per share.
Futures Orders
As of the end of the quarter, worldwide futures orders for Nike Brand athletic footwear and apparel scheduled for delivery from March 2015 through July 2015 were 2 percent higher than orders reported for the same period last year. Excluding currency changes, reported orders would have increased 11 percent.
