21 Mar Nike’s Q3 Exceeds Street Targets, Futures Ahead 14 Percent
Nike Inc. reported earnings rose 3.5 percent in the third quarter, to $685 million, or 76 cents a share. Revenues advanced 12.7 percent to $6.97 billion. Both earnings and revenues surpassed Wall Street targets. Nike Brand revenues grew globally 14 percent on a currency-neutral basi, with a 12 percent gain in North America. Converse revenues climbed 16 percent on a currency-neutral basis. Nike Brand futures were ahead 14 percent on a currency neutral basis.
Highlights of the period include:
- Revenues from continuing operations up 13 percent to $7.0 billion
- Diluted earnings per share from continuing operations up 4 percent to $0.76
- Worldwide futures orders up 12 percent, 14 percent growth excluding currency changes
- Inventories as of February 28, 2014 up 12 percent
Nike, Inc. said that despite the negative impact of changes in foreign exchange rates, earnings per share for the quarter were up 4 percent due to higher revenues driven by strong demand for Nike, Inc. brands, gross margin expansion, a lower tax rate and slightly lower average share count, partially offset by the impact of higher SG&A investments in Nike, Inc. brands and business capabilities.
“Our strong Q3 results demonstrate our relentless focus on delivering innovations that resonate with consumers,” said Mark Parker, president and CEO of Nike, Inc. “Despite macroeconomic challenges, Nike delivers consistent results because we focus on the biggest opportunities for growth while we manage risk across our diverse global portfolio. This is how we continue to drive long-term value for our shareholders.”*
Third Quarter Continuing Operations Income Statement Review
Revenues for Nike, Inc. rose 13 percent to $7.0 billion, up 14 percent on a currency neutral basis.
Revenues for the Nike Brand were $6.6 billion, up 14 percent on a currency neutral basis powered by growth in every geography and key category.
Revenues for Converse were $420 million, up 16 percent on a currency neutral basis, mainly driven by strong performance in our largest direct distribution markets: the United States, China and the United Kingdom.
Gross margin expanded 30 basis points to 44.5 percent. Gross margin benefitted from higher average prices and continued growth in the higher margin Direct to Consumer business, partially offset by higher product input costs, unfavorable foreign exchange rates, and higher discounts, reflecting actions to clear excess inventory in select markets.
Selling and administrative expense increased 16 percent to $2.2 billion. Demand creation expense was $733 million, up 18 percent, driven by marketing support for key product launches, the upcoming World Cup and investments in retail product presentation for wholesale accounts. Operating overhead expense increased 15 percent to $1.4 billion due to investments in infrastructure, digital innovations and higher Direct to Consumer costs driven by comparable store sales growth and new store openings.
Other expense, net was $45 million, comprised primarily of foreign exchange losses. For the quarter, the company estimates the year-over-year change in foreign currency related gains and losses included in other expense (income), net, combined with the impact of changes in currency exchange rates on the translation of foreign currency-denominated profits, decreased pretax income by approximately $40 million.
The effective tax rate was 22.4 percent, compared to 22.8 percent for the same period last year, an improvement primarily due to an increase in earnings from operations outside of the U.S., which are generally subject to a lower tax rate, partially offset by a benefit in the prior-year period from the retroactive reinstatement of the U.S. research and development credit.
Net income increased 3 percent to $685 million while diluted earnings per share increased 4 percent to 76 cents a share, reflecting a slight decline in the weighted average diluted common shares outstanding.
Analysts had expected the company to report earnings excluding items of 72 cents a share on nearly $6.7 billion in revenue.
February 28, 2014 Balance Sheet Review for Continuing Operations
Inventories for Nike, Inc. were $3.8 billion, up 12 percent from February 28, 2013. Nike Brand wholesale unit inventories increased 7 percent to support future demand. Changes in the average Nike Brand wholesale product cost per unit, combined with the impact of changes in foreign currency exchange rates, drove approximately 5 percentage points of net inventory growth.
Cash and short-term investments were $5.0 billion, $987 million higher than last year as a result of proceeds from the issuance of debt as well as higher net income.
Share Repurchases
During the third quarter, Nike, Inc. repurchased a total of 10.4 million shares for approximately $788 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 39.6 million shares had been repurchased under this program at a cost of approximately $2.5 billion, an average cost of $63.21 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 2014 through July 2014 totaled $10.9 billion, 12 percent higher than orders reported for the same period last year, and 14 percent higher on a currency neutral basis.
