22 Mar Nike’s Q3 Results Race Past Wall Street Targets
Nike Inc. reported earnings rose 20.1 percent in its third quarter ended February 28, easily exceeding Wall Street’s targets. Earnings were particularly helped by lower spending.
“The power of Nike’s diverse, global portfolio delivered another solid quarter of growth and profitability,” said Mark Parker, chairman, president and CEO, Nike Inc. “To expand our leadership and ignite Nike’s next phase of growth, we’re delivering a relentless flow of innovation through performance and style, increasing speed throughout the business and creating more direct connections with consumers leveraging digital and membership.”
Third Quarter Income Statement Review
- Revenues for Nike Inc. increased 5 percent to $8.4 billion, up 7 percent on a currency-neutral basis. Wall Street on average was projecting $8.47 billion.
- Revenues for the Nike Brand were $7.9 billion, up 7 percent on a currency-neutral basis, driven by double-digit growth in Western Europe, Greater China and the Emerging Markets as well as the Sportswear and Jordan Brand categories. By region, sales on a currency-neutral basis for Nike Brand grew 3 percent in North America, 10 percent in Western Europe, 3 percent in Central & Eastern Europe, 15 percent in Greater China, 8 percent in Japan, and 12 percent in Emerging Markets.
- Revenues for Converse were $498 million, up 3 percent on a currency-neutral basis, driven by growth in North America.
- Gross margin contracted 140 basis points to 44.5 percent, as higher average selling prices were more than offset by higher product costs, unfavorable changes in foreign exchange rates and the impact of higher off-price sales.
- Selling and administrative expense decreased 3 percent to $2.5 billion. Demand creation expense was $749 million, down 7 percent as fiscal 2017 spend was weighted towards the first six months due to significant investments around the Olympics and the European Championships. Operating overhead expense decreased 1 percent to $1.7 billion, as continued investments in Direct-to-Consumer (DTC) were offset by lower bad debt expense compared to the prior year and lower administrative costs as Edit-to-Amplify initiatives are driving productivity in core operational spending.
- Other income, net was $88 million comprised primarily of net foreign currency exchange gains, and to a lesser extent, non-operating items.
- The effective tax rate was 13.8 percent, compared to 16.3 percent for the same period last year, primarily due to a reduction in tax reserves and an increase in the mix of earnings from operations outside of the U.S., which are generally subject to a lower tax rate.
- Net income increased 20 percent to $1.1 billion and diluted earnings per share increased 24 percent to 68 cents as revenue growth, selling and administrative expense leverage, higher other income (net), a lower tax rate and a three percent decline in the weighted average diluted common shares outstanding more than offset lower gross margin. Wall Street on average expected 53 cents a share.
February 28, 2017 Balance Sheet Review
Inventories for Nike Inc. were $4.9 billion, up 7 percent compared to the prior year as a 3 percent decrease in Nike Brand wholesale unit inventories was offset by increases in average product costs per unit and higher inventories associated with growth in DTC.
Cash and short-term investments were $6.2 billion, $1.1 billion higher than the prior year as growth in net income and proceeds from the issuance of debt in the second quarter of fiscal 2017 as well as proceeds from employee exercises of stock options more than offset share repurchases, higher dividends and investments in infrastructure.
During the third quarter, Nike Inc. repurchased a total of 8.9 million shares for approximately $475 million as part of the four-year, $12 billion program approved by the Board of Directors in November 2015. As of February 28, 2017, a total of 64.9 million shares had been repurchased under this program for approximately $3.6 billion.