Nike Q4 Profit Misses on Marketing Costs, Slowing Sales

Nike will outfit China's Olympic teams, one of the many nations the company made uniforms and footwear for.

Beaverton, OR—In its first earnings miss in 22 quarters, Nike Inc. reported Thursday that its fourth quarter profit fell 7.6% as marketing costs increased and sales slowed.

For the quarter ended May 31, the athletic apparel, accessories and footwear giant posted net income of $549 million, or $1.17 a share, from $594 million or $1.27 in the same quarter a year ago.

Net income rose 12%to $6.47 billion. Excluding foreign currency fluctuations, Nike Brand saw sales increase14% “driven by growth in all geographies, key categories and product types.” Revenues for other businesses grew 16%.

Although revenue from China rose 18% to $667 million, Nike expects growth to moderate and said it has too much inventory in the region and sales were down 25% from third quarter.

Sales Slow in Europe, China

But Nike missed analysts’ average estimate for earnings of $1.37 a share on sales of $6.51 billion.

“We’ll see continued uncertainty in the global economy,” said Mark Parker, Nike’s ceo. “Commodities and labor costs will continue to fluctuate; currency pressure is increased, especially in Europe and the emerging markets. China’s economy is expected to grow more slowly than we’ve seen over the past five years.”

In January, responding to higher costs, Nike had a widespread price increases to help margins. But the increases weren’t enough to offset inflation, narrowing gross margin 1.5 percentage points to 42.8%.

Parker said sales slowed in Europe, which accounts for about 25% of total revenue, as consumers pulled back on spending due to austerity measures and recession in the Eurozone.

Nike also increased its spending in marketing by 23% to $760 million for product launches coinciding with the European Football Championships and the Summer Olympics in London. And operating overhead expenses increased 6% to $1.2 billion due to additional investments in the company’s direct to consumer and wholesale businesses.

Nike’s sales and profit miss spooked retail analysts and its shares fell in early trading today. Not to mention the company posted a 23% increase in inventories, raising the specter that Nike may be to discounts if demand declines.

“We would not be buyers of the stock because of concerns sales growth will slow and the risk that Nike” will be left with a glut of inventory after the Olympics, Camilo Lyon, an analyst for Canaccord Genuity, said.

Cole Haan, Umbro to Be Divested

ISI Group analyst Omar Saad said sales at Nike “may no longer be enough for investors to overlook the company’s perplexing ongoing margin pressure.” And the margin miss leaves him “a little concerned that this highly sophisticated, dominant, global consumer company does not have as good a handle on its costs as one would hope.”

Nike also recently announced it plans to divest its Cole Haan and Umbro brands to focus on building Nike, Jordan, Converse and Hurley brands.

For fiscal 2012, Cole Haan and Umbro together contributed $797 million in revenues and a combined loss before interest and taxes of $43 million. This compares to fiscal 2011 combined revenues of $745 million and a loss before interest and taxes of $18 million.

 

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