Nike Q1 Profit, Sales Jump to Another Record

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Nike's “Make Yourself” Campaign Fall 2011

Beaverton,OR—Despite concerns about a weakening economy here and abroad, Nike Inc. raised its full year sales forecast last week as the athletic giant reported a 15% increase in its first quarter profit.

For the quarter ended August 31, Nike reported net income rose to $645 million, or $1.36 a share, from $559 million, or $1.14 a share, a year ago. The sports footwear and apparel giant hasn’t posted a loss since August 2002.

Net revenue rose 18% to $6.08 billion. Excluding foreign currency exchanges, revenue rose 11%. The quarterly report dashed past analysts’ average estimates which expected earnings of $1.21 a share and revenue of $5.75 billion.

The company said it has sales growth in all geographic regions except Western Europe, which was flat due to the comparisons with last year when the World Cup inflated sales there. Sales in North America advanced 16% to $2.2 billion. Revenue from Nike brand apparel also gained 16% to $1.59 billion, or 30% of total sales.

Nike’s gross margin declined 44.3% as the company noted higher input and production costs hurt operations, but fell less than expected thanks to a 17% increase in comparable store sales in the company’s direct-to-consumer division. The company told analysts that gross margins may narrows as much as two percentage points in its second quarter before recovering in the second half.

“We’re off to a strong start in fiscal year 2012. We have a powerful and diverse portfolio of brands and businesses, and we’re focused on leveraging them to drive growth and create value for our shareholders,” said Mark Parker, Nike’s president/ceo.

‘Reinforcing that Nike Inc. is a Growth Company’

While acknowledging that rising costs labor, materials and freight might cut into profits in the near term, Parker said things should improve toward the end of Nike’s fiscal year.

While Nike doesn’t forecast specific forecasts, it expects sales to increase in the mid- to high teens for its second quarter, and low- to mid-teens for the full year as price increases hit retail and roll out on new products.

The company said future orders, scheduled for delivery through January, totaled $8.5 billion, 16% higher than orders reported for the same period last year.

“Those numbers do a good job of reinforcing that Nike Inc. is a growth company,” Parker told analysts in a conference call. “And our growth is accelerating.”

Parker noted the company has been investing in future growth, including about $500 million to be invested in its direct-to-consumer business. E-commerce was up more than 30% in the first quarter, according to the report. Parker credited Nike as an early adaptor into digital technology more than 10 years ago, resulting in successes such Nike+ Sensor products and iPod applications.

Although Nike executives said they would be cautious in the coming months, Parker said there are bright spots at retail. “The growing middle class in developing markets is increasing consumption. Consumers everywhere are ready to buy when they fell good about what they get for their money.”

Retail analysts were enthused with Nike’s report. “This is a fantastic quarter,” Camilo Lyon, an analyst for Canaccord Genuity Corp.  said. “Nike understands how to reach the consumer with relevant product, and this is further evidence of that.”

“They’re on all cylinders,” said Sam Poser, analyst at Sterne Agee & Leach. Added Sara Hasan, analyst with McAdams Wright Ragen, Nike is well positioned based upon retailers’ behavior in past downturns as they “narrowed their assortments to key brands.”

NBA Lockout Impact?

Matt Arnold, analysts at Edward Jones & Co. told Bloomberg that Nike is “the 800-pound gorilla in athletic footwear, and if they can become that in apparel, that’s a significant market opportunity for them.”

Besides fielding the usual financial questions, the company was asked about the postponement of National Basketball Association (NBA)’s game and the prospect of an extended lockout between owners and players.

But Nike Brand president Charlie Denson indicated he wasn’t too concerned about impact on sales since NBA and basketball are more popular worldwide now than in 1999 during the last NBA lockout.

In the event of a longer postponement, Denson said Nike would focus on providing college teams with signature shoes designed by Nike’s athlete ambassadors.

The company noted it repurchased 7.7 million shares in the first quarter for about $649 million.  The repurchases are part of a 4 year, $5 billion plan passed by the board back in September 2008.  As of the end of the first quarter, Nike had bought back about 38 million shares worth something like $3 billion, the release read.