Nike Futures Improve

Nike Futures Improve
Mark Parker

NEW YORK — After last quarter’s concerns over tepid financial results and an ominous futures forecast, Nike Inc. regained analyst confidence last week with better-than-expected first-quarter results.

Improved gross margins, decreased inventory and moderating currency pressures helped boost profits at the Beaverton, Ore.-based company, as income rose slightly to $513 million, or $1.04 a diluted share, 7 cents better than the analyst consensus on Yahoo Finance. Nike reported a profit of $510.5 million, or $1.03 a share, in the year-ago quarter.

“The first quarter shows a lot more than how we performed over the last three months. It shows that Nike is poised to benefit as we move through the current economy,” Mark Parker, the company’s president and CEO, said on a conference call. “We feel very good about our relationships with consumers around the world, and we continue to gain share in key markets and categories.”

Future orders for Nike brand athletic footwear and apparel, which dipped by 12 percent last quarter, now total $6.2 billion for September 2009 through January 2010, down just 6 percent from the year-ago period. Gross margins, too, were better than most expected, and inventories were down 7 percent at the quarter’s end. The company now expects second-quarter gross margins to come in below last year’s second quarter, and predicted second-half gross margins would improve year-over-year.

As a result, several analysts revised their stock ratings and full-year EPS estimates for the stock. “We’re expecting better sales trends in the second quarter than the first, and an improvement in sales over the course of the year,” said Robert W. Baird & Co. analyst Mitch Kummetz, who upped his full-year EPS estimate to $3.60, from $3.55. “The adjustment in gross margins is impressive, and futures should continue to improve.”

Thomas Shaw, an equity analyst at Stifel Nicolaus, also raised his full-year EPS estimate by 9 cents to $3.67. “People had feared that future orders would look as bad, if not worse, than last quarter,” he said, “but by showing a slight sequential improvement, and indicating an improving order pattern, Nike encouraged us that the worst could be behind the company.”

Charlie Denson, president of the Nike brand, said on the call, “We’re performing better than ever around the things we control. But consumers remain cautious; so do retailers. We’re seeing that play out across our categories and our geographies.”

Revenues, in fact, remained weak, declining 12 percent to $4.8 billion from $5.43 billion. Footwear sales dropped 10 percent to $2.61 billion, and apparel was down 16 percent to $1.28 billion.

Both the basketball and action-sports categories were strengths during the quarter, while the running business was down “in pretty much every geography,” said Denson. “We’re seeing a little bit of erosion [in the running business] from where we’ve been, but we’ve got some product coming down the pipe that’s going to deal with some of that.”

Executives pointed to double-digit growth in both the Converse and Hurley brands, but those gains could not offset declines in the Cole Haan, Nike Golf and Umbro divisions, which resulted in a 5 percent decline for Nike’s “other businesses” segment.

As per Nike’s new geographic breakout, which divides the world into six key regions, footwear declined universally.

Total sales in North America fell 5 percent to $1.76 billion, as footwear sales declined 4 percent to $1.22 billion. In Central and Eastern Europe, greater China, Western Europe and Japan, footwear revenue dropped by 32 percent, 17 percent, 15 percent and 4 percent, respectively. Only the Emerging Markets region, which includes South America, Central America, the Pacific countries and Korea, reported an uptick in footwear sales, of 6 percent.

Executives seemed unfazed by reported weakness in back-to-school sales in the U.S., maintaining that any broader athletic slowdown has actually benefited Nike. “We always perform a little bit better in these types of situations because people tend to migrate toward us,” said Denson.

However, Sam Poser, senior equity research analyst at Sterne Agee, said he believes Nike’s strength in specialty retail has much more to do with the relative weakness of its competitors. “There’s no one stepping up in that segment,” he said. “Nike is picking up share, but that’s because other brands are such a disaster right now.”

Parker conceded that, to be successful in the long term, Nike must do more than overtake its competitors. “Our strategy is not just about gaining share this quarter or next quarter,” he said. “We’re focused on growing the marketplace over the long term, and we target our resources with that in mind.”

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