Nike Touts Big Agenda Despite Headwinds

NEW YORK — Nike Inc. is a good long-term bet, but near-term challenges remain, said analysts.

Even as the Beaverton, Ore.-based athletic giant raised its 2015 sales target and earnings growth plan at its analyst day last Tuesday, market watchers said gross margin pressure continues to threaten top-line momentum in fiscal 2012.

That said, efficiencies will drive improved margins beginning in the second half of next year, considering that 80 percent of footwear and 50 percent of apparel are produced using lean manufacturing techniques, which reduces waste, noted Sam Poser, an analyst at Sterne Agee.

Citi Investment Research analyst Kate McShane agreed, saying, “Nike’s innovation remains a core competency, which … enables pricing to offset higher product and labor costs.”

As a brand, Nike registered its highest growth rate in a decade in fiscal 2011, as revenue increased 10 percent and the firm saw improvement in every category and region, said Nike Brand President Charlie Denson. “The original plan for the Nike brand was to reach revenues of $23 billion by 2015. Today, we’re now on a path to deliver $24 billion to $25 billion of annual revenue by that same date, he said.”

To do that, the firm expects to grow footwear (which makes up more than 60 percent of the Nike brand today) at a high-single-digit rate, powered by innovative styles such as Nike Free and Flywire.

“Flywire is the lightest and most stable upper construction of anything in the industry [today],” said Denson. “[We] can leverage that technology not only in basketball but also in everything from running to golf. Our innovation pipeline is fuller and more robust than ever.”

Paul Swinand, analyst at Morningstar Inc., pointed out that the Nike brand has momentum in soccer in China, Brazil and Europe.

“That’s where the competition is tough and where that sort of momentum tends to continue. Don’t forget there’s the World Cup and Olympics both coming up in South America. That will be a big long-term driver,” Swinand added.

Nike said its greater China business has doubled to $2 billion today from 2007, and it plans to hit $4 billion in the next two years.

The company also increased its fiscal 2015 revenue target to a new range of $28 billion to $30 billion, up from its previous target of $27 billion, announced in May 2010. Long term, the group plans to increase revenue in the high single digits, grow earnings per share by the mid-teens and expand returns on capital.

“Nike has a history of crushing its nearest competitors when those competitors begin to improve,” said Poser. “Given the strong and apparently accelerating global sales, we expect such a crushing to be put upon Adidas as the European Championships and Olympics near.”

For the fourth quarter ended May 31, 2011, Nike posted a 14 percent increase in net income, handily topping analysts’ estimates and sending its shares up 10 percent the next day.

“The beat was driven by better-than-expected top-line growth; [sales, general and administrative expenses] leverage; and a lower tax rate, partially offset by expected gross margin pressures,” said Susquehanna Financial analyst Christopher Svezia.

Net income was $594 million, or $1.24 a share, up from $522 million, or $1.06, in the same period a year ago. Revenue jumped 14 percent to $5.8 billion from $5.1 billion.

For the full year, Nike’s net income grew 12 percent to $2.1 billion, or $4.39 a share. Revenue advanced 10 percent to $20.9 billion.

The firm ended the year with cash and cash equivalents of $2 billion, down 33 percent from $3 billion last year. It also reduced its long-term debt by 38 percent, to $276 million.

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