Analysts Bearish on Nike

Analysts are on the sidelines of Nike Inc. as the athletic giant struggles with its Chinese business and revealed for the first time financial details of the two businesses it seeks to divest.

Kate McShane, analyst at Citi Investment Research, said she remains concerned about the firm’s fundamentals through the end of fiscal 2013.

“In addition to topline deceleration … China futures were even weaker than expected [at negative 6 percent]. While still healthy, first-quarter global futures decelerated even faster than our estimates, [and] we remain concerned about a further futures slowdown as the company laps several growth drivers, including higher pricing,” she said.

Camilo Lyon, analyst at Canaccord Genuity, agreed that the 6 percent drop in China futures was disappointing. He said, “The inventory issue in China is likely to get worse before it improves. I suspect it will take two to three quarters to fully right-size.”

Donald Blair, VP and CFO of Nike, acknowledged on a call with analysts that “combined with the slowdown in the Chinese economy and the shakeout in the broader industry, these actions will create some near-term volatility in our financial results.”

But, he added, “As we reset the market, we’ll tighten our futures orders to ensure a quality order book and will work with our retail partners to clear the marketplace of excess inventory. As these changes take hold, we expect to see improved retailer inventory turns in store productivity, creating the foundation for sustainable profitable growth for Nike and our retail partners.”

Charles Denson, president of Nike brand, said China remains one of the largest growth opportunities for the brand, and the plan now is to leverage the strength of Nike’s name, deliver product assortments more sharply focused for Chinese consumers and transform the distribution network, with an emphasis on improving productivity in the Nike-branded stores.

Meanwhile, the firm clearly stated it is eager to find a buyer for Cole Haan and Umbro, as without them, first-quarter EPS would have come in at $1.27, instead of $1.23, said Blair.

And for the first time, the firm broke out the operating results of both brands, as well as the costs associated with divesting of them. The brands’ combined revenue grew 4 percent in the first quarter, while earnings before interest and taxes were flat, as growth at Cole Haan was offset by a decline at Umbro.

Assuming neither business is divested during the second quarter, Nike estimates a consolidated pre-tax loss from these businesses of approximately $25 million. And if both businesses continue to be held through the end of fiscal 2013, Nike expects they will yield a consolidated pre-tax loss of $50 million to $75 million.

On the progress of the sale, Grimes said, “Both sale processes are on track with multiple prospective buyers.”

For the period ended Aug. 31, the Beaverton, Ore.-based firm earned a net income of $567 million, a 12 percent decrease from the same period a year ago. Earnings per share fell 10 percent to $1.23.

Total revenue advanced 10 percent, or 15 percent on a currency-neutral basis, to $6.7 billion.

By region, North America sales surged 23 percent. On a currency-neutral basis, Western Europe rose 6 percent; Central and Eastern Europe advanced 16 percent; China and emerging markets gained 7 percent; while Japan declined 7 percent.

Nike brand’s worldwide future orders grew 6 percent, or 8 percent currency-neutral, to $8.9 billion.

Cash and short-term investments stood at $3.3 billion, $433 million lower than a year ago, as the company made debt repayments and more share repurchases and dividend payments compared with a year ago.

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