By  on December 20, 2011

Nike Inc. exceeded analysts’ expectations for its second-quarter profits as the company combated higher costs and weaker margins with a 20 percent increase in its footwear and apparel businesses.

For the three months ended Nov. 30, the Beaverton, Ore.-based sports gear giant boosted its net income 2.6 percent to $469 million, or $1 a diluted share, 6 cents better than the 94 cents expected, on average, by analysts. Year-ago profits came to $457 million, or 94 cents.

Total revenues moved up 18.4 percent to $5.73 billion from $4.84 billion, but a 23.9 percent increase in cost of sales, to $3.28 billion, lowered gross margin 260 basis points to 42.7 percent of sales from 45.3 percent a year ago. The firm said that higher product costs “more than offset the positive effects of growing sales in our direct-to-consumer operations, price increases and ongoing product cost reduction initiatives.” Selling and administrative expenses declined to 31.8 percent of sales from 33.3 percent in the second quarter of last year.

Nike’s closely watched futures orders metric, reflecting footwear and apparel scheduled for delivery through April, totaled $8.9 billion, 13 percent above the 2010 mark.

In the quarter, footwear sales rose 19.6 percent to $3.09 billion, surpassed on a percentage basis by apparel’s 20.9 percent expansion to $1.68 billion. By region, growth was strongest in Greater China, up 34.9 percent to $650 million; emerging markets, up 25.6 percent to $948 million, and its largest market, North America, ahead 21.5 percent to $2.07 billion.

Operating income grew 1.8 percent to $621 million, with double-digit improvement in North America, China and emerging markets offsetting a double-digit descent in Europe.

Company executives delivered mixed messages about Europe, with bullish expectations for its involvement with the Summer Olympics in London and European Championships tempered by concerns about general economic conditions and the potentially erosive effects of currency fluctuation. Donald Blair, chief financial officer, said he expects Nike’s gross margin to remain under pressure and finish the current fiscal year down about 160 basis points from fiscal 2011, a steeper drop than forecast earlier. In addition to currency issues, he cited the promotional tenure of business during the just concluded quarter.

“We expected improvement in discounts [in the second quarter] but they came out about flat,” he told analysts on the company’s late afternoon conference call.

However, with the strength of Nike’s brands and modification in input pressures, he added that he expects the firm to resume year-on-year margin growth “over time.”

Blair also projected that revenue increases in the back half of Nike’s fiscal year would be slightly above the 13 percent growth in futures orders. Year-to-date revenues were up 17.9 percent, to $11.81 billion from $10.02 billion. Net income rose 9.6 percent to $1.11 billion, or $2.36 a diluted share, from $1.02 billion, or $2.08.

The company made frequent reference to the strength of its category strategy, with the executives noting the strength of its basketball products despite the NBA lockout. Although highly confident about its plans for the Olympics, European Championships and the National Football League apparel license it takes over from Reebok next year, Blair noted that those programs had not yet begun to affect it future order position.

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