Nike Shares Up on Q3 Earnings Beat

Ongoing restructuring leads to declines in sales and profitability in Greater China.

Shares of Nike Inc. surged in after-hours trading Thursday when the company reported third-quarter earnings and futures orders well ahead of Wall Street’s expectations.

This story first appeared in the March 22, 2013 issue of WWD.  Subscribe Today.

Virtually the only decreases in Nike’s report for the three months ended Feb. 28 came from declines in both its sales and operating income in Greater China, which pulled back 8.5 percent and 20.1 percent, respectively, under pressure from what Mark Parker, president and chief executive officer, termed Nike’s “strategy to reset the marketplace. But we still have more to do before it can capture its long-term growth potential.”

After hitting a new 52-week high of $54.72 in midday trading, shares closed at $53.60, down $1.23 or 2.2 percent, in Thursday’s regular trading session. Upon the release of results after the market, they began an upward trajectory that would see them pick up 8.4 percent to $58.10.

RELATED CONTENT: Click Here for More Earnings Coverage >>

For the quarter, net income rose 54.6 percent to $866 million, or 95 cents a diluted share, from $560 million, or 60 cents. Excluding discontinued operations, such as the Cole Haan and Umbro brands sold since the close of the first quarter, earnings per share were 73 cents, 6 cents above the 67-cent result expected, on average, by analysts.

Revenues from continuing operations in the quarter rose 9.4 percent to $6.19 billion, below the $6.23 billion Wall Street expected, from $5.66 billion a year ago. Although down for the year to date, quarterly gross margin picked up 30 basis points to 44.2 percent of sales from 43.9 percent in last year’s period.

Nike apparel revenues grew 7.5 percent to $1.57 billion while footwear grew more briskly, up 9.3 percent to $3.66 billion. In North America, apparel sales were up 21.6 percent to $697 million while in Western Europe and China, Nike’s second and third largest regions for clothing, they dropped 2.3 percent and 11.3 percent, respectively, to $298 million and $196 million.

The closely watched futures orders metric, which measures Nike brand footwear and apparel scheduled for delivery through July, rose 6 percent and was up 7 percent on a currency neutral basis, well ahead of the 4.7 percent bump expected.

Operating income was up in all geographic markets except China. The largest gain, and the largest contribution to profitability, came from North America, where earnings before interest and taxes rose 24.3 percent to $625 million.

Parker pointed out that Nike’s e-commerce business grew 33 percent in the third quarter, outpacing the growth in direct-to-consumer sales overall.

During the company’s late-afternoon conference call, Charles Denson, president of Nike brand, said of China, “Near term, we are continuing to focus on aggressively clearing inventory from the marketplace….While we continue to see progress, we still have work to do to clean up the market.” Don Blair, chief financial officer, noted that futures orders in Greater China were up 3 percent at constant currency but flat in Mainland China.

For the first nine months, net income rose 8.5 percent to $1.82 billion on an 8.9 percent increase in revenues from continuing operations to $18.62 billion.