NEW YORK — Nike Inc. charged off the line of scrimmage in its first quarter, but an expected accounting charge took an otherwise profitable period and threw it for a loss.
For the three months ended Aug. 31, the Beaverton, Ore.-based athletic footwear and apparel titan reported a net loss of $48.9 million, or 18 cents a diluted share. That compares with last year’s profits of $199.2 million, or 73 cents.
Excluding an accounting change regarding the amortization of goodwill that resulted in an after-tax charge of $266.1 million, or 99 cents a share, Nike would have posted 6.4 percent growth in earnings to $217.2 million, or 81 cents, 1 cent higher than Wall Street estimates. Minus a $5 million, or 2 cent a share, write-off in the prior-year period, year-ago earnings were $204.2 million, or 75 cents. The charges in both periods resulted from adjustments attributable to Nike’s acquisition of footwear maker Cole Haan and hockey equipment manufacturer Bauer Hockey Inc.
"The goodwill charge was expected," said Wells Fargo analyst John Shanley. "Nike just hadn’t gotten around to doing it yet. However, it does indicate that they overpaid for those companies."
Strong international sales pushed total revenues up 7 percent to $2.8 billion from $2.61 billion a year ago.
"The results from the quarter indicate that Nike is delivering on two levels," said chief executive officer Philip Knight in a statement. "First, the strength of the Nike brand has never been more robust on a global level. Second, our management team has been managing the company effectively and efficiently, with a continued commitment to operating discipline toward the goal of operating sustainable profit growth."
Shares of Nike’s stock closed up $1.35, or 3.2 percent, to finish at $43.05 in Wednesday New York Stock Exchange trading.
Despite the solid business news, of growing concern is Nike’s problematic relationship with its largest customer, Foot Locker Inc. In a quarterly statement filed last week with the Securities and Exchange Commission, the specialty footwear retailer, the nation’s largest, said it will reduce its orders of Nike’s high-end basketball sneakers by $150 million to $250 million in 2003. Foot Locker has already scaled back its orders for the "marquee" sneakers, citing waning customer demand for footwear with price points as high as $185.In a conference call with analysts, Nike said it has "a lot of confidence" about the prospects of finding other specialty retail chains, such as Footstar and Finish Line, to sell its higher-end sneakers. Nike said it derives 15 percent to 20 percent of its revenue from those high-end sneakers and acknowledged that Foot Locker’s competitors are much smaller than the retailing giant.
"We’re expecting a significant drop in futures [orders]," said Charlie Denson, president of the Nike brand, "but we’re confident that over time, we can replace them with alternative channels of distribution. Back-to-school was not a great back-to-school by any measure. And the futures indicate that the booking for the holidays is not that strong."
Said Shanley of the Nike-Foot Locker feud, "Obviously they haven’t been able to resolve their differences. The problem is that kids are just less interested in spending north of $130 for footwear.
"On the other hand, apparel is a whole different story. It’s doing very well and there’s a lot of potential there, especially in women’s apparel."
Looking at sales by region, first-quarter revenues in the U.S. grew 1.6 percent to $1.28 billion from $1.26 billion a year ago. Of that, apparel sales increased 6 percent to $329 million.
In Europe and Africa, managed as a single business unit, revenues increased 15 percent to $869 million, while apparel sales gained 14 percent to $311 million. On a constant-dollar basis, total revenues in the region increased 5 percent.
Asia Pacific sales chipped in a 24 percent increase to $308 million and apparel revenues climbed 54 percent to $99 million. On a constant-dollar basis, regional sales increased a slightly more modest 22 percent.
Only the Americas recorded sales declines, with the region falling 11 percent to $142 million from $160 million last year. Of that, apparel sales dropped 22 percent to $39 million. Weakness in Mexico and, especially, Argentina were mostly to blame. Had the U.S. dollar remained constant against those currencies and others, revenues would have grown 2 percent.
Going forward, Nike reported worldwide futures orders for footwear and apparel scheduled for delivery between September 2002 and January 2003 totaled $3.3 billion, a 2.5 percent increase over orders for the same period last year. Had the U.S. dollar remained constant, futures orders would have grown 2.1 percent.By region, futures orders in the U.S. were down 3 percent and in Europe, including Africa, up 9 percent. Asia Pacific gained 18 percent, and the Americas fell 13 percent. In constant dollars, Europe increased 5 percent, Asia Pacific increased 18 percent and the Americas decreased 4 percent.
"We continue to deliver futures order growth even despite the tough U.S. environment," added Knight in the statement. "These results also demonstrate the continued strength of our international business as futures orders outside the U.S. are up 8 percent.
Other first-quarter performance indicators included a gross margin improvement of 200 basis points to 41.4 percent compared with 39.4 percent last year. Selling, general and administrative expenses were 28.6 percent of revenues compared with 26.6 percent a year ago, and the effective tax rate remained consistent with last year at 35 percent.
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