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Nike Shares Tumble After Earnings Slip

Fourth-quarter earnings fell 7.6 percent under pressure from higher-product and marketing costs.

Nike Inc. suffered a sizable stumble Thursday as fourth-quarter earnings not only missed analysts’ expectations but fell 7.6 percent under pressure from higher-product and marketing costs.

Despite a 12.2 percent increase in overall revenues and growth in all regions, profitability was off for the Nike brand in Western Europe and corporate gross margin fell 150 basis points, to 42.8 percent of sales. Investments in digital operations and “demand creation” collided with higher product input costs, a higher tax rate and what was termed “an unanticipated customs assessment” in its emerging markets segment to produce the shortfall.

Investors didn’t take well to the miss, sending Nike shares down $11.03, or 11.4 percent, to $85.86 in the first two hours of after-hours trading. Prior to the release of the numbers and the close of the equity markets at 4 p.m., they dropped $1.22, or 1.2 percent, to $96.89.

Net income for the three months ended May 31 fell to $549 million, or $1.17 a diluted share, versus the analyst earnings per share consensus estimate of $1.37 and year-ago net profit of $594 million, or $1.24.

Demand was not the issue. Revenues rose to $6.47 billion from $5.77 billion as initiatives ranging from Nike’s Flyknit footwear construction and expanded National Football League program to its expanded direct-to-consumer and China enterprises resonated with consumers.

“Nike brand direct-to-consumer revenue increased 21 percent, driven by comp[arable]-store growth and…a 23 percent increase in online sales,” said Charlie Denson, president of Nike brand.

Revenues in China grew 23.3 percent for the full year, to $2.54 billion, while Western Europe managed a 7.1 percent boost, to $4.14 billion.

In the quarter, footwear revenues moved ahead 12 percent, to $3.65 billion, and apparel grew 10.3 percent to $1.59 billion. Future orders for the Nike brand rose 7 percent, or 12 percent excluding currency fluctuation.

The positive momentum on the top line was slowed by a 15.3 percent increase in cost of sales, to $3.7 billion and an increase in selling, general and administrative costs that grew nearly as quickly as revenues, up 12.1 percent to $1.99 billion.

Nike last month said that it was looking to divest the Cole Haan and Umbro brands to focus on its increasingly segmented Nike business as well as Converse and Hurley. The company on Thursday provided financial results for the brands, reporting that their combined revenues in 2012 rose 7 percent, to $797 million, while the loss before interest and taxes more than doubled, to $43 million from $18 million in fiscal 2011.

Mark Parker, president and chief executive officer, noted that much of the profit decline in the quarter was attributable to the company’s commitment to innovation both in its products and its online and offline retail outreach. He reaffirmed Nike’s intention to post revenues of between $28 billion and $30 billion by the end of fiscal 2015, “even with our leaner portfolio of brands. Quite simply, we are a growth company and that always starts with innovation.”

For the full year, net income was up 4.2 percent to $2.22 billion, or $4.73 a diluted share, while revenues rose 15.7 percent to $24.13 billion. Gross margin retracted 220 basis points to 43.4 percent of revenues.