Nike Inc. crossed the fourth-quarter finish line with earnings and sales that comfortably exceeded analysts’ expectations but resounded with the footsteps of higher costs.

This story first appeared in the June 28, 2011 issue of WWD. Subscribe Today.

In the three months ended May 31, the Beaverton, Ore.-based athletic footwear and apparel giant generated net income of $594 million, or $1.24 a diluted share, 13.8 percent better than the $522 million, or $1.06, registered in the 2010 quarter. Sales progressed at a similar pace, growing 13.6 percent to $5.77 billion from $5.08 billion a year ago.

The consensus of analysts polled by Yahoo Finance was for earnings per share of $1.16 on revenues of $5.54 billion.

The earnings “beat” came despite a 20.3 percent increase in cost of goods sold, to $3.21 billion from $2.67 billion, that reduced gross margin to 44.3 percent of sales, 310 basis points below the 47.4 percent margin recorded in the final quarter of 2010. The company identified the primary cause of the margin erosion as higher product costs but also cited higher freight costs, higher inventory obsolescence reserves and higher royalties paid for endorsed team merchandise, more than enough to neutralize “ongoing product cost reduction initiatives” and improved sales in the firm’s direct-to-consumer channel.

Nike emphasized that some of the pressure on freight was a result of strong demand for certain Nike brand products, which necessitated shipment by air.

The growing burden on the bottom line — for Nike and virtually all firms involved in the soft goods supply chain — was easily discernible in the contrast with the firm’s results for the year. In the 12 months, net income rose 11.9 percent, to $2.13 billion, or $4.39 a diluted share, from $1.91 billion, or $3.86, in 2010, while sales were up 9.7 percent to $20.86 billion from $19.01 billion. Cost of goods sold was up appreciably less, rising 11.2 percent to $11.35 billion, and cutting into gross margin just 70 basis points, to 45.6 percent from 46.3 percent.

“In fiscal year 2011, we delivered exceptional results in extraordinary times,” said Mark Parker, Nike’s president and chief executive officer. “Our business is organized to drive growth across multiple brands, geographies and categories as we manage through the ever-changing macroeconomic landscape.”

Reported futures orders, a closely watched barometer of the business booked for Nike footwear and apparel during the next six months, were up 15 percent to $10.3 billion and 12 percent with the exclusion of currency fluctuation. With and without currency effects, all geographic markets but Japan were ahead, with orders in Greater China up 24 percent versus Japan’s 13 percent decline.

Operating income rose in North America and Greater China and in emerging markets, but fell in Western Europe, Central and Eastern Europe and in Japan, in the latter case dropping 67 percent.

Apparel sales in the quarter were up 8.4 percent to $1.44 billion while footwear jumped 18.6 percent to $3.26 billion.

Shares of Nike were up 44 cents, or 0.5 percent, to $81.62 before quarterly results were reported Monday and rose 3.9 percent in early after-hours trading. Retail shares were up 1 percent as the S&P Retail Index finished the day at 518.42 and the Dow Jones Industrial Average reclaimed the 12,000 plateau, scoring its first advance in four sessions with a 0.9 percent uptick to 12,043.56.

Nike is hosting an investor day today to discuss its results and forward outlook.

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