Tuesday, December 21, 2010

Nike (NYSE: NKE): Q1 Earnings Preview

Nike Inc. (NYSE: NKE), the world’s largest athletic apparel and footwear maker, is scheduled to release its fiscal second-quarter financial results after the closing bell on Tuesday, December 21, 2010. Analysts, on average, expect the company to report earnings of 88 cents per share on revenue of $4.81 billion. In the year ago quarter, the company reported earnings of 76 cents per share on revenue of $4.41 billion.

Nike, Inc. designs, develops, and markets footwear, apparel, equipment, and accessory products for men, women, and children worldwide. It is a seller of athletic footwear and athletic apparel in the world. Nike's business operations are divided into four major segments, with Footwear being the leading revenue contributor at 55 percent, followed by Apparel at 26 percent, Equipment with 5 percent, and Other's contributing 14 percent to the total revenue.

In the preceding fiscal first quarter, the Beaverton, Oregon-based company's net income was $559 million or $1.14 per share, compared to $513 million or $1.04 per share, in the year-ago quarter. Revenues for the first quarter increased 8% to $5.18 billion from $4.80 billion in the same quarter last year. Analysts, on average, expected the company to report earnings of $1.01 per share on revenue of $5.22 billion.

Companies producing footwear have posted positive results so far this year and hope to continue the trend through the holiday season. Innovation is proving all important in the footwear industry and those such as Nike Inc. which are spending time on design have been gaining market share. As the Christmas season approaches companies have been making sure that their products are easily available. Thus, many have been re-vamping their web offerings as well as opting into new mobile distribution avenues allowing customer to buy, individualize and exchange gift cards from their mobile phones.

On a currency-neutral basis, the company expects FY ’11 growth at the top end of its high-single digit target range. Nike expects reported revenue growth to be lower due to weaker foreign currencies versus last year. For Q2, the company expects revenue growth slightly below reported futures growth. At its last earnings call in September, Nike said that it expects increasing pressure from FX headwinds, rising input costs, and higher freight costs. The company expects full year FY ’11 gross margin about 50 basis points below FY ’10, with relatively flat margins in Q2 and more challenging comparisons in the second half. The company expects FY ’11 demand creation to grow at a mid-single digit rate. The company anticipates Q2 demand creation to grow at a low-single digit rate, with spending below prior year in the second half as compared against the heavy investments in World Cup marketing in Q4 last year. 

Early this year, the company unveiled its strategy for long-term growth across its global portfolio of brands and businesses, indicating its main financial objectives through 2015 to include high single-digit revenue growth, mid-teens earnings per share growth, and a return on invested capital of 25%. The company's target included revenues of $27 billion by the end of fiscal 2015 based on growth expectations across its portfolio, like the Nike Brand, Cole Haan, Converse, Hurley, Jordan Brand, Nike Golf and Umbro.

During the quarter under review, Nike announced the extension of its license agreement with Perry Ellis International (NASDAQ: PERY) in which Perry Ellis will continue to design, produce, manufacture and distribute men's, women's and children's swimwear, performance and casual swimwear products, select apparel and swim equipment within North America under the Nike Swim brand through 2014. Perry Ellis International will maintain distribution through its current account base of sporting goods stores, department stores and specialty swim accounts, while also focusing on growing its accessory and team sales business by adding on additional school and aquatic club programs.

The company has been rewarding its shareholders through stock buy backs and generous dividend hikes. Nike recently raised its quarterly dividend by 15% to 31 cents a share on its Class A and Class B common shares. In terms of stock performance, Nike shares have gained nearly 35% since the beginning of the year. 

Full Disclosure: None.
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