Shares of footwear and athletic apparel retailer Nike (NKE) rallied last week, after the company reported strong third quarter earnings that exceeded analyst estimates. For the quarter ending on February 28, the Beaverton, Oregon-based company earned 73 cents per share, or $662 million, a 16% improvement from the 61 cents per share, or $569 million, it earned in the prior year quarter. Analysts have expected the company to earn 67 cents per share. Revenue surged 9.4% to $6.19 billion, slightly missing the $6.23 billion analysts were expecting, but it didn’t matter much – shares rallied 8% last Thursday after the company reported its third quarter results.
Nike’s robust results alleviated investor concerns that slowing growth in Asia would derail the company’s global growth prospects. As expected, revenue in China slid 9% to $635 million, while sales in Japan dropped 13% to 175 million. However, orders for Nike products in the current quarter rose 3% – a complete surprise to analysts, who had projected a decline of 4.3%.
North America remained the company’s strongest segment, reporting 18% sales growth to $2.5 billion. Debt-stricken Western Europe managed to post 8% sales growth to $1.0 billion, while Central & Eastern Europe – considered high growth markets – gained 16% to $266 million. Revenue from emerging markets also rose 6% to $839 million.
Future orders in North America also rose 11%, while total worldwide futures orders for footwear and apparel rose 6% to $9.9 billion. Nike’s e-commerce business also rose 33% during the quarter. In addition, the company recently started a three-month program to create products and services that inspire athletes using Nike technology. Recent technological enhancements to its footwear line include Flyknit – which adapts to moving feet, and Hyperwarm & Hypercool apparel, which regulate heat and cooling in harsh weather conditions.
During the third quarter, Nike marked down its older products to clear its inventory, in order to make way for new products, which it believes can revive growth. It faces a steep challenge in clearing out products in China, where inventory hangover remains as far back as the 2008 Beijing Olympics. Labor cost inflation is also expected to remain a major challenge in China.
Despite these markdowns, Nike’s gross margin expanded 30 basis points from 43.9% to 44.2% during the quarter – the first time gross margin has improved in two years. This improvement helped offset rising labor and material costs. Looking forward, Nike expects revenue to grow a high single-digits, while EPS is expected to rise by the mid-teens, in line with Wall Street estimates.
During the quarter, Nike bought back 4.9 million shares. Out of its $8 billion previously authorized, only $548 million has been spent. Shares of Nike currently trade at 19.58 times forward earnings, with a 5-year PEG ratio of 2.01. The stock pays a quarterly dividend of 21 cents per share – a 1.41% yield at current prices.
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