Jun 29, 2012
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Nike profit hit by costs, shares fall

Jun 29, 2012

Nike Inc missed quarterly profit estimates for the first time in at least two years as higher spending and increased costs of materials used in its shoes and T-shirts hurt margins, while demand eased in international markets.

The results sent shares of the world's largest sportswear maker down nearly 13 percent in extended trading on Thursday.

Orders of Nike branded shoes and clothes scheduled for delivery from June through November, a closely-watched metric of demand known as "futures orders" rose 7 percent. That is less than half of the rise of futures orders in the fiscal third quarter.

In the fourth quarter that ended May 31, futures orders rose only 5 percent in Greater China, down from a 24 percent increase a year earlier, a sign that even the popular Nike "swoosh" is not immune to slowing global economic growth.

Analysts and investors have been worried about a cooling in demand as footwear trends typically last about two to three years. Nike has been hot in the running shoe market for almost two and a half years now, said Morningstar analyst Paul Swinand.

The company earned $549 million, or $1.17 cents a share, in its fourth quarter, compared with $594 million, or $1.24 a share, a year ago.

Analysts, on average, had been expecting the company to earn $1.37 share, according to Thomson Reuters I/B/E/S.

Revenue rose 12 percent to $6.5 billion.

Gross margins fell 1.5 percentage points in the fourth quarter and have been declining for more than a year.

"While we had expected some gross margins decline and some increase in spending with the Olympics and soccer championships, both are higher than expected," said Swinand.

Swinand also said the drop in the share price could be a chance for investors to buy shares of the company, as he did not think the company has any flaws in execution.

Matt Arnold, consumer discretionary analyst for Edward Jones, saw improvement ahead for Nike.

"Margins will eventually become better and they have already taken pricing actions, so in general we think it is a matter of time. Nike is a strong brand with a lot going right for it," said Arnold.

Nike's finance chief, Don Blair, said higher input costs were the primary reason for the profit drop in the quarter. Higher prices and lower air freight expenses helped mitigate the rising materials costs.

The company also said it had more inventory than desired in China and Western Europe, raising questions about how much it would have to discount in those regions to clear off merchandise.

"There's inventory that's been piling up for quite a few quarters ...that can take a few quarters," said Canaccord Genuity analyst Camilo Lyon.

Shares of Nike, based in Beaverton, Oregon, were down 12.9 percent at $84.40 in after-hours trading on Thursday after closing at $96.89 on the New York Stock Exchange.

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