Nike reported revenues increased 18 percent to $5.7 billionin its second quarter ended Nov. 30, and advanced 16 percent on a currency-neutral basis. Earnings rose 2.6 percent due to the impact of a lower gross margin but came out slightly ahead of Wall Street’s expectation. Futures orders rose 13 percent year over year. An overview of the second quarter showed that revenue growth at Converse offset lower revenues at NIKE Golf, Cole Haan, Hurley and Umbro.
“Our strong second quarter results demonstrate that the Nike, Inc. portfolio is a powerful engine for growth,” said Mark Parker, president and CEO, Nike, Inc. “We’re able to accomplish this by staying focused on what we do best – deliver innovative products and experiences that serve athletes, inspire consumers and reward our shareholders. Going forward we’ll continue to use the unique power of our portfolio to drive growth, manage risk and connect with consumers.”
Second Quarter Income Statement Review
Revenues for Nike, Inc. increased 18 percent to $5.7 billion, up 16 percent on a currency-neutral basis. Excluding the impacts of changes in foreign currency, Nike Brand revenues rose 18 percent with growth in every geography except Japan and in all key categories except Action Sports. Revenues for Other Businesses increased 5 percent with minimal impact from changes in currency exchange rates, as growth at Converse more than offset lower revenues at Nike Golf, Cole Haan, Hurley and Umbro.
Gross margin declined 260 basis points to 42.7 percent due primarily to higher product costs, which more than offset the positive effects of growing sales in our Direct to Consumer operations, price increases and ongoing product cost reduction initiatives.
Selling and administrative expenses grew at a lower rate than revenue, up 13 percent to $1.8 billion. Demand creation expenses increased 12 percent to $644 million driven by marketing support for key product initiatives and investments in consumer events for the Nike Brand. Operating overhead expenses increased 13 percent to $1.2 billion due to additional investments made in our wholesale and Direct to Consumer businesses.
Other expense, net was $9 million, primarily comprised of net foreign exchange losses, partially offset by non-recurring items. For the quarter, we estimate the year-over-year change in foreign currency related gains and losses included in Other expense, net combined with the impact of changes in foreign currency exchange rates on the translation of foreign currency-denominated profits decreased Income before income taxes by approximately $17 million.
The Effective tax rate was 24.1 percent compared to 25.0 percent for the same period last year, an improvement due primarily to a reduction in the effective tax rate on operations outside the United States.
Net income increased 3 percent to $469 million and Diluted earnings per share increased 6 percent to $1.00, reflecting a 4 percent decline in the weighted average diluted common shares outstanding. Wall Street’s consensus estimate was 97 cents a share.
November 30, 2011 Balance Sheet Review
Inventories for Nike, Inc. were $3.2 billion, up 35 percent from November 30, 2010. Inventories were higher compared to a year ago due to significantly higher average unit product cost and growth in total units. Nike Brand inventories were up 39 percent. Approximately 20 percentage points of the increase was due to higher wholesale unit inventories as a result of strong demand and more timely deliveries from our product suppliers. The remaining 19 percentage points of the increase in Nike Brand inventories were primarily a result of significantly higher product input costs. Relative to revenues and futures, current unit inventories remain broadly consistent with levels reported prior to the 2009 – 2010 economic downturn.
Cash and short-term investments were $3.4 billion, $1.4 billion lower than last year as higher working capital investments reduced free cash flow from operations, while share repurchases, dividend payments and long-term debt payments also increased year-on-year.
During the second quarter, a total of 7.6 million shares were repurchased for approximately $672 million as part of our four-year, $5 billion share repurchase program, approved by the Board of Directors in September 2008. As of the end of the second quarter, a total of 45.6 million shares were repurchased for approximately $3.6 billion under this program.
As of the end of the quarter worldwide futures orders for Nike Brand athletic footwear and apparel, scheduled for delivery from December 2011 through April 2012, totaled $8.9 billion, 13 percent higher than orders reported for the same period last year. Changes in foreign currency exchange rates did not have a significant impact on reported futures orders.