Nike Beats on Q4 Earnings Despite FIFA Expenses
Shares of the official sponsor of The FIFA World Cup 2014, Nike Inc. (NKE) gained approximately 3% in yesterdays’ after hours trading session following the company’s better-than-expected fourth-quarter and fiscal 2014 results.
The athletic apparel, footwear and accessories retailer reported earnings of 78 cents per share for the fourth quarter which increased 3% year over year and surpassed the Zacks Consensus Estimate by a couple of cents.
Results were driven by an impressive top line, improvement in gross margin and moderately lower average share count. This was partly offset by higher selling, general and administrative (SG&A) expenses due to marketing investment prior to the mega soccer World Cup, increased tax rate and negative effect of currency rates.
Delving Deeper
The company’s top line surged 11% to $7,425 million and also came ahead of the Zacks Consensus estimate of $7,339 million on the back of robust demand for its brands and significant growth in its main categories and all of its locations. However, on a currency neutral basis, sales jumped 13%.
Revenue at the company’s NIKE Brand segment soared 13% year over year to $7 billion on a currency neutral basis. The segment registered growth across every category and every region except Japan.
Further, at the company’s Converse subsidiary revenues soared 15% to $410 million on a currency neutral basis, resulting from solid performance in the U.S., UK and China, all being the company’s biggest distribution centers.
Gross profit escalated 15% to $3,385 million with gross margin increasing 170 basis points (bps) to 45.6%. Increase in gross margin was aided by higher average prices, sustained growth in the direct to consumer operations with high margins, partly offset by greater product input expenses and negative impact from exchange rates.
SG&A rose 21% to $2,448 million, on account of a 36% rise in demand creation cost and a 13% surge in operating overhead costs.
Demand creation costs surged due to increase in product launch promotions and investment in World Cup-themed commercials. Ahead of the world’s mega soccer event, Nike signed two major European soccer players, Cristiano Ronaldo and Wayne Rooney for World Cup commercials.
On the other hand, operating overhead costs were pushed by infrastructure related investments, greater direct to consumer expenses (owing to growth of same store sales and introduction of new outlets) and expenses related to digital innovations.
Fiscal 2014 Performance: A Synopsis
Earnings of the athletic apparel and shoe powerhouse for fiscal 2014 came at $2.97 per share which was 11% higher than the fiscal 2013 earnings of $2.68 and a penny ahead of the Zacks Consensus Estimate of $2.96. Results were driven by an impressive top line, improvement in gross margin, lower tax rate and moderately lower average share count, partly offset by higher SG&A expenses and negative effect of currency rates.
The company’s top line surged 10% to $27,799 million in fiscal 2014 on the back of robust demand for the company’s brands and significant growth in its main categories and all of its locations. However, on a currency neutral basis, sales jumped 11%, and also came ahead of the Zacks Consensus estimate of $27,684 million.
Revenue at the company’s NIKE Brand segment increased 8% year over year to $26.1 billion on a currency neutral basis. The segment registered growth across every category and every region. Further, at the company’s Converse subsidiary, revenues jumped 15% to $1.7 billion on a currency neutral basis, powered by solid performance in the U.S., UK and China.
Balance Sheet
Nike ended the fiscal with cash and short-term investments of $5,142 million, compared with $5,965 million last year. Higher share repurchases and dividend payments as well as increased capital investment more than offset the higher net income benefit. Therefore, cash and short-term investment was $823 million lower than fiscal 3013 level. Inventories improved 13% to $3,947 million.
Nike’s long-term debt (excluding current maturities) stood at $1,199 million, compared with $1,210 million in the previous fiscal. Shareholders’ equity was $10,824 million at the end of the fiscal, as against $11,081 million last fiscal.
Share Repurchase
During the quarter, Nike bought back 12.3 million shares worth $912 million. This buyback was part of the 4-year authorization worth $8 billion, approved by the board in Sep 2012. So far under the program, the company has bought back 51.9 million shares worth nearly $3.4 billion.
Future Orders
The company’s global future orders, slated to be delivered between Jun–Nov 2014, soared 11% to $13.3 billion, from the comparable prior-year period. On a currency neutral basis future orders increased 12%.
Outlook
Looking ahead, the company intends to continue its investment toward growth strategies in fiscal 2015. Nike anticipates its revenues for fiscal 2015 to grow in the range of high-single-digit. Gross margin is expected to improve 75 bps in the fiscal driven by growth in direct-to-consumer business, better product mix and price hike to offset inflation. SG&A expenses are projected to grow at a similar rate to that of fiscal 2014 while effective tax rate for fiscal 2015 will be nearly 25%.
For first-quarter fiscal 2015, the company anticipates revenue to grow in the low-double-digit range while gross margin to improve 75 bps due to the above mentioned factors.
Conclusion
Nike’s solid quarterly performance reflects its concentration on adopting innovations, to keep up with its customers. In spite of macroeconomic headwinds, the company’s results remain impressive, backed by its continuous focus on exploiting growth opportunities along with efficient risk management. Going forward, Nike plans to follow these standards in order to enhance shareholder value in the long run.
However, we remain slightly uncertain about the company’s future performance due to unfavorable currency fluctuations coupled with the impact of recent currency devaluation in developing markets. Further, we expect soft discretionary spending and intense competition from its peers amid rapidly changing customer preferences to undermine Nike’s future prospects.
Therefore, Nike currently carries a Zacks Rank #4 (Sell).
Other Stocks to Consider
Other better-ranked stocks in the apparel-shoe industry include Iconix Brand Group, Inc. (ICON), Brown Shoe Co. Inc. (BWS) and Carter’s, Inc. (CRI), all carrying a Zacks Rank #2 (Buy).
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