Nike 4Q Profit Fell 7.6% As Margins Slid, Costs Jump
06/28/2012| 05:57pm US/Eastern
--Nike's sales rise as products resonate with consumers but weaker margins again pressure results
--Shares skid in after-hours as results missed Wall Street's expectations
--CEO touts ability to deliver profit growth but concedes global economic headwind challenges will remain this year
(Updates throughout with additional background, the latest stock quote and more financial details.)
By John Kell
Nike Inc.'s (>> NIKE, Inc.) fiscal fourth-quarter slid 7.6% as weaker gross margins and higher marketing costs tied to product launches and two key global sporting events more than offset solid revenue growth across all global markets.
Shares slipped 10% to $86.83 in after-hours trading as results missed Wall Street's expectations, putting the stock in the red for the year and badly trailing double-digit gains seen for a handful of athletic-focused stocks in 2012, including Under Armour Inc. (UA) and Foot Locker Inc. (>> Foot Locker, Inc.).
Though Nike continues to resonate with consumers with an evolving product slate that features new styles, colors and materials, weaker margins have pressured results. Gross margin dropped to 42.8% from 44.3%, the sixth-straight quarter on a year-over-year basis. The latest decline was attributed to higher product costs and increased investments in Nike's digital business, offsetting price increases and lower air freight costs tied to improved factory deliveries.
So-called "demand creation expenses" jumped 23% to $760 million in the latest quarter, driven by marketing costs tied to key product launches, the European Football Championships and the Summer Olympics.
President and Chief Executive Mark Parker on Thursday touted Nike's ability to deliver profit growth for the year despite global economic headwinds, though he conceded those challenges would remain into the next year.
Worldwide future orders, an indicator of growth, jumped 7% while inventories--which have surged of late--increased 23%.
The inventory expansion comes as Nike has developed a slate of new apparel, footwear and tech offerings that have made analysts positively giddy. Those products include Nike's Flyknit running shoes, Nike+ FuelBand movement-tracking wristband, and apparel launches tied to the National Football League, 1992 men's basketball "Dream Team" and the Summer Olympics.
Product launches such as the Nike Free running line and the Nike+ FuelBand, as well as new features like Lunar shoe cushioning, have helped Nike's products remain relevant as consumers remain cautious about spending. Nike is in the midst of a strong athletic-footwear cycle that has driven sales for more than two years, and which analysts say typically occur over a span of three to five years.
For the quarter ended May 31, Nike reported a profit of $549 million, or $1.17 a share, down from $594 million, or $1.24 a share, a year earlier. The latest period included a $24 million restructuring charge related to Nike brand's Western Europe operations. Analysts polled by Thomson Reuters most recently projected per-share earnings of $1.37.
Revenue increased 12% to $6.5 billion, or 14% excluding currency impacts. The company in March expected revenue growth in the low double digits on a percentage basis.
By category, footwear and apparel sales jumped 12% and 10%, respectively. The smaller equipment unit posed a 20% increase in sales.
Sales growth was strongest in greater China, up 18%, while emerging markets, North America, central and eastern Europe, and Japan all notched double-digit top-line growth. Nike's western Europe sales posted a more modest 2% increase, as the macroeconomic situation in that region has worsened in recent months. Nike's growth in western Europe also comes under the 7% increase rival Adidas AG (ADDYY, ADS.XE) reported in late April.
In May, Nike announced plans to shed its Cole Haan and Umbro brands, its first planned divestitures in roughly four years, as the company plans to focus more on its namesake, Jordan, Converse and Hurley brands. Cole Haan and Umbro contributed $797 million to the top line in fiscal 2012, with the combined loss before interest and taxes totaling $43 million.
-Tess Stynes contributed to this article
-Write to John Kell at email@example.com