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Nike profit up but U.S. and margins disappoint
2007-03-22
Nike Inc. (NYSE:NKE) reported on Thursday an 8 percent rise in net profit, topping analysts' estimates, but soft sales at U.S. malls and a forecast of lower gross margins this quarter sent its shares down 3 percent. While analysts were cheered by 9 percent growth in global forward orders, they were worried by a mere 2 percent sales rise in the United States, a decline in sales in Japan, and continued softness in Britain and France. "The U.S. is a concern," said Sara Hasan, an analyst at McAdams, Wright, Ragen who has a "buy" rating on Nike shares. "That hit people out of left field." The world's largest maker of athletic shoes and clothing said gross margins, a measure of sales minus costs of goods sold, would be at or slightly below year-ago levels in the fourth quarter and fiscal year. "It's going to be a very important issue that a lot of investors will focus in on tomorrow in terms of their investor decisions on Nike," Susquehanna Financial analyst John Shanley, who has a "neutral" rating on Nike, said of the gross margin. Nike posted third-quarter net profit of $350.8 million, or $1.37 per share, compared with $325.8 million, or $1.24 per share, a year earlier and an average analyst estimate of $1.33, according to Reuters Estimates. Quarterly sales rose 9 percent to $3.93 billion. A favorable currency exchange rate boosted revenue growth by 3 percentage points and gross margins improved in the period. MALL TROUBLE The global brand, known for its "swoosh" logo, has seen its two largest U.S. customers, Foot Locker (NYSE:FL) and Finish Line (Nasdaq:FINL), struggle recently with disappointing sales. Some on Wall Street question whether the popularity of non-athletic footwear has cut into sales of the company's primary products. "It's no secret that mall-based athletic specialty guys have had a pretty tough year," Nike Brand President Charlie Denson said on a conference call. "We obviously are a big part of this business so I think we've experienced some of that as well." Nike said it was working to fix the issues it is having at malls but Susquehanna's Shanley said it was unclear whether the company would be able to turn around that business and achieve target sales growth rates in the mid-to-high single digits. "It's having a major negative effect on Nike's U.S. business," said Shanley, who estimated that Nike derives 21 percent of its U.S. revenues from the two store chains. In Europe, Nike sales rose 15 percent, though the impact of a weak U.S. dollar alone boosted sales by 9 percent. Sales in Asia Pacific grew 11 percent, but Japan saw a 3 percent drop. Revenues from Nike's other businesses -- including hot brands such as Converse and Hurley and its lower-cost Exeter Brands division, where shoes are sold in chains such as Payless ShoeSource (NYSE:PSS) -- rose 15 percent. On a positive note, Hasan said a 7 percent rise in inventories was in line with Nike's revenue jump. In recent quarters, analysts have worried over inventory rises that have exceeded revenue growth. "I think that's a huge strong point," Hasan said of the inventory rise. "People have been really focused on that." Nike shares fell $2.91 to $105.69 in after-hours trade after closing at $108.60 on the New York Stock Exchange. The stock -- up 11 percent in 2007 and up 27 percent since January 2006 -- are valued at nearly 17 times 2008 earnings, above German rivals Adidas AG (ADSG.DE) at nearly 12 and Puma AG (PUMG.DE) at 12.5. Nike also trades above much smaller U.S. rival Skechers USA (NYSE:SKX) and the Dow Jones U.S. Consumer Goods Index (^DJUSNC), at 15.9 times forward-looking earnings.
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