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NIKE, Inc. (NYSE:NKE) today reported financial results for its fiscal 2013 second quarter ended November 30, 2012. For continuing operations, strong demand for NIKE, Inc. brands propelled double-digit revenue growth on a currency neutral basis, and diluted earnings per share grew faster than revenue due to SG&A leverage, an increase in other income and a lower average share count, which more than offset the impact of a slightly lower gross margin and an increase in the effective tax rate.
“Our strong second quarter results show that our growth strategies are working, even under challenging macroeconomic conditions,” said Mark Parker, President and CEO, NIKE, Inc. “We have a focused and flexible portfolio that allows us to target the biggest growth opportunities at all levels – brand, category and product. We stay connected with our consumers and that enables us to deliver innovations that excite the marketplace, grow the business and deliver more value to shareholders.”*
Second Quarter Continuing Operations Income Statement Review
Revenuesfor NIKE, Inc. increased 7 percent to $6.0 billion, up 10 percent on a currency-neutral basis. Excluding the impact of changes in foreign currency, NIKE Brand revenues rose 11 percent, with growth in all key categories, product types and geographies except Greater China. Revenues for Other Businesses increased 6 percent on a currency-neutral basis, as Converse, Hurley and NIKE Golf all increased revenues during the quarter.
Gross margin declined 30 basis points to 42.5 percent. Gross margin benefitted from pricing actions and easing material costs; however, these benefits were more than offset by higher labor costs and unfavorable changes in foreign exchange rates. Additionally, gross margin was negatively impacted by a shift in the mix of the Company’s revenues to lower margin products and businesses.
Selling and administrative expenses grew at a slower rate than revenue, up 6 percent to $1.8 billion. Demand creation expenses were $613 million, relatively unchanged from the prior year. Operating overhead expenses increased 10 percent to $1.2 billion due to additional investments made in the wholesale business to support growth initiatives and higher Direct to Consumer costs as a result of higher volume driven expenses in existing NIKE-owned stores and the cost of new stores opened in the last year.
Other income, net was $17 million, comprised primarily of foreign exchange gains and other non-operating items. For the quarter, the Company estimates the year-over-year change in currency related gains and losses included in other income, net, combined with the impact of changes in currency exchange rates on the translation of foreign currency-denominated profits, increased pretax income by approximately $10 million.
The effective tax rate was 26.8 percent, compared to 24.1 percent for the same period last year. The increase was largely as a result of an increase in our effective tax rate on foreign operations.
Net income from continuing operations increased 9 percent to $521 million while diluted earnings per share increased 11 percent to $1.14, reflecting a 3 percent decline in the weighted average diluted common shares outstanding.
November 30, 2012 Balance Sheet Review for Continuing Operations
Inventories for NIKE, Inc. were $3.3 billion, up 9 percent from November 30, 2011. NIKE Brand inventories increased 8 percent; of which 6 percentage points of growth were due to higher NIKE Brand wholesale unit inventories to support future demand and 2 percentage points of growth were due to higher average product cost per unit.
Cash and short-term investments were $3.5 billion, $160 million higher than last year mainly as a result of higher net income and proceeds from the sale of the Umbro brand.
During the second quarter, NIKE, Inc. repurchased a total of 4.0 million shares for approximately $384 million and concluded the Company’s previous four-year, $5 billion share repurchase program approved by the Board of Directors in September 2008. During this program the Company purchased a total of 59.4 million shares at an average price of $84.16.