NEW YORK (

TheStreet

) -

Nike

(NKE) - Get Report

reported better-than-expected fourth-quarter earnings, but also highlighted higher product costs and a glut of inventory.

Gross margins took a hit, sliding 260 basis points to 42.7%, while inventory levels ended the quarter up 35%.

"The other factor (and I think this is true of all retail), is that we will have to live with inventory increases. In the '09/10 downturn, most companies pared inventory to the bone to try to minimize working capital," says Rahul Sharma, founder of Neev Capital. "That took inventory to unsustainably low levels. We are now at the stage where inventory needs to grow to drive sales versus those lean levels. In other words, companies do need to take some risk and grow inventory to drive sales, otherwise you can't service demand."

But Nike's brand power and domination in its category still led it to higher profits and sales even as it raised prices to offset increased production costs.

During the quarter, the athletic apparel and footwear giant earned $469 million, or $1 per share, compared with $457 million, or 94 cents, in the year prior. Revenue rose 28% to $5.7 billion. Analysts were calling for a profit of 97 cents on revenue of $5.63 billion.

Futures orders - a key metric for the company -- grew 13% to $8.9 billion.

-

Reported by Jeanine Poggi in New York.

Follow TheStreet.com on

Twitter

and become a fan on

Facebook.