Friday, March 18, 2011

NKE 3Q Results – First Miss Since ‘06

Nike, Inc. reported earnings today for their third quarter ended February 28, 2011. 3Q EPS was $1.08 versus $1.01 last year but less than Street expectations of $1.12. Revenues for the quarter increased 7% year-over-year to $5.08bn as sales in every region besides Japan rose. $5.5mn shares were repurchased during the quarter.

NKE traded down as much as 11% on the EPS miss and gross margin concerns through the back half of 2011. 3Q gross margin contracted 110 basis points compared to 2010, and management expects to see a 300 bps decrease in 4Q. The gross margin pressure is caused by rising sourcing costs which will force higher pricing points. This, however, is an issue facing many companies throughout the sector and we believe NKE will be able to effectively manage gross margins through 2H11.

Despite the aggressive sell-off today, we are still bullish on Nike’s story and fundamentals. Futures orders for branded products scheduled for delivery from March to July totaled $7.9bn, an increase of 9% compared to last year. NKE remains an innovator in the industry and the brand continually shows strength, and we are reticent to sell at this time given the long-term potential upside in the name.


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