Sunday, June 27, 2010

Nike shares drop as it sees increased costs

By Andria Cheng, MarketWatch

Athletic-gear giant Nike Inc. shares fell Thursday after the company's fiscal fourth-quarter sales fell short of Wall Street expectations and it forecast increased cost pressures.

Nike (NKE 70.12, +0.49, +0.70%) shares fell 4.5% to $69.27 in late trading.

"Currency changes and input cost inflation will put significant pressure on our reported top and bottom line results for fiscal 2011," said Chief Financial Officer Don Blair on a call with analysts Wednesday afternoon.

He said costs for product components such as oil, labor and freight will put "significant" pressure on gross margins, which could be as much as 1 percentage point below the rate last year. He also forecast higher air freight costs to meet stronger-than-expected demand for running products. Some analysts had expected gross margin would widen instead.

Analysts have said rising materials costs as well as higher labor wages and an appreciating yuan in China will likely hurt Nike. As uncertainty over the European economy lingers, that also may hurt consumer demand in the region while a declining euro may dent sales after they are translated back to the U.S. dollars, they said.

"The cautionary tone on input cost inflation is concerning," said Sterne Agee analyst Sam Poser. Still, he said Nike has relatively light China manufacturing exposure, 35% versus as much as 80% for its footwear rivals. Nike also is in the midst of a multiyear lean manufacturing/global supply chain initiative that should help alleviate pressures, Poser wrote in a note.

Nike has consolidated factories to help lower source costs.

Nike's warning helped send down shares in the retail stocks and others in the consumer discretionary sector. See full story on retail stocks.

Athletic-shoe retailer Foot Locker Inc. (FL 13.32, -0.16, -1.19%) shares fell 2%. Apparel company VF Corp. (VFC 75.33, +0.61, +0.82%) was down 1.8%. Jones Apparel Group Inc. (JNY 17.55, +0.39, +2.27%) fell 5.3%. Liz Claiborne Inc. (LIZ 4.57, 0.00, 0.00%) declined 3.2%.

The forecast overshadowed the company's report that fiscal fourth-quarter profit jumped 53%, helped by gains in China and other emerging markets.

Net income rose to $521.9 million, or $1.06 a share, from $341.4 million, or 70 cents, a year earlier, when it had $145 million in restructuring charges. Sales in the quarter ended May 31 rose 8% to $5.08 billion, the Beaverton, Ore.-based company, which also owns brands including Umbro, Cole Haan, Hurley and Converse, said after the close of regular trading. Excluding the impact of currency translations, sales would have risen 4%, Nike said.

Nike's $27 Billion Sales Plan
Nike plans to increase sales by more than 40% to $27 billion in five years. MarketWatch's Andria Cheng talks to Nike brand President Charlie Denson about how apparel and retail expansion fit into that growth plan and how Nike aims to increase its soccer share in this year's World Cup.

Analysts, on average, estimated Nike (NKE 70.12, +0.49, +0.70%) to earn $1.05 a share on sales of $5.13 billion, according to FactSet.

Worldwide orders of shoes and apparel for delivery between June and November rose 7% to $8.8 billion. Excluding currency impact, orders, a gauge of future demand, would have jumped 10%.

Orders in North America rose 8%. They rose 19% in Greater China and surged 30% in emerging markets. They declined 2% each in Western Europe and in Central and Eastern Europe, hurt by the impact of currency translations. Without the currency impact, orders would have been up 11% and 3% separately in the each of the European regions.

Nike has counted on aggressive expansion in developing markets, led by China and also including Brazil and India, as part of Chief Executive Mark Parker's goal to increase sales by more than 40% to $27 billion in five years. Nike's growth goal: $27 billion in 5 years.

Amid the World Up furor in South Africa, Nike also has launched a "Write the Future" marketing campaign, featuring soccer stars including Cristiano Ronaldo and Wayne Rooney, which analysts have said helped the company, not an official World Cup sponsor, generate publicity and buzz against its top rival Adidas AG. (DE:ADS 41.36, +0.18, +0.44%) .

Soccer related sales were up about 40% in the quarter with futures orders up at least 10% through the holiday time period, Nike Brand President Charlie Denson said on a call Wednesday.