Tuesday, December 20, 2005

NIKE reports its second quarter

NIKE ( NKE) reported record results for its second quarter with revenues up 10%, net income up 15%, and earnings per share were up 18%.

During the quarter, the Company purchased a total of 2,926,400 shares for approximately $240 million accelerating its pace versus the previous quarter when about $150 million was purchased. The company’s share count has been reduced to about 263.7 million shares outstanding on a fully diluted basis versus a year ago at 270.5 million. In addition, almost $300 million in long term debt has been paid down in the last 12 months. On a TTM basis their return on invested capital was 24%.

The negatives…
  1. gross margins fell slightly to 43.5% from 44.1%

  2. European footwear revenues grew 0%. Total revenues on a YTD basis were +4% but pre-tax income is up 18%.

  3. Futures orders were somewhat disappointing…up only 2.5% after currency effects, up 7% before currency.

  4. U.S. gross margins down 170 basis points

  5. Japan remains slow but improving

The positives…
  1. Gross margins in Europe were actually up slightly.

  2. Total soccer business is $1.5 billion…this was a $40 million business in 1994. Take that Adidas!

  3. U.S., South and Central America, China, and Central Europe are very strong.

  4. U.S. had 20% unit growth in footwear. An amazing franchise.

The company has bought back close to $1 billion of its $1.5 billion authorization after only 18 months. The dividend has increased by 24% in the last year. Likely more to be seen both in dividend increases and increased buybacks.

The stock sold off about 3.5% after the close reflecting some pessimism about the slowing futures data.

In my opinion, the company is demonstrating that it continues to grow despite being 25% of the footwear market. There appears to be tremendous opportunity worldwide both in footwear and apparel. From the conference call, it seemed that challenging areas such as France, Germany, and Japan were beginning to show some signs of life.

Any weakness tomorrow based on what appears to be mostly currency related slippage in the futures data, will likely represent a buying opportunity, at least from my perspective. The company is trading at only about a 4.5% free cash flow yield and below an S&P P/E. The median of analysts' growth rate is only 13.5% but I think it could sustain 16%.


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