Nike, Inc. reported net earnings decreased slightly in its second quarter ended Nov. 30 due to higher losses from discontinued operations. Earnings from continuing operations grew 8.5 percent to $521 million. Revenues grew 7.4 percent to $5.96 billion and delivered double-digit revenue growth on a currency neutral basis.
The bottom-line growth reflected SG&A leverage and an increase in other income, 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
Revenues for 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.
Following the completion of the previous program, the Company began repurchases under the four-year, $8 billion program approved in September 2012. Of the total shares repurchased during the second quarter, 3.1 million shares were purchased under this program at a cost of approximately $294 million.
As of the end of the quarter worldwide futures orders for Nike Brand athletic footwear and apparel, scheduled for delivery from December 2012 through April 2013 totaled $9.3 billion, 6 percent higher than orders reported for the same period last year. Excluding currency changes, reported orders would have increased 7 percent.
The Company continually evaluates its existing portfolio of businesses to ensure resources are invested in those businesses that are accretive to the Nike Brand, and represent the largest growth potential and highest returns. On May 31, 2012, the Company announced its intention to divest of the Umbro and Cole Haan businesses, which will allow it to focus resources on driving growth in the Nike, Jordan, Converse and Hurley brands.
On November 30, 2012, the Company completed the sale of certain assets of the Umbro brand to Iconix Brand Group for $225 million. For the second quarter ended November 30, 2012, the Company recorded a loss of $107 million, net of tax, on the sale of these assets, representing the sale price less the value of the Umbro assets sold, the release of the associated cumulative translation adjustment, and other miscellaneous charges, offset by a tax benefit on the loss. This loss is included in the Net Loss from Discontinued Operations.
On November 16, 2012, the Company announced it had reached a definitive agreement to sell Cole Haan to Apax Partners for $570 million. As of November 30, 2012, the Company classified Cole Haan as an asset held-for-sale and included the results of Cole Haan's operations in the Net Loss from Discontinued Operations. The Company expects to complete the sale of Cole Haan in the third quarter of fiscal 2013, and to record a gain on the sale at that time.
For the second fiscal quarter of 2013, the Company's Net Loss from Discontinued Operations was $137 million. This includes the loss recorded for the sale of the Umbro brand of $107 million, net of tax, in addition to net operating losses and divesture transaction costs for Umbro and Cole Haan during the period, net of tax.