Nike Inc. (NKE), a global leader in sports equipment and apparel, came out with its third-quarter 2012 results. The company’s earnings came in at $1.20 per share, up 11.1% from the year-ago earnings of $1.08 per share, surpassing the Zacks Consensus Estimate of $1.16 per share. In the quarter, robust demand scenario for Nike brands coupled with selling and administrative expense leverage and lower share count boosted its bottom line.

Third Quarter at Length

Nike’s total revenue grew 15.1% to $5,846 million from $5,079 million in the prior-year quarter, primarily driven by growth in all key categories of NIKE Brand, and in geographic regions excluding Japan. Revenue for the quarter surpassed the Zacks Consensus Estimate of $5,829 million. During the quarter, all brands including Converse, Hurley, NIKE Golf and Umbro, reflected growth from last year, while Haan remained flat.

Nike’s quarterly gross profit surged 10% from the year-ago quarter to $2,561 million, while gross margin contracted 200 basis points to 43.8%. The margin contraction mainly resulted from higher product costs, offset by favorable profitability from Direct to Consumer operations, positive pricing actions impact and benefits from cost reduction initiatives.

Selling and administrative expenses for the quarter grew 10% to $1,802 million from $1,637 million in the year-ago quarter. Earnings before taxes (EBT) rose 9% to $770 million from $707 million in the year-ago period. However, EBT margin contracted 70 basis points from the prior-year quarter to 13.2%.

Global inventories rose 32% year over year to $3,356 million. Most of the growth in inventories came from increased product input costs and an altered product mix, while some of the upside was driven by higher wholesale unit inventories holding up the strong demand and on time deliveries from product suppliers. Nike ended the quarter with cash and cash equivalents of $2,021 million compared with cash balance of $2,132 million in the year-ago period.

During the quarter, the company repurchased 2.5 million shares for about $239 million as part of its 4-year, $5.0 billion program approved in September 2008.

Future Orders

Nike reported an increase of 15% in future orders to $9.4 billion from the prior-year quarter, which is scheduled for delivery from March through July 2012. Future orders measure customer orders, which are expected to be delivered in the coming season and are a widely used metric to gauge the retailer’s performance.

Our Take

Nike is the industry leader in the U.S. footwear and athletic apparel industry. In an attempt to expand its global reach and market share, Nike is aggressively expanding its operations in the emerging markets while focusing on direct-to-consumer business and other brands, which augur well for future operating performance. Moreover, the company’s near-to-debt free balance sheet offers financial flexibility to drive future growth.

However, Nike faces intense competition in both domestic and international markets from local as well as established players, such as Adidas AG (including Reebok), PVH Corporation (PVH) and Brown Shoe Company Inc. (BWS). These companies are primarily in athletic wear and intend to grab market share in active wear or lifestyle consumer products.

Currently, Nike maintains a Zacks #2 Rank, which translates into a short-term Buy rating. However, we retain a long-term ‘Neutral’ recommendation on the stock.

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