Nike earnings beat forecast, mounting costs still worrying investors

Nike, the global apparel and sporting equipment giant, reported earnings this week that topped estimates, but the company's gross profit margin took a hit amid high raw material costs.

The Oregon-based company said earnings per share increased 11 percent in its third fiscal quarter, beating analysts' projections. Revenue was also up, rising 15 percent from the year prior to $5.8 billion, with inventories jumping precipitously. The company noted the growth in revenue was promising, as it increased in all of its markets aside from Japan.

However, Nike's gross margin declined 200 basis points to 43.8 percent, the result of the high costs the company has had to pay for raw materials. Volatile commodity prices have affected businesses operating across a wide array of sectors. Nike endeavored to offset the effects of such rising raw material expenditures through aggressive business cost reduction initiatives and a hike in retail prices, though the jump in commodities still negatively impacted profitability.

Nike's net income increased 7 percent to $560 million, a figure that topped expectations and underscored the success of the sporting giant's marketing and consumer campaigns. Nike inventories registered $3.4 billion in its third quarter, a 32 percent jump. Company executives said roughly 20 percentage points of the increase in inventories could be attributed to substantially higher input costs and a shift in product offerings. Robust demand from wholesalers accounted for the 12 remaining percentage points of the increase, Nike noted.

Nike has overhauled supply chain management in the wake of the recession, and the company said its current unit inventories remain "broadly consistent" with figures reported prior to the economic contraction. Many apparel companies have worked with procurement consultant firms to implement strategic sourcing best practices in an effort to bolster profitability since the financial and housing crises struck in 2007.

Nike chief executive Mark Parker said the company's strong third quarter earnings underscored how it has deftly navigated the post-recessionary economic climate. He conceded future growth prospects were murky, as Europe continues to totter on the edge of a recession and amid worries the nascent economic recovery in the U.S. will be ephemeral. Like most companies, Nike is remaining cautiously optimistic about growth prospects in the second half of the year.

"We had a strong third quarter. Our relentless focus on innovation delivered powerful new products and services for athletes and consumers, and continues to drive value to our shareholders," Parker said in a statement. "The environment remains volatile, but I'm optimistic about the future. We're starting a great season of major sports events and we have a pipeline full of innovation to fuel growth over the long term."

The Associated Press reports analysts are concerned mounting costs will continue to erode Nike's profitability over the duration of 2012. Aside from paying more for labor and materials, the company was also impacted by surging oil prices, with freight costs rising significantly from the year prior. Parker said cost pressure was easing, though he added it would not likely fall to prior lows, at least in the short term.

Moreover, analysts cautioned Nike and many of its competitors could only raise retail prices to a certain extent before they risk alienating their customer base. Although luxury spending has remained strong over the past few years, other segments have not fared as well.

"Margins are expected to remain surprisingly choppy as high inventory and continued input cost increases pressure gross margin, and event-driven marketing drives [expenses] higher," Susquehanna Financial Group analyst Christopher Svezia told the AP.

Shares of Nike closed roughly 3 percent lower Thursday following the release of the earnings report, although they had climbed 15 percent since the beginning of the year amid an overall rally in equities.