Nike Faces Falling Profits as Costs Increase – ValueWalk Premium

Nike Faces Falling Profits as Costs Increase

Nike Faces Falling Profits as Costs Increase

NIKE, Inc. (NYSE:NKE) is seeing a massive tumble in share price, from an opening price of $97.54 yesterday, the stock has made a steep fall of more than 10% and is now trading at around $87 (10:50 AM EDT). These bad tidings for Nike have come coupled with the disappointing financial statements filed by the company for the first quarter of fiscal 2012.

the Beaverton, Oregon-based company reported a 7.6% decline in net income, for the quarter that ended on 31st’ May 2012. This decline amounts to a $549 million or the profit of just $1.17 per share while the company garnered $1.24 profits per share for the same quarter of fiscal 2011. On the other hand stock analysts predicted a profit of $1.37 a share.

This major player of sporting goods industry has not missed a step in the past 4 years and has almost always outperformed on Wall street expectations. It is not that Nike has never seen a fall in profits, its just that the company has shown stability and miffed the analyst expectations at all times except in 2009 when the profits saw a huge decline of 30%, after the company had to bear major corporate restructuring costs. So what was the reason behind this fresh downslide:

– Nike’s Umbro and Cole Haan units have become a serious liability with a combined loss of about $43 million. Nike has declared its intention to divest these units and focus on Jordan, Converse and Hurley brands.

– Company is facing higher product costs that severely affect its gross margins.

– Nike’s quarterly report shows a rise of 12% in selling and administrative expenses and are now costing the company a revenue of $2 billion.

– The demand creation spendings have also been up 23%. Nike is furnishing marketing support for major product releases in the European Football Championships and the Summer Olympics.

The company is a favorite of many analysts who enjoy Nike’s consistency in showing results therefore we still believe Nike will steer its wagon in the right direction and once again exceed expectations for the upcoming quarter.


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