10-QPeriod: Q3 FY2006

NIKE, Inc. Quarterly Report for Q3 Ended Apr 7, 2006

Filed April 7, 2006For Securities:NKE

Summary

NIKE, Inc.'s (NKE) Q3 fiscal year 2006 report for the period ending February 28, 2006, showcases robust revenue and net income growth. Revenues increased by 9% to $3.61 billion compared to the prior year, driven significantly by strong demand in the U.S. region. Net income saw a substantial 19% increase, reaching $325.8 million, translating to diluted earnings per share of $1.24, a 23% year-over-year improvement. This growth was supported by effective expense management, with selling and administrative expenses decreasing as a percentage of sales. Despite overall positive performance, the company experienced a slight decline in gross margin percentage due to lower in-line net pricing margins for footwear, particularly in the U.S. and EMEA regions, influenced by higher product costs and increased discounting. However, strategic investments in demand creation, such as global campaigns and sports marketing, along with disciplined operating overhead, indicate a focus on future growth. The company also continued its active share repurchase program, returning capital to shareholders.

Key Highlights

  • 1Revenues grew 9% to $3.61 billion in Q3 FY06, with the U.S. region being a key driver of this growth.
  • 2Net income increased by 19% to $325.8 million, and diluted EPS rose 23% to $1.24.
  • 3Gross margin percentage declined by 50 basis points to 43.6% due to lower footwear pricing margins, partly offset by currency hedging improvements.
  • 4Selling and administrative expenses decreased as a percentage of revenue by 120 basis points, indicating improved operational efficiency.
  • 5Demand creation expenses increased by 15% in Q3 FY06, primarily for global product launches and marketing campaigns.
  • 6The company repurchased 1.5 million shares of Class B common stock in the quarter as part of its ongoing $1.5 billion repurchase program.
  • 7Futures and advance orders for the March-July 2006 period showed a modest 2.9% increase, with a 2.5% reduction due to currency exchange rate fluctuations.

Frequently Asked Questions

The primary driver of revenue growth in this quarter was strong demand for NIKE brand products in the U.S. Region, which contributed over half of the revenue increase.

The gross margin percentage declined primarily due to lower in-line net pricing margins for footwear, influenced by factors such as higher product costs (partly due to oil prices) and increased customer discounts, particularly in the U.S. and EMEA regions.

NIKE has effectively managed its selling and administrative expenses, which decreased as a percentage of sales by 120 basis points in the third quarter. This was achieved through disciplined control over operating overhead, even while increasing demand creation expenses for strategic marketing initiatives.

Futures and advance orders for the upcoming period (March-July 2006) showed a 2.9% increase, though this was reduced by currency exchange rate impacts. Excluding currency effects, the growth was driven by higher average selling prices for apparel and volume increases in both footwear and apparel, suggesting moderate future demand.