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Nike Q3 Earnings Leap on Strong Revenue and Gross Margin Gains

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NIKE, Inc. (NKE) reported quarterly earnings Thursday for its fiscal 2015 third quarter that exceeded Wall Street estimates despite the impact of the strong dollar. Sales slightly missed estimates, however, but investors seemed to not care, sending the stock jumping by more than 4 percent in midday trading to all-time highs.

Diluted earnings per share for the quarter were up by 19 percent, due to revenue gains resulting from  continued strong demand for the company’s brands, and gross margin expansion, partially offset by higher SG&A investments and a higher effective tax rate.

Revenues in the quarter ending Feb. 28 rose 7 percent to $7.5 billion, a 13 percent increase on a currency neutral basis.

Revenues for the NIKE Brand were $6.9 billion, up 11 percent on a currency neutral basis driven by growth in every geographic region and most key categories.

Revenues for Converse were $538 million, up 33 percent on a currency neutral basis, mainly driven by continued growth and timing of shipments in North America, the transition to direct distribution in Austria, Germany and Switzerland, and growth in the Direct-to-Consumer (DTC) business.

On the quarterly earnings conference call, the company said sales of footwear, the company’s largest and most profitable business, rose by 8 percent in the quarter, while apparel sales rose 3 percent. North American sales grew by a lower-than-expected 6 percent in the quarter. Though consumer demand continues to be very strong in North America, sales were hurt somewhat by the port congestion on the West Coast, which escalated late in the quarter. Western Europe sales skyrocketed by 21 percent in the quarter led by double-digit growth in sportswear, women’s training and running. In Greater China, Q3 revenues increased 17 percent on a currency-neutral basis, led by double-digit growth in sportswear, basketball, and running. Sales at Nike.com were up by 42 percent in the period.

Gross margin expanded 140 basis points to 45.9% of total net sales. Gross margin benefited from a continued shift in mix to higher margin products, partially offset by higher product input and warehousing costs. SG&A expense increased by 10 percent to $2.4 billion. Demand creation expense was $731 million, flat compared to the prior year as increased investments in digital brand marketing and sports marketing were offset by lower advertising expense due to product launch timing.

Net income in the quarter increased 16 percent to $791 million, driven by strong revenue growth and gross margin expansion, while diluted earnings per share increased 19 percent to $0.89, reflecting a 2 percent decline in the weighted average diluted common shares outstanding.

For the quarter, the company estimates that the year-over-year change in foreign currency related gains and losses included in other income, net, combined with the impact of changes in exchange rates on the translation of foreign currency-denominated profits, decreased pretax income by approximately $20 million.

“Our strong third quarter results show that our growth strategies are working, even under challenging macroeconomic conditions,” said Mark Parker, president and CEO, in a statement. “Nike has the ability to deliver consistent shareholder value due to the strength of our brand, our relentless commitment to innovation and our powerful portfolio that allows us to invest in the opportunities with the highest potential for growth as well as manage risk.”

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