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NIKE (NKEFree Nike stock report), the world's leading designer, marketer, and distributor of athletic footwear, apparel, equipment, and accessories for a wide variety of sports and fitness activities, recently reported first-quarter results. (Fiscal years end May 31st.) Revenues increased 8%, to $7.0 billion, which was in line with both our estimate and the consensus target. Management said that strong demand for the company's brands propelled the top-line advance. Share earnings, meanwhile, surged 37%, to $0.86, further fueled by gross margin expansion, SG&A leverage, a reduced tax rate, and a lower average share count. Value Line and most analysts on Wall Street were looking for share net of $0.78.

Revenues for the NIKE brand were $6.5 billion, up 7%, with growth in most product types and most geographies. More specifically, NIKE brand revenue advances were highest in the running, basketball, soccer (football), and men's training categories, offsetting a lackluster performance in sportswear. Geographically, the NIKE brand did well in North America, Western Europe, and Central & Eastern Europe. Growth was subpar in emerging markets, and sales dipped slightly in China and fell markedly in Japan. The strong results in Western Europe and the softness in emerging markets were the only real surprises here. Sales of Converse-branded goods were $494 million, up 16%, driven by strong demand in the U.K., North America, and China. (Investors should note that the company changed the reporting structure for what was historically identified as Other Businesses. Hurley and NIKE Golf have been included in the overall financial results for the NIKE brand, and Converse will now be reported as a separate segment. This comes after NIKE sold off the Cole Haan and Umbro brands last year, and reflects the operation of Converse as a stand-alone brand.)

Gross margins were much wider than anticipated at 44.9% (versus our expectation of just 43.0%). Easing raw materials costs, a shift in the mix of revenues to higher-margined offerings, fewer discounts, and growing direct-to-consumer sales were all cited as favorable expense trends for NIKE. SG&A expenses also held steady at $2.1 billion, though this was slightly higher than the $2.0 billion we were targeting. Demand creation costs fell as anticipated, but operating outlays rose due to investments in digital innovation and new store openings among other things. Lastly, the effective tax rate was merely 25.0%, 250 basis points below our expectation of 27.5%.

Net income increased 33%, to $780 million, which was well ahead of the $715 million we had estimated. The aforementioned 37% rise in share earnings reflects ongoing stock repurchase efforts. More specifically, the company bought back 8.4 million shares for $526 million in the August quarter as part of the $8 billion program approved by the board of directors this time last year. As of the end of the fiscal first quarter, 23.7 million shares had been repurchased at a cost of $1.3 billion under this authorization.

Investors reacted favorably to the earnings release, driving the price of NKE up noticeably. Moreover, this newly added member of the Dow Jones Industrial Average has made investors very happy over the last month or so, as NKE has risen handsomely from about $63 in late August to the current price.

As far as NKE's investment merits go, we still think this issue is a reasonably strong choice for most, thanks to the apparel giant's strong portfolio of brands and management's ability to create demand in almost any environment. That said, we believe long-term capital appreciation potential is somewhat unexciting. The pop associated with the recent addition to the DJIA and the decent dividend yield are nice bonuses.

Our fiscal 2014 estimates are under review at this time. We still think full-year top-line growth of 9%-10% is achievable, and share-earnings growth should easily eclipse that pace.

About The Company:Nike, Inc. designs, develops, and markets footwear, apparel, equipment, accessories, and services. It sells products to retail accounts, through NIKE-owned retail stores and the Internet, and through a mix of independent distributors and licensees in approximately 190 countries. It operates over 300 domestic and roughly 450 locations (including factory stores). It has about 48,000 employees.

At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.