Nke



|Nike Inc. |(NKE – NYSE) |$62.32 |

Note: More details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.

Reason for Report: Flash Update: 4Q13 & FY13 Earnings Release

Prev. Ed.: Apr 19, 2013; 3Q13 Earnings Update

Flash News Update [Earnings update in progress; to follow]

On Jun 27, 2013, Nike came up with robust 4Q13 and FY13 results, driven primarily by strong demand for NIKE branded products. The company’s fourth-quarter earnings of $0.76 per share climbed 27% y-o-y and beat the Zacks Consensus Estimate of $0.74. The y-o-y rise in the bottom line was primarily due to increased revenues, improved margins, reduced tax rate and a lower share count.

Quarter in Detail

Nike's total revenue grew 7% y-o-y to $6,697 million and came ahead of the Zacks Consensus Estimate of $6,636 million. In adjusting for the currency effect, the company’s revenues increased 9%. The year-over-year rise in revenues was primarily driven by robust performances across all geographical regions, except for Greater China and Western Europe. Moreover, the company registered growth in all key categories, excluding Sportswear, Action Sports and Football.

On a currency neutral basis, revenues for NIKE brands climbed 8%, while other businesses delivered 10% growth. Increase in Nike’s other businesses revenues were primarily led by strong performances at Converse, NIKE Golf and Hurley.

Nike's quarterly gross profit grew 10% from the year-ago quarter to $2,940 million, and gross margin expanded 110 basis points (bps) to 43.9%. The margin expansion mainly resulted from better pricing actions and lower material costs, partially offset by increased labor expenses, higher discounts in Greater China and adverse foreign exchange rates.

Selling and administrative expenses increased 7% to $2,022 million, primarily due to a rise of 19% in operating overhead costs, partially offset by a decline of 13% for demand creation expense. Overhead expenses rose due to increased investments in the wholesale business and higher Direct to Consumer costs due to new store openings and mounting expenses at existing stores.

Operating income for the quarter increased 18.8% y-o-y to $918 million, while operating margin expanded 130 bps to 13.7%. The y-o-y expansion in margins was primarily due to higher gross margin.

FY13, in brief

In FY13, Nike’s revenues shot up 8% to $25,313 million, primarily driven by robust performances across all geographical regions except Greater China. Moreover, the company’s revenues for the fiscal surpassed the Zacks Consensus Estimate of $25,280 million. Further, Nike’s earnings in FY13 surged 11% to $2.69 per share from $2.42 in the comparable prior-year period and outpaced the Zacks Consensus Estimate of $2.67.

Balance Sheet

Global inventories increased 7% at the end of FY13 to $3,434 million, compared with $3,222 million at the end of FY12. The increase was primarily led by an 8% rise in NIKE Brand inventories –including a 6% rise in wholesale unit inventories and 2% rise due to change in foreign exchange rates and product costs.

Nike ended FY13 with cash and short term investments of $5,965 million, up approximately 59% from $3,757 million as of May 31, 2012. Increase in cash and cash equivalents was a result of proceeds from issuance of debt in the fourth quarter, sale of Umbro and Cole Haan business, and a higher net income. Moreover, the company has a long-term debt of $1,210 million and shareholders’ equity of $11,156 million at the end of FY13.

Share Repurchase

During the quarter, the company repurchased 4.2 million shares for about $242 million under its $8.0 billion share repurchase program approved in Sep 2012. Since the beginning of this new share repurchase program, Nike has repurchased 15.3 million shares at a cost of nearly $789 million. During FY13, Nike bought back 33.5 million shares for nearly $1.7 billion.

Future Orders

Global future orders for footwear and apparel scheduled for delivery from June through November this year were up 8% to $12.1 billion. The y-o-y increase in future orders was led by 12% increase in both  North America and emerging markets, 14% in Central & Eastern Europe, 2% in Western Europe and 3% in Greater China. Future orders in Japan declined 17%.

MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON NKE.

Portfolio Manager Executive Summary [Note: only highlighted material has been changed]

Nike Inc. (NKE) is a global designer, marketer, and distributor of athletic footwear, apparel, equipment, and accessories for sports and fitness enthusiasts. In addition to its namesake brand, the wholly-owned subsidiaries of the company include Converse, Chuck Taylor, Hurley, All Star, One Star, Star Chevron, and Jack Purcell. Nike sells its products through a mix of independent distributors, licensees, and subsidiaries in over 160 countries. Nike's athletic footwear products are generally designed for specific athletic use, although a substantial portion of its products are worn for casual or leisure purposes.

Nike Inc. has historically invested heavily in brand and product marketing, with sound distribution standards, which helped the company to sustain its uniqueness among key consumer demographics around the world. The company and its Swoosh logo have earned significant recognition across the globe via continued innovation and high-class products range along with excellent marketing tactics.

Of the 17 firms covering the stock, 6 firms provided positive ratings (35.3%), 11 rendered neutral ratings (64.7%), while none of the firms rated the stock negative.

Neutral or equivalent outlook (11/17 firms or 64.7%) – These firms remain impressed by Nike’s strong 3Q13 performance. Despite the weak trends experienced in China for the last several quarters, the company posted robust 3Q13 earnings driven by better-than-anticipated margins and solid expense control. Though the company believes that its efforts to transform the China marketplace area are starting to pay off, the firms believe the decline in 3Q13 orders in China will continue to impact investor sentiment in the near-term.

Going forward, the neutrally biased firms remain watchful of the company’s longer term prospects as it continues to work with other retailers to resolve the issue of excess inventories in the Chinese market. They believe any positive development in the Chinese market will prove beneficial for the stock. Moreover, the firms remain encouraged by the company’s string of innovations and programs, which should further boost the company’s top lines.

These firms also believe that Nike is best positioned to navigate through the distributional challenges given its global reach and scale. The firms believe opportunities for investing in new and existing businesses and return cash to shareholders through dividends and stock repurchases remain. Additionally, the firms see ample balance sheet strength with solid cash and short-term investments and feeble debt levels that provide significant financial flexibility to pursue future growth.

Positive or equivalent outlook (6/17 firms or 35.3%) – The firms are positive on NKE, considering its dominance in the athletic industry and ability to drive healthy growth consistently. Moreover, these firms expect Nike to continue to outperform top-line expectations, given the unique combination of balance sheet strength, free cash flow generation, growth prospects, exposure to emerging markets and an impressive management team.

In addition, the bullish firms believe that NKE’s innovative, compelling product across footwear (Flywire, Lunar, and upcoming Fresh Air) and apparel (performance apparel, developing sportswear) should continue to drive share gains and/or drive category growth. The firms believe that there are growth opportunities for Nike in nearly all geographic markets and product categories. Opportunities exist for broader expansion in established global markets and aggressive investments in the developing markets.

These firms believe the long-term structural view of the company remains intact given its ability to execute. The bullish firms favor Nike for its brand strength, sustained growth, strong financials and long-track record. They believe the company remains well on track to generate $28–$30 billion in revenue by FY15 through its robust and innovative product pipeline. Further, the firms expect gross margins to expand in the long term, given the company’s cost initiatives, logistics, and direct-to-consumer approach.

April 19, 2013

Overview [Note: only highlighted material has been changed]

Nike Inc. (NKE), based in Beaverton, Oregon, is the designer, marketer, and distributor of athletic footwear, apparel, equipment, and accessories for a wide variety of sports and fitness activities. The company sells sports equipment under the NIKE brand name, including sports balls, eyewear, skates, bats, gloves, and other equipment. It also sells various plastic products and plastic injected and metal products to other manufacturers. Wholly-owned Nike subsidiaries include Converse Inc., which designs, markets, and distributes athletic footwear, apparel and accessories and Hurley International LLC, which designs, markets, and distributes action sports and youth lifestyle footwear, apparel and accessories. The company sells its products through a mix of independent distributors, licensees, and subsidiaries in over 160 countries worldwide. Its website is . The company’s fiscal year ends on May 31; fiscal references do not coincide with the calendar year.

The firms identified the following issues as critical to evaluating the investment merits of NKE:

|Key Positive Arguments |Key Negative Arguments |

|Innovation in Footwear and Apparel: Nike’s innovative strategies on |Increased Competition: Nike may continue to face stiff competition from |

|Footwear and Apparel and its retail initiative could further fuel the |Reebok, Adidas, Columbia, Under Armour, and Puma. An escalation in |

|growth of men's and women's apparel. |competition will likely compel NKE to increase expenses in order to |

| |protect market share. |

|Focus on expansion, geographically as well as building market share: Nike | |

|is expanding its global reach and market share by capitalizing on the |Customers’ credit risk. The promotional retail environment has |

|growth opportunities in the emerging markets, especially China, as well as|significantly squeezed profit margins, leading to a series of retailer |

|focusing on the direct-to-consumer business model. These investments in |bankruptcies. In addition, retail rationalization will likely concentrate |

|China and focus on direct-to consumer business will strengthen Nike’s |credit risk among the survivors and strengthen their negotiating power |

|competitive position, alongside expanding the market share. |with Nike, which could undermine product margins. |

| | |

|Strong Balance Sheet and Cash Balance: Nike’s strong balance sheet and |Deteriorating Economic Backdrop and Currency Headwinds: The company is |

|growing cash balance empower it to make acquisitions where appropriate. |subject to a challenging consumer environment, resulting from the steep |

|This can leverage the existing infrastructure. |slowdown in the economy. |

| | |

| |Gross Margins Headwinds: Continued product cost increases and a stronger |

| |US dollar would create further pressure on gross margin. |

April 19, 2013

Long-Term Growth [Note: only highlighted material has been changed]

For long-term growth, management plans to (1) facilitate innovation and demand creation, (2) target a broader demographic, (3) groom the next generation of management at NKE, (4) accelerate growth in developing and emerging markets, and (5) leverage operating expenses while maintaining a robust rate of demand creation spending.

Management believes Nike is a growth company, and views promising opportunities for growth by focusing on these 3 key areas: innovative products, brand strength, and premium distribution.

Though the company remains focused on creating consumer demand with innovative products and effective marketing, it believes it can better manage these efforts by organizing itself around six core product categories: basketball, running, soccer, men’s training, women’s fitness, and sport culture. Some breakthrough innovations made across the company’s portfolio, include Flyknit, FuelBand, Lunar, Free, the NFL products, Pro Combat, Considered Design and many more.

In addition, Nike plans to expand its ‘direct to consumer’ sales efforts, including adding retail stores, in order to enhance its appeal to consumers and better differentiate its products.

Going ahead, the company is looking to innovate using the digital technology space, which it believes is truly a game changing innovation. The company will use digital technology to change everything about the product creation process, from the time it leaves the mind of the designer to reaching the consumer. This is viewed as a breakthrough innovation that will allow Nike to accelerate the creation and commercialization of new products.

With this technology, the company hopes to connect with its customers, who have been extending their reach and connection with each other and with their sports heroes as well as their favorite teams.

Over the longer term, the company expects to register an annual revenue growth in the high-single digits range with EPS growing in the mid-teens range. The company anticipates total revenue to reach $28 – $30 billion by the end of FY15. Further, the company expects retail sales at Nike brands to more than double to $5.5 billion in FY15.

The firms view visibility to sustained top-line growth, and believe that NKE’s dominant position in the athletic footwear industry allows the company to capitalize on a strengthening product cycle, as evidenced by accelerating future orders; global positioning, which affords material international expansion (emerging markets, Greater China, in particular); opportunities to harvest investments in apparel and direct-to-consumer; and unmatched financial flexibility, all of which should support further competitive separation, a thesis regardless of macro conditions.

Further, the firms believe global prospects for the brand remain strong and Nike continues to have room for growth in the U.S. as well as ample growth opportunities in key geographic regions worldwide. Nike’s portfolio is increasingly diversified, and the company remains committed to its strategy of a complete offense.

Despite ongoing cyclical fashion changes, Nike continues to drive healthy growth for both itself and the overall industry. The Nike brand remains distinctive at retail, as the company continues to segment consumer groups, intensify its commitment to performance in sport culture categories, and deliver a constant flow of meaningful and innovative products. In addition, as Nike works closely with its partners to elevate its presence in the marketplace, retail partners are building renewed interest and curiosity among consumers and more distinctive and compelling positions for themselves.

Management believes that there remains a healthy appetite for both the sport performance and the sport culture product. As the company’s portfolio becomes increasingly diversified, it can better manage through some of the macro challenges in the marketplace.

April 19, 2013

Target Price/Valuation [Note: only highlighted material has been changed]

|Rating Distribution |

|Positive |35.3%( |

|Neutral |64.7%( |

|Negative |0.0% |

|Avg. Target Price |$58.96( |

|Highest Target Price |$68.00( |

|Lowest Target Price |$48.00( |

|No. of Analysts with Target Price/Total |12/17 |

Risks associated with the target price primarily include adverse currency fluctuations, the risk that revenue from future orders will fall short of expectations, protracted deterioration of the gross margin, macroeconomic troubles, slowdown in performance athletic footwear trends, and execution risk, particularly the integration of acquired brands.

Recent Events [Note: only highlighted material has been changed]

On Mar 21, 2013, Nike Inc. reported third-quarter 2013 earnings of $0.73 per share, which surpassed the Zacks Consensus Estimate of $0.67. Moreover, the quarterly earnings climbed 19.7% year over year. Nike's total revenue augmented 9% to $6,187 million but fell short of the Zacks Consensus Estimate of $6,229 million.

Revenue [Note: only highlighted material has been changed]

Provided below is a summary of total revenue as compiled by Zacks Digest:

|Revenue ($ M) |3Q12A |

|Copy Editor |Rajani Lohia |

|Content Ed. |Rajani Lohia |

|Lead Analyst |Rajani Lohia |

|QCA |Sumit Singh |

|No. of brokers reported/Total brokers | |

|Reason for Update |Flash |

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June 27, 2013

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