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Nike Drops Most Since May on Apparel Maker’s First Profit Miss Since 2006

Nike Inc. (NKE), the world’s largest sporting goods company, sank 9.2 percent, the most in more than two years, after profit missed analysts’ estimates for the first time in 19 straight quarters, amid higher costs.

Net income rose to $1.08 a share in the third quarter ended Feb. 28, the Beaverton, Oregon-based company said yesterday in a statement. That compared with the $1.12 average of estimates compiled by Bloomberg.

Nike, led by Chief Executive Officer Mark Parker, is grappling with higher costs for cotton, labor and transportation. Increasing some prices and reducing marketing costs couldn’t stop gross margin, the difference between sales and cost of goods, narrowing 1.1 percentage points in the quarter.

“The market is focused on the earnings miss that is predominantly margin driven,” Matt Arnold, an analyst at Edward Jones & Co. in Des Peres, Missouri, said yesterday in an interview. The earnings miss “is surprising given the streak they had,” said Arnold, who recommends buying Nike shares.

Nike fell $7.82 to $77.59 at 4:01 p.m. in New York Stock Exchange composite trading for the largest drop since December 2008. The stock was little changed this year before today.

Orders for the Nike brand from March to July increased 9 percent for a total of $7.9 billion, excluding currency fluctuations, from the same period a year earlier. That missed the average estimate of four analysts for a gain of 9.8 percent.

Photographer: Jin Lee/Bloomberg

Women's running shoes sit on display at Nike Inc.'s flagship Niketown store in New York. Close

Women's running shoes sit on display at Nike Inc.'s flagship Niketown store in New York.

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Photographer: Jin Lee/Bloomberg

Women's running shoes sit on display at Nike Inc.'s flagship Niketown store in New York.

Gross Margins Narrow

Gross margin may shrink by 3 percentage points in the current quarter from a year earlier, Nike Chief Financial Officer Don Blair said on a call with analysts. Nike began raising prices on select products last year and will enact widespread increases in the first half of next year to combat cost inflation, Blair said.

The damage caused by the earthquake in Japan will affect Nike’s sales in a region that has been underperforming, Chris Svezia, an analyst for Susquehanna Financial Group in New York, said in an interview before the results. Sales from Japan declined 8.5 percent to $195 million in the third quarter.

In Japan “no one is going to be focused at the moment on buying athletic footwear and apparel,” said Svezia, who has a “neutral” rating on Nike shares. “The flipside is there could be a surge six months from now when people need to replenish.”

Nike’s organization and assets in Japan haven’t been significantly affected, Blair said. While it’s too early to make a specific assessment on the disaster’s financial impact, the company does “anticipate there will be a negative impact on our revenues and profitability for this geography,” he said.

To contact the reporter on this story: Matthew Townsend in New York at mtownsend9@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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